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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