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Taxation

Taxation. “ In this world nothing can be said to be certain , except death and taxes . ” Benjamin Franklin. Why We Tax…. Fiscal Policy Cost of Government & Goods /Services Redistribute Income (Lorenz Curve) Encourage / Discourage Behavior Sin Taxes (Excise Tax)

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Taxation

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  1. Taxation “In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin

  2. Why We Tax… • Fiscal Policy • Cost of Government & Goods /Services • Redistribute Income (Lorenz Curve) • Encourage / Discourage Behavior Sin Taxes (Excise Tax) • Discouraging behavior or raising revenue? • Cigarettes / Tobacco • Alcohol

  3. Net Income • Gross income: How much you earn • Net income: how much you keep • Net income = gross income - gross income*tax rate • For example: If Mr. Salem made $47,500 last year. • Net income = $47,500 - $47,500(.25) • Net income = $47,500 - $11,875 = $35,625

  4. In reality… • US Federal Tax Rates: (only 3 % of Americans make over $250,000) • Filing under a different status will change the rates.

  5. World Tax Rates Corporate Tax rate Income Tax Sales Tax Country

  6. Property Tax (Flat) Proportional • Tax on something you own • Usually expensive like your house or boat • For example: $100,000 home • 5% property tax rate • 100,000 X .05 = $5,000 property tax

  7. Income Tax Progressive Tax on a household income % of changes based on income The more you make, the higher your tax “Ability to Pay Principle” Deductions make this much less progressive. -Buffet

  8. Regressive Tax • Smaller % taken the higher your income • Sales tax • For example: 5% tax, $25,000/year w/$10,000 consumption pays: 10,000 X .05 = $500, or 2% of total income • $50,000/year w/$15,000 consumption pays: 15,000 X .05 = $750, or 1.5% of total income • Incentive?

  9. Estate Vs. Inheritance tax • Estate Tax – Federal Government • Inheritance Tax – State Govenments • Sometimes called “death tax” • Very hot political topic.

  10. Gift tax • Tax on gifts or rewards • Games shows, gambling, lottery • Rate depends on gift • 35-60 %

  11. OTHER TAXES • Wheel Taxes • Gas Taxes • Special Taxes (Arena) • Capital Gains Tax • Tariff • Others by community or state…

  12. Revenue / Spending

  13. Why taxes will increase? • Social Expectations “I deserve…” • Entitlements • Welfare • Lorenz Curve – graph that depicts distribution of wealth • Increase Cost of Technology • Increase Life Expectancy • Social Security • Medicare

  14. Types of Fiscal Policy • The government can operate using 3 basic types of tools • 1. Government Purchases • 2. Taxes • 3. Transfer Payments (payments to households) • Social Security • Unemployment compensation • Welfare

  15. Types of Fiscal Policy • Expansionary Policy • Lower Taxes • Increase Spending / Transfer Payments • Contractionary Policy • Raise Taxes • Decrease Spending / Transfer Payments

  16. Problems With Fiscal Policy • Effectiveness • Slow process. Changing tax laws. • Political Consequences • Expansionary policy may be popular but contractionary policy may get your opponent elected. • Members of the “Fed” don’t have to be reelected. • Budget Deficit (Surplus) / National Debt • Check out the U.S. Debt Clock!!!

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