Taxes and Public Policy

1. Taxes and Public Policy

2. Role of Government • Provide society with a set of public goods and services. • Protect society from harmful goods and services. • Regulate business so competition provides society with lower prices and more good and services.

3. How does Government pay for these services? • Revenue is collected by taxing three economic bases: • income • consumption • wealth

4. "Taxes are what we pay for a civilized society." Oliver Wendell Holmes, 1809-1894 former Justice of the United States Supreme Court

5. Taxes, Taxes and More Taxes!! I N C O M E Personal Income Tax Corporate Income Tax State Income Tax FICA (payroll tax for Social Security) Local Income Tax

6. Taxes, Taxes and More Taxes!! S A L E S State SalesTax (most of us in TN pay 9.75%) Local Sales Tax Federal Excise (per-unit) Tax State Excise (per-unit) Tax

7. Taxes, Taxes and More Taxes!! Federal Estate Tax (this is a tax on the value of your assets (retirement funds, property, etc. upon your death) Federal Gift Tax (this is a tax on a sizable gift of either money or property that you get from someone) Capital Gains Tax (this is a tax on personal profits based on the sales of assets like stocks or bonds) Real Estate Property Tax (this is a yearly tax on the estimated value of your property) Personal Property Tax (a tax on valuable personal property used in a business) WEALTH

8. Two Goals for Tax Systems Tax equity: The fairness of a tax system. Tax efficiency: How a tax system maintains the incentives to be productive.

9. Two Principles of Tax Equity Benefits received principle: states that a fair tax is one that taxes people in proportion to the benefits they receive when government spends those tax revenues. Ability-to-pay principle: states that those who can afford to pay more taxes than others should be required to do so.

10. Three Tax Structures Progressive tax: collects a higherpercentage of high incomes than of low incomes. Regressive tax: collects a higherpercentage of low incomes than of high incomes. Proportional tax: collects the samepercentage of income, no matter what the income. This is NOT a sales tax!

11. Major Sources of Revenue for the Federal Government Personal Income Taxes Corporate Income Taxes Estate, gift, excise and other taxes Contributions to Social Security

12. Federal Tax Revenue Sources:The majority of federal revenue is derived from the personal income tax (2008) 50% 33% 6% 8%

13. Married Individuals Filing Joint 2009 Tax … a Proportional Tax: Taxable income: Over But not over +% On amount over $0 $ 16,700 10 $0 $ 16,700 $ 67,900 15 $ 16,701 $ 67,900 $137,050 25 $ 67,901 $137,050 $208,850 28 $137,051 $208,850$372,950 33 $208,851 $372,950 ....... 35 $372,951

14. Corporate Income Tax Rates—2004 … another Proportional Tax, but with Some Regressive Elements Taxable income Over Not over Tax rate $ 0 $ 50,000 15% 50,000 75,000 25% 75,000 100,000 34% 100,000 335,000 39% 335,000 10,000,000 34% 10,000,000 15,000,000 35% 15,000,000 18,333,333 38% 18,333,333 .......... 35%

16. Social Security Tax The Social Security tax is the second largest source of federal revenue. For 2009, the maximum salary for applying the 6.2% social security rate is $106,800, while the Medicare rate remains 1.45% and applies to all wages. Although both employees and employers contribute toward Social Security taxes, the burden of employers’ contributions is shifted to workers in the form of lower pay.

18. A Federal Estate Tax Return must generally be filed for the estate of every U.S. citizen or resident whose gross estate, taxable gifts, and specific exemptions exceed $1,500,000 for decedents dying in 2004-2005.

19. For 2004, an annual gift tax exclusion is provided that permits tax-free gifts to each donee of $11,000 for each year. A husband and wife who agree to treat gifts to third persons as joint gifts can exclude up to $22,000 a year to each donee. An unlimited exclusion for medical expenses and school tuition both paid directly to the institution for the benefit of any donee is also available in addition to the annual gift tax exclusion.

20. It is all relative! If you owe $50, you are a delinquent account. If you owe $50,000, you are a small business. If you owe $50 Million, you are a corporation. If you owe $50 Billion, you are the government.

21. What Characteristics of a “Fair” Tax? Should be efficient. Should not demand a government dossier on the private affairs of every citizen. Should give the citizen first use of earnings, otherwise it becomes a form of slavery. Should be easy to understand, with the tax burden clearly visible. Should not be used to dictate personal economic decisions. Should not push people into poverty. Should be as cheat proof as possible. Should help the United States compete in world markets. Should encourage, not discourage work, family and freedom.

22. Possibilities for Tax Reform? Value-Added Tax (VAT) Consumption Income Tax Flat Tax

23. The Value-Added Tax A VAT collects the difference between what companies earn in revenues and what they pay out in previously taxed costs. Taxing value-added yields the same tax revenues as a retail sales tax.

24. Consumption-Income tax Income tax that exempts savings Rationale: Savings are for future consumption, which will be taxed at that time. Far simpler than current personal income tax plan Rather similar to a sales tax so it is regressive Exemptions to reduce regressivity: • Food, shelter, medical • Give standard refund based on family size

25. The Flat Tax A truly flat tax would: have a single rate and be applicable to all income. minimize distortions of relative prices within the economy. be simple and broadly based. be proportional in nature.

26. End. Good luck with the last quiz and free response of our study of Microeconomics.