Sources of Government Revenue

1. Sources of Government Revenue Chapter 9

2. Goals & Objectives Economic impact of taxes. 3 criteria for effective taxation. 2 primary principles of taxation. How taxes are classified. Progressive nature of income taxes. Sources of federal revenue. State revenues. Local revenues. Paycheck/payroll deductions. Tax Reforms. VAT & Flat taxes.

3. 2013 Tax Payers

4. The Economics of Taxation • 2012: Federal Revenue: 2.4 Trillion • Rate of Government Growth • 1940-2013 an 1000 +% increase in federal revenues • 1942 Public Revenue Act?

5. Federal Revenue 2012

6. What is a Trillion?

7. Economic Impact of Taxes & Who really pays the tax? • 1. Resource Allocation: Tax on a good or service raises the price or lessens the supply • Luxury Tax (1991)? Vehicles over $35,000.00 or more, yachts, private aircraft, etc…. “Soak the rich tax” • Result: Less luxury production results in fewer jobs for workers & higher prices for consumers

8. Health Care Luxury Tax 2014

9. Economic Impact of Taxes • 2. Behavior Adjustment: Taxes which encourage or discourage certain types of “behavior”. • 1. Sin Tax: Alcohol and Tobacco • 2. Mortgage Tax Deductions: Buy a second home “tax loophole” 3. Sugar Tax? 4. Affordable Health Care Act: Smokers, Obese, & young males in good health.

10. Excise Tax & Tanning Booth Behavior Adjustment

11. Economic Impact of Taxes • 3. Productivity and Growth: Taxes can encourage people to save more, invest more, work less, or spend less of their money. • A. Capital Gains Taxes: • B. Diminished Incentive: Progressive Taxes • C. Entitlements:

12. Taxes & Productivity

13. Economic Impact of Taxes • 4. The Incidence of a Tax: Who really pays taxes? • “The party being taxed is not always the one that bears the burden of taxes?” • A. Property Taxes? • B. Sales Taxes? • C. Corporate Taxes? • D. Utility Taxes, Severance Taxes

14. Who pays Sin Taxes?

15. Criteria for Effective Taxes • 1. Equity--- Tax fairness. Who decides fairness? What is fairness? • a. Just, Impartial • b. Tax Loopholes • 2. Simplicity--- Individual Income Taxes, Sales Taxes • 3. Efficiency –3 Trillion Dollars $$$$$$

16. Tax Loopholes

17. Two Principles of Taxation • 1. Benefit Received Principle: • --those who benefit should pay in proportion to the amount they receive • Duties, Imposts, Excises: Article I Section 8 clause 1 • Article I, section 9 Clause 4: No direct taxes without apportionment and enumeration regard to census

18. Education level & tax collection

19. Two Principles of Taxation • 2. Ability to Pay Principle: “People should pay according to their ability to pay regardless of benefits received”. • Karl Marx: “From each according to his ability to each according to his need”Communism • LBJ: “We will take from the haves and give to it to the have-nots”Socialism

20. Spending vs Taxes Paid

21. 3 Types of Taxes • 1. Proportional: Everyone pays the same percentage regardless on income. • Benefits received principle----Flat Taxes: no loopholes, no subsidies, no entitlements

22. 3 Types of Taxes • 2. Progressive Taxes: Higher taxes are placed on higher incomes • “The more you make the more they take” • Karl Marx: “the redistribution of wealth” • The more able, smarter, productive you are, the more taxes you must pay….diminished incentive

23. 3 Types of Taxes • 3. Regressive Taxes: a higher percentage of taxes on lower incomes… • Sales Taxes on Food, Medicine, “needs” • Property Taxes on homes, cars, trailers, etc..

24. State Regressive Taxation

25. The Federal Tax System • 1. Individual Income Taxes: 1913---16th amendment: • 1787-1913… Business Foreign and Domestic paid 89% of taxes see pie chart • 1913-1942…Top 10% of workers earning over $500,000 a year or more paid income taxes • 1935: Public Salary Tax (Social Security) • 1942-2007…Public Revenue Act… 800% tax increase

26. 1942 Public Revenue Act

27. Individual Income Taxes • 1. Payroll withholding system: automatic deduction: Federal Income, Social Security, Medicare, State Income, Local Income • IRS—Internal Revenue Tax: Private Business contracted by the Federal Treasury Department to collect income taxes. Why a private company? • Example: US Military Rules vs. Blackwater USA

28. Income or Payroll Tax vs. Stock (Dividend) Tax

29. FICA • 1. Medicare: (1965) free health care for the elderly…President Bush’s “free prescription drug benefit”…largest government program in the history of America.. • 2. Social Security: mandated government retirement…1935

30. Payroll Taxes vs. Article I Section 8 clause 1 (Duties, Customs, Excises)

31. Corporate Income Taxes • Tax a corporation pays on its profits: • 15% on income under $50,000 • 25% on income under $75,000 • 35% on income over $75,000-$1.8 million

32. 1932 Corporate Taxes

33. Other Federal Taxes • 1. Excise Taxes: tax on a business that is handed down in the form of higher prices to the consumers, “Hidden Tax”“Theft Tax” • 2. Death Taxes: Estate and Gift Taxes • 18-50% of valued assets.Estate sales • Gift Taxes: 40% of valued asset

34. Death Tax by State

35. Other Federal Taxes • 3. Customs and Duties: prior to 1913 these were the largest forms of federal tax revenues • Taxes on Foreign Business. Why? • To protect American Business and the Ameican Worker

36. Other Sources of Revenue • User Fees: Ronald Reagan National Parks. Pay only when you use the park • Benefit Received Principle of Taxation • Protection of citizens civil liberties

37. State and Local Tax System • Intergovernmental Revenues: Education & Welfare • State Income Taxes • Sales Taxes, Utility Fees • Local • Intergovernmental Revenues • Local Income • Property Taxes • Sales Taxes, Utility Fees

38. Current Tax Issues • 1981 Tax Reform; Ronald Reagan “the new right” which was the old “new left” of the 1960’s • Smaller government and smaller corporations • Opposed to the MIC: Military Industrial Complex • Trickle Down Economics: Cut Taxes to increase GDP

39. Tax Reforms • 1986 & 1993: • Millionaires paid no income taxes from 1983-1986. • Taxes lowered with an additional surcharge: additional above the base rate • Alternative minimum tax: 20% regardless of exemptions & loopholes in tax code.

40. The Value-Added Tax • VAT—European tax, national sales tax, FAIR Tax. • 1. Advantages: • Hard to avoid. • 2. Disadvantages: Invisible to consumers, would compete with state and local taxes

41. Value Added Tax Steps

42. National Sales Tax: Obama-phones

43. The Flat Tax • 1. Advantages: • What groups support the flat tax system? • 2. Disadvantages: • What interest groups oppose the flat tax system and Why?

44. Flat Tax Closes Loopholes