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Taxes and Taxation

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  1. Taxes and Taxation “In this world, nothing is certain but death and taxes.” Ben Franklin

  2. Four Maxims (guiding principles) of Taxation Written by Adam Smith: Equity: The rich should be able and willing to pay a higher percentage of taxes because they benefit the most from government Certainty: The amount and how to pay should be clear, and not set arbitrarily Convenience: Tax system should not be overcomplicated; it should be straightforward and predictable Efficiency: taxes should produce maximum gain for the government while causing minimum loss to the taxpayers

  3. Who should pay and why? Ability-to-pay principle: Citizens should be taxed according to their income or wealth; the more you make, the higher the taxes (Federal and State income taxes, luxury items tax) Benefits-received principle: Those who use the services should pay for it (gas tax with money going towards roads and toll booths

  4. Taxation Basics: tax base and tax rates Tax base: is the thing that is taxed. This could include private property, goods sold at a store, or personal income Tax rate: percentage of income that is paid in tax.

  5. Tax Structures: Proportional, Progressive, and Regressive Proportional: tax that takes the same share of income at all income levels (examples: flat tax, medicare tax, property taxes, user fees and tolls) Progressive: tax that takes a larger share of income as income increases (examples: Income tax, corporate income taxes, luxury tax, estate and inheritance taxes) Regressive: tax that takes a smaller share of income as income increases (examples: sales tax, social security tax, excise taxes (alcohol, cigarettes, gambling))

  6. How Income Taxes Work: Internal Revenue Service (IRS) is in charge of issuing federal income tax forms, and processing tax returns; they also make sure taxpayers are in compliance with the tax code (set of laws that govern federal taxes) In each paycheck a certain amount is withheld for federal taxes; at the end of the year, a W-2 form is sent to the worker that details how much taxes were withheld and how much the person earned in the year Taxpayers must submit their tax returns from Jan. 1 – April 15th; If the IRS has questions or concerns about a return, they can order an audit, which is a formal review of all claims and information on the return. A taxpayer’s marginal tax rate is determined based on the last dollar a person earned is a given period

  7. How does the Federal Government spend the revenue they raise? • U.S. debt Clock • Federal Deficit: difference between tax revenues and government expenditures • To make up the deficit, government borrows money by issuing the sale of government bonds; still adds to the National Debt (total amt. owed by a nation’s government as a result of borrowing

  8. Mandatory v. Discretionary Spending Fiscal Year: October 1st to September 30th Mandatory Spending: Spending that is fixed by the law; interest on national debts and Entitlements (Social Security, Medicare and Welfare) Discretionary Spending: expenditures that can be raised or lowered as Congress sees fit (biggest item includes defense)