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Explore the important roles of taxes in a market economy, including the provision of public goods and services and the redistribution of income. Learn about different tax structures, their impact on society, and how federal taxes are collected and allocated.
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The Role of Government • Two typical microeconomic roles of government in a market economy are: • provision of public goods and services • redistribution of income
The dilemma • Markets produce too few public goods • The government determines the amount to produce through looking at benefits and costs
What are taxes? • Taxes- a mandatory payment to the government • Revenue- is government income from taxes and other sources. • Criteria for taxation • Equity • Simplicity • Efficiency
Tax info • Taxes was firstly introduced in Ancient Egypt as records show that the pharaoh would collect taxes from the people of Egypt for the kingdom. • What is tax? Tax is derived from the Latin word ‘taxare’ meaning ‘to estimate’ • Tax is levied (imposed) directly on people or corporations. • Tax is the main source of revenue of every country which it can distribute in different types of expenses like defense, education, public health, etc.
Challenge Question #1 • Why are taxes needed and what do they provide? • Taxes are needed because market economies will not naturally produce public goods and services. Taxes provide public goods and services such as a military or public education.
Tax bases • Who is taxed? • Individual income tax • Corporate income tax • Sales tax • Property tax • How are they taxed? Tax Structure • Regressive- the wealthier you are, the percent of tax you pay goes down EX: Social Security Tax • Progressive- the wealthier you are, the percent of tax you pay goes up EX: Income Tax • Proportional- (flat tax) everyone pays the same percentage of tax. EX: Sales Tax
Challenge Question #2 • Which tax structure (progressive, regressive, flat) best demonstrates the principle of redistribution of income? • Progressive- Take from the rich and give to the poor
How do Taxes impact society? • Resource Allocation- can change the way resources are distributed • Productivity and Growth- can hamper or spark growth • Economic Behavior- through tax incentives the government can compel the tax base to behave the way they want them to. EX: Cigarette taxes
Federal Taxes • How do you pay? • Individual income tax is the largest source of income for the federal government • Paid through a payroll tax that is deducted from a paycheck as withholding, or money taken from a worker’s pay before the worker receives it. • The amount of money owed is based on taxable income, the portion of income subject to taxation. • Each year, taxpayers must file a tax return, a form used to report income and taxes owed to various levels of government
Federal taxes • FICA- Federal Insurance Contributions Act- is a payroll tax imposed to fund Social Security and Medicare. • Social Security – gives aid to older citizens, children who have lost a parent, and the disabled. • Medicare- national health insurance program mainly for citizens under 65. • FICA is the second largest source of federal tax revenue
Federal Taxes • Unemployment taxes- unemployment compensation is a program funded by federal and state taxes and is administered by the state. Gives aid to people who have been fired for a certain amount of time
Challenge Question #3 • How do people pay their income and FICA taxes? • It is deducted from each paycheck
Federal taxes • Corporate Income Tax- is tax on corporate profits
Other federal taxes • Estate tax- a tax on property transferred to others on the death of the owner. • Gift tax- a tax on assets given by one living person to another. • Made to prevent people from giving away large estates prior to death • Does not include charitable gifts, or gifts of less than $13,900 annually • Excise tax- is a tax on the production or sale of a specific good or service • Taxes on things the that have an inelastic demand (gas) • “Sin tax”-Taxes on things the government wants to discourage (cigarettes) • Customs duty- is a tax on goods imported into the United States • User fee- is money charged for the use of a good or service • Ex. Tolls on bridges, entrance fees for parks, etc.
Federal Government Spending • Mandatory Spending- programs that require that the federal government pay back the contributions previously taxed from the citizens. • Entitlements- social welfare programs (Social Security, Medicare, Medicaid, Food Stamps) • Discretionary Spending- spending on programs like defense, roads, schools, and running the government.
Challenge Question #4 & 5 4. If we increase our military spending because we go to war with Cuba, is that discretionary spending or mandatory spending? • Discretionary 5. Due to the war with Cuba, if we want to decrease our spending for Medicare is that discretionary spending or mandatory spending? • Mandatory
Federal Government Spending (cont.) • Federal budget- the plan for spending federal tax money • Fiscal year- a 12 month period for which an organization plans its expenditures. • The President proposes his budget which is prepared by the Office of Management and Budget. • Congress works from the budget and appropriates money • Methods • Transfer payments- payments of those who provide nothing in return EX: Social Security, Welfare • Grants in aid- a transfer payment to state and local government for certain projects EX: Federal Highway Funds
State and Local Taxes • Sales tax- all but 4 states take a percentage of the price of an item sold, usually luxury or non-essential items. (Indiana- 7%) • Excise tax- taxes on cigarettes, alcohol, fuel • Income tax- moststates also charge income taxes. Not Texas and Florida • Property tax- a tax assessed by a tax assessor that is a percentage of real estate or other property • Balanced budget- Many states have constitutions that say they cannot spend more money than they have • Expenses • Education is the largest major expense for states
Municipal Spending • At the city level, taxes pay for these things • Schools • Public Safety- Police and Fire • Public Welfare- health departments and medical care for the needy • Other- Roads, Parks, Public Utilities, Snow Removal, Public Transit, Sewage, and trash removal.
Costs and benefits • Adjusting government spending according to costs and benefits • Example: President must increase military spending out of political necessity, but needs to reduce spending in other programs such as education to limit the deficit (spending more money than is received).
