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Chapter 5 Taxation Issues

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  1. Chapter 5Taxation Issues

  2. Taxpayers want lower taxes Agencies’ agendas Parental choice Tuition tax credits School vouchers Competition for Education Dollars

  3. Public $$$ Public Scrutiny Most people believe that the correct taxation level is somewhat less than what they currently pay, & the level of service they want is somewhat higher than currently exists.

  4. The More You Understand About School Finance… The better you can explain to your parents & community WHY they need to support public education with their tax dollars.

  5. Schools do not operate as a “for-profit” company designed to generate dividends & increase stock prices for shareholders, such as IBM They are not a professional “fee for service” organization like a dentist’s practice Schools & Finance

  6. Schools Are a Public Service Schools are a public service on a scope & scale unlike anything else in our society.

  7. Paying for Education • Public schools are no longer funded by user fees or tuition • In fact, the United States Supreme Court has repeatedly indicated that public education must be free of tuition • Education services are not sold to consumers based on price points derived by economists .

  8. A Tax Primer • The purpose of a tax is to pay for a government function • A tax should be equalized – • The government should have a formal mechanism to calculate a lower cost to those who can least afford the service & have a higher cost to those who can most afford the service.

  9. In a public service ‘company’ like education, taxes are the operating revenue. Taxes = Operating Revenue

  10. School Finance Issues Understanding school finance vocabulary & concepts is the first step in understanding school finance issues.

  11. Tax Equalization “Floor of Services” Property Taxes – Historical View Understanding Tax Terms That Underlie School Funding Issues • Tax Categories – • Stock of Wealth • Flow of Production • Capacity & Effort • Equity v. Equality

  12. Understanding Tax Terms That Underlie School Funding Issues, cont. TAXES ON: Stock of Wealth Flow of Production In Personam Ad Valorum In Rem Ad Valorum Tax Structures: Proportional Regressive Progressive

  13. Understanding Tax Terms That Underlie School Funding Issues, cont. Tax Revenue Sources: • Property • Income • Sales • Lotteries • Severance • Corporate • Sumptuary

  14. Tax equalization tends to make the most needed services more affordable to those who are least able to pay Taxes have the effect of redistributing wealth – at the local, state, or federal levels. This equalization tends to level the playing field as we invest in human capital Tax Equalization

  15. A federal service -- defense -- should be spread out over the entire country A state service-- education -- should be extended over the entire state A local service -- a city or county park -- should be distributed over the entire locality Taxes Should be Spread Out As Much As Possible

  16. Legal & Moral Reasons Require Equalization of Funds Dispersing education’s tax bill over the entire state allows smaller, remote, or economically-disadvantaged localities with little local wealth to provide a quality education for its citizens.

  17. Our country holds a moral & legislative imperative that wealth must be redistributed, in part, to promote equity of educational opportunity and democratic citizenship. People Don’t Want to Give $$$$ Away, but…

  18. Without this Resource Reallocation, poverty & ignorance would spiral downward, reaching a critical mass that would ultimately restructure our society to a lower standard of living & general well-being, increase deprivation, & foment civil unrest.

  19. Taxation perpetuates our democratic government, permits our comfortable lifestyles to continue, & allows all educated individuals – regardless of race, ethnicity, gender, age, or creed – to participate in “the good life.” Taxation Supports U.S. Freedoms & Lifestyles

  20. Paying for the “Floor of Services” • The tax burden must be spread over as large a group as possible • Each state has established a minimum “floor of educational services” that localities must provide • With the No Child Left Behind Legislation of 2001, the federal government is “ratcheting up” the floor level of services

  21. Wealthy localities may have no problem meeting these standards Poor localities may be unable to meet the required levels of increasing progress The state, therefore, has a legal responsibility to help redistribute monies – or equalize funding – to help less wealthy localities meet these educational benchmarks Equalizing Wealth Lets All Meet the Standard

  22. In the U.S., states rely primarily on property tax revenues for the majority of their income to operate schools. Property Taxes

  23. Massachusetts Law of 1647, “Ye Olde Deluder, Satan Act” Property owners’ taxes were used to hire a teacher in towns of 100 The community’s sons & servants could be educated Brief History of Property Taxes Funding Public Schools

  24. Property was Taxed Because It was How Most People Earned Their Living • A farmer made his living from the land • A merchant earned money from goods sold on his property • A carpenter sold furniture made in a workshop on his property

