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Taxes and Government Spending ( Chs . 9/10). Test and Notebook Due on Wednesday, April 9, 2008 ****SHORTER UNIT !!!!****. The government uses taxes to operate. Taxes are levied on personal income and property. Taxes are levied on the federal, state, and local level.

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taxes and government spending chs 9 10

Taxes and Government Spending (Chs. 9/10)

Test and Notebook Due on Wednesday, April 9, 2008

****SHORTER UNIT!!!!****

taxes a way of life

The government uses taxes to operate.

  • Taxes are levied on personal income and property.
  • Taxes are levied on the federal, state, and local level.
  • Not all taxpayers have to pay all taxes.
  • Refusing to pay taxes can result in criminal investigation.
Taxes: A Way of Life
how do taxes affect the economy

Resource allocation

    • Taxes levied on a product causes an increase in price; this can affect supply and demand
    • Luxury items are taxed heavily – tend to be less available
  • Consumer behavior
    • Tax codes reward taxpayers for some behaviors (owning a home, having a family, giving to charity); and punish them for others (sin taxes - smoking, alcohol, and gambling).
    • Taxes limit purchases because take home income is decreased.
  • National productivity & growth
    • Change incentives for saving, investment and working
    • Business may reconsider their growth against their tax liability
  • Incidence of tax – who gets the tax burden
    • Companies will adjust production and employment according to taxes; consumers will purchase less – both are passing their burden to each other.
How do taxes affect the economy?
the principles of taxation

Benefit of Principle of Taxation

    • Those who benefit the most should pay taxes directly proportionate to the amount of benefits they receive.
    • Limitations
      • Those who use government assistance have the least about of ability to pay.
      • Can be difficult to judge who is getting most benefit
  • Ability-to-pay Principle
    • People should be taxed according to their ability to pay
    • Takes into account society can not always measure the benefits of government spending.
    • Assumes higher incomed persons can afford to pay more
The Principles of Taxation
criteria for effective taxes

1. Equity

    • Taxes must be impartial.
    • Eliminate as many loopholes (oversights that allow some to avoid paying taxes) as possible.
  • 2. Simplicity
    • Need to be understandable (hahahaha).
  • 3. Efficiency
    • Easy to administer and collect
    • Needs to raise enough revenue to be worthwhile
Criteria for Effective Taxes
types of taxes

Proportional Tax

    • The same percentage on everyone.
    • Example: Property Tax
  • Progressive Tax
    • Higher tax rate as income/value increases.
    • Example: Federal Income Tax
  • Regressive Tax
    • Though it may be a fixed amount, tax rate is actually higher on low income than higher income.
    • Example: Sales Tax
Types of Taxes
federal tax system

Individual Income Tax

    • Withheld from Payroll deductions, or if self-employed, saved and paid quarterly
    • Responsibility of Internal Revenue Service
    • Every individual or family must file a tax return detailing their income and expenditures for their year.
    • Pay a progressive tax based on their adjusted gross income (after deductions & exemptions are met).
  • FICA (Federal Insurance Contributions Act)
    • Social Security – government benefits for elderly, disabled.
    • Medicare – medical assistance for elderly
  • Corporate Taxes
    • Levied on corporate profits
    • Individuals employed by corporations must file personal income tax returns
  • Excise Taxes
    • Taxes on consumption of specific good or item
    • Examples: liquor, gasoline, public utilities
  • Estate and/or gift taxes
    • Transfer of property between persons when no legal sale has occurred.
  • Customs Duties/Import Taxes
    • Taxes paid on manufactured goods being brought into the US from other countries
Federal Tax System
state and local taxes

State Government Revenue Sources

    • Intergovernmental Revenues
      • Portions of tax revenues that are collected by one level of government and distributed to another.
      • Example: Welfare, education, highways, etc.
    • Sales Tax
      • Tax paid on items a consumer purchases
      • Personal Income Tax
    • Corporate Income Tax
  • Local Government Revenue Sources
    • Property Taxes
      • Taxes on possessions such as homes, land, automobiles, buildings.
    • Usually used to fund schools, road maintenance
    • Sales Taxes
    • Additional Income Taxes – usually major metropolitan areas
State and Local Taxes
current tax issues

Tax Cuts for the Wealthy

    • Reduction of overall rates
    • Trickle Down Theory – tax cuts for corporations will result in economic growth and new jobs.
    • Capital Gains –taxes on the profits from the sale of an assets should not be as high
  • Tax Cuts for the Middle and Working Class
    • Reduction of Rates
    • Increased access to government services to offset standard of living costs
    • Earned Income Credit – those who are actually employed have smaller tax liability than those who aren’t.
  • A Value Added Tax – a manufacturing tax added at each stage to passed on to the consumer – higher product price (of which a % would be taxes) would replace personal income tax.
    • Pros: Almost impossible to avoid – taken at the register; wide spread; may encourage saving among consumers;
    • Cons: Difficult to see – may not catch unfair taxes because they are more inconspicuous; it would be the equivalent of a federal sales tax
  • Flat Tax – one rate across the board regardless of income
    • Pros: Simple, no need for itemizing/deductions; eliminates bureaucracy
    • Cons: Definitely easier on people with higher incomes
Current Tax Issues