Taxes Taxes impact the economy in by affecting: Resource allocation – the higher the taxes on resources, the fewer people can afford them + it can unemployment. Consumer behavior – can discourage consumers from buying certain products. Ex: The sin tax (a relatively high tax designed to raise revenue + consumption) on items such as tobacco + alcohol. The nation’s productivity + growth Also, the burden of taxes is sometimes transferred onto another party besides the one being taxed. If a company is charged a higher tax it may the cost of its goods (passing cost onto consumers), take it out of profits (passing cost onto owners), or lay off workers (passing cost onto employees). Ch 9 – Sources of Gov.’t Revenue
Criteria for effective taxes 1. Equity – fairness. But what is fair? 2. Simplicity – laws should be written so that the tax payer + tax collector can understand them. Good ex: Sales taxes Bad ex: The income tax 3. Efficiency – relatively easy to administer + reasonably successful at generating income. Good ex: Income tax Bad ex: Toll booths on highways
Principles of taxation The benefit principle of taxation says that those who benefit from gov.’t goods/services should pay in proportion to the benefits they receive. Ex: toll booth taxes, gas taxes, etc… 2 disadvantages: 1. Those who can least afford to pay taxes are usually the ones who benefit most from gov.’t services. 2. Benefits are often hard to measure. The ability to pay principle of taxation says that people should be taxed according to their ability to pay regardless of the benefits received. Ex: income tax 2 bases for: 1. Benefits are often hard to measure. 2. Assumes that people w/ higher incomes suffer less discomfort paying taxes than people w/ lower incomes.
Types of taxes Proportional tax or “flat tax” – everyone pays the same percentage rate (not the same amount) regardless of income. Ex: If flat tax was applied to income taxes everyone would have to pay 20%. So someone who made $20,000 would pay $4,000 + someone who made $200,000 would pay $40,000. Progressive tax – people who make more pay a higher percentage rate of their income. Ex: Current income tax Regressive tax – people who make less pay a higher percentage rate of their income. Ex: Sales tax End Section 1
Federal taxes The most important taxes the national gov.’t collects are the income tax (over 35% of its revenue), social security taxes (about 33%), + corporate income taxes (about 7.5%). P. 232 Excise tax – taxes on the manufacture or sale of selected items like gas, alcohol, coal, etc… Property tax – taxes levied on either real property (land, buildings, etc) or on personal property (cars, stocks, bank accounts, etc). Estate tax – (or “death tax”) taxes the gov.’t levies on the transfer of property when a person dies. Gift tax – taxes on donations of $ or wealth PAID BY THE PERSON GIVING THE GIFT. This is to prevent people from giving away their wealth shortly before dying. Customs duties or tariffs – taxes on imports. User fees – charges on the use of goods/service such as gov.’t land. End Section 2
The flat tax A proportional tax on individual income. Gained widespread attention during the election of 1996 as a way to “fix” the current tax system. Advantages: 1. Simplicity 2. Eliminates many loopholes 3. Reduces the need for many accountants, tax preparers, + a good portion of the IRS Disadvantages: 1. Removes many behavior incentives in the current tax code (ex: you can get deductions for certain donations) 2. Would benefit the wealthy more + hurt lower classes 3. No one knows what rate would be needed to raise the current revenue. End Section 4