Sources of Government Revenue. Revenue collection by all levels of Government has grown dramatically. Increased 800% since 1940. Economic Impact of Taxes
Sources of Government Revenue
Revenue collection by all levels of Government has grown dramatically.
Increased 800% since 1940
A. Resource allocation – taxes can raise or lower the cost of production and therefore affect supply which in turn will affect price which in turn will affect demand. Cutbacks in some industries mean resources will have to go elsewhere to other industries
B. Behavior Adjustment – some taxes are used to encourage or discourage certain behaviors. – Sin taxes are relatively high taxes placed on items the government wishes to discourage consumption of such as tobacco and liquor. Homeowners can deduct interest payments on home loans and this encourages home ownership.
C. Productivity and Growth – taxes can change our incentive to save, invest, and work.
D. The incidence of a tax is the final burden of the tax; it is easier for a producer to shift the incidence of a tax to the consumer if the demand is inelastic; the more elastic the demand, the more likely the producer will absorb much of the tax.
(see page 225 in textbook)
II. Criteria for effective taxes—
D. Efficiency – easy to administer and successful at generating revenue
III. Two Principles of Taxation
C. The ability-to-pay principle – people should be taxed according to their ability to pay, regardless of the benefits they receive.
D. This principle is based on two ideas: that society can’t always measure the benefits derived from government spending and that people with higher incomes suffer less discomfort in paying taxes than people with lower incomes.
IV. Types of Taxes
Section 2 –
II. FICA taxes
III. Corporate Income Taxes
A. Excise tax – a tax on the manufacture of sale of certain items. (gas, liquor, tires, legal betting, coal etc.) These are regressive taxes because low income families spend larger portions of their income on these goods than do high-income families
B. The estate tax deals with the transfer of property when a person dies
C. The gift tax is placed on large donations of money or wealth and is paid by the donator
D. A custom duty is a charge levied on goods brought in from other countries
E. User fees are charged for the use of a good or service
F. User fees are based on the benefits received principle of taxation
A. Intergovernmental revenue are funds collected by one government and distributed to another level. States receive a lot of money from the federal government to help with education, highways, health and welfare.
B. Intergovernmental revenue is the largest source of revenue for state and local governments
C. Sales tax – levied on all consumer purchases; second largest source of income
D. Employee retirement contributions make up the third largest source of income
E. Individual income tax revenues make up the fourth largest source of revenue
F. Other sources include interest on surplus funds, fees from state owned colleges, universities, and schools, and corporate income taxes
II. Local Government Revenue Sources
(largest source of local money)
III. Examining Your Paycheck
E. 1997 – Taxpayer Relief Act – gave child credits and educational expense credits and reduced capital gains tax
F. 2003 – reduced the top four tax brackets and capital gains taxes.
II. The Value-Added Tax (VAT)
III. The Flat Tax
IV. Future Reform