  25. Many items were bartered or traded as a money substitute. Not All These Transactions Were Cash Sales

  26. It was logical, then, for government to tax property because that property was the basis for making one’s income. Property Taxes Were a Realistic Proxy for Measuring Income

  27. Today, for many of us, our homes represent more of a revenue drain than a revenue source … a stock – rather than a flow – of accumulated wealth. Today’s Property is NOT a Source of Wealth

  28. Taxes levied on the flow of production or services, i.e. Personal income taxes Corporate income taxes Retail sales taxes Taxes levied on the stock of wealth: This wealth has ceased to move in the flow of production It has become an asset of the individual or the company Two Tax Categories

  29. Taxes Levied on the Stock of Wealth Property, as measured in our home valuation, is therefore a stock of wealth. Taxing property is taxing an individual’s or company’s portion of wealth.

  30. “Ad Valorum” means a portion of the value. Property taxes are known today as an ad valorum tax because a portion of the assessed value of the home is taxed to support a service. Ad Valorum Tax

  31. In rem taxes include those that are imposed on “things” such as machinery, cars, and houses These taxes are based on the value of the “thing” being assessed In rem taxesdo not consider whether an individual owns the “thing” free & clear or whether the “thing” is bought entirely on credit In Rem Taxes

  32. Individuals may pay taxes on items they do not really own & cannot claim as an asset While they “have” the taxable item, the item may not actually be theirs – the bank may hold the title . In Rem Taxes - DISadvantage

  33. The best example of in personam taxes are those imposed on people’s earned income Personal income determines the amount of tax to be paid If you have $100,000 salary, you are WORTH $100,000 of tangible value --- In Personam Taxes are Imposed on People

  34. In Rem Taxes – $100,000 house 0 (zero) assets $100,000 liability 0 (zero) net worth This is NOT a realistic indicators of your wealth In Personam Taxes – $100,000 income $100,000 net worth This is a better indicator of your wealth In Rem vs. In Personam Taxes

  35. Funding Education Each of these types of taxes is used to generate funding for public services such as education. It is important for educators to know what types of taxes support their funding & what taxes are more generally favored by the public. The different types of taxes can have different effects on taxpayers.

  36. Under the proportional taxes, each income group has the same percentage rate of tax to pay – 10% In the regressive tax structure, the lower income individuals pay a greater percentage of their income in taxes than do the upper income individuals In the progressive scenario, the lower income individuals pay a lower percentage of their income than do the upper income. As income increases, so does the percentage of taxes paid Tax Structures

  37. A proportional tax requires the same percentage from each person’s income A sales tax is an example This tax affects the less wealthy persons more heavily than it does the richer ones The amount taxed on any item is the same dollar amount for each, but it represents a larger share of the less well-off person’s financial resources Proportional Taxes 4.5% Sales Tax

  38. Poorer people tend to spend a greater %age of their income on basic living cost items – Food, Clothing Shelter, Transportation… in contrast to those at the higher income levels. Proportional Sales Taxes can be Regressive on Individuals

  39. The spending habits of two families with incomes of $50,000 and $75,000 may differ significantly. The basic necessities of life – bread, milk, and butter, for example – differ little in quantity purchased by a family of four at these income levels. Proportional Sales Taxes, cont.

  40. Example: Proportional Tax -- Regressive Effect • Groceries for a family of 4 (2 teenagers) might cost $200/week • A sales tax of 4.5% would be $9/wk • Over 1 year, the sales tax on groceries would total $468 • For a family with an income of $100,000/yr. = .468% of income • For the same family (same eating habits) earning $50,000/yr., sales tax on groceries = .936% of income

  41. The family with the higher income level spends a lower percentage on the sales tax related to these items. Proportional Sales Taxes Tax the Wealthier, Less

  42. The family with the lower income level spends a higher percentage on the sales tax related to these items. But Proportional Sales Taxes Tax The Less Wealthy, More

  43. A regressive tax requires those with higher incomes pay lower percentages of their income. Social security taxation system At the beginning income levels all individuals pay 7.65% of their income in FICA tax FICA taxes are not collected after one’s income reaches $68,400 Regressive Taxes

  44. FICA* is a regressive tax. An individual earning $68,400 would pay $5,232.60 each year in FICA taxes. An individual earning twice that rate, or $136,800, would pay the same FICA tax amount or 3.825% - 1/2 the % of income that the $68,400 earner would pay!! Regressive Taxes, cont. *FICA - Federal Insurance Contributions Act