Taxes & Taxation. Incidence of Taxation. To learn who really is most burdened by a tax, you must look at the incidence of taxation. You can’t just look at the dollar amount of taxes paid!. Incidence of Taxation.
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Incidence of Taxation • To learn who really is most burdened by a tax, you must look at the incidence of taxation. • You can’t just look at the dollar amount of taxes paid!
Incidence of Taxation • REGRESSIVE – The lower someone’s income or wealth, or the smaller a business’ profits, the higher their tax rate. • PROGRESSIVE – The higher someone’s income or wealth, or the greater a business profits, the higher their tax rate.
Types of Taxes • INCOME – A tax on income that people earn, such as salaries and bonuses. • SALES – A tax on products when they are sold. Example: just buy something. • EXCISE– A tax on a specific item when it is sold. Example: tax on alcohol.
Types of Taxes • USER FEES – A tax for the use of specific product. Example: toll on a bridge. • PROPERTY – A tax on on property owned by individuals or businesses. • CORPORATE INCOME– A tax on the profits of corporations.
Types of Taxes • INCOME – Used to be progressive, much less so today. • SALES – Regressive. • EXCISE– Regressive.
Types of Taxes • USER FEES – Regressive, but can be avoided if product not purchased. • PROPERTY – Used to be progressive, much less so today. • CORPORATE INCOME–Used to be progressive, much less so today.
Regressive Nature of Sales Tax • We will look at the impact of a sales tax on four different households. • You need a grid of 4 rows and five columns to do this quickly and efficiently.
Regressive Nature of Sales Tax • Assume that the household have the following incomes: • $10,000 • $40,000 • $80,000 • $200,000
Regressive Nature of Sales Tax B. Assume a 5% sales tax on all products C. Assume that the households spend as follows: • $10,000 • $38,000 • $65,000 • $130,000
Regressive Nature of Sales Tax D. Compute the households’ savings. E. Compute the dollar amount they pay per year in sales taxes. F. Compute the percentage of their net income taken by the sales tax. G. Discuss which family has the highest burden of taxation.
Regressive Nature of the Excise Tax • We will look at the impact of an excise tax on four different households. • You need a grid of 4 rows and five columns to do this quickly and efficiently.
Regressive Nature of the Excise Tax • A. Assume the same four households. • B. Assume a 5% gasoline tax. • C. Assume that all 4 households buy $25 worth of gasoline per week.
Regressive Nature of the Excise Tax • D. How much do they pay in gasoline taxes per year? • E. Discuss which family has the highest burden of taxation.
Notes on other Taxes • USER FEES • Are regressive. Compare a $1.00 toll for a Lexus vs. a Chevette. • Can be avoided, by not using that product or service.
Notes on other Taxes • PROPERTY TAXES • Probably the most irritating because: - hard to understand - seem arbitrary - most open to corruption
Notes on other Taxes • PROPERTY TAXES • Originally progressive, and often still progressive. • But less progressive than 30 years ago.
Notes on other Taxes • CORPORATE INCOME TAXES • Originally progressive. • Massive corporate lobbying has created so many loopholes and exemptions that many large businesses pay at a lower rate than middle class Americans.
Corporate Income Taxes • General Motors paid no taxes at all in 3 of the last five years, despite a total of $12.5 billion in U.S. profits for those years. • Enron reported $1.8 billion in profits for the last 4 years, and was actually given a rebate for $381 million. • Microsoft paid no taxes in 1999, in spite of $12.3 billion in US profits.
Alternative Taxes Used in other countries, or proposed for use here in the United States.
VALUE ADDED TAX • A value added tax is a tax on each step of production. • Naturally the tax on each step of production would be passed onto the purchaser at the next step.
VALUE ADDED TAX on Beer • The VAT on the hops farmer. • The VAT on the brewer. • The VAT on the shipping companies. • The VAT on the wholesaler. • The VAT on the retailer. • Where does the tax end up?
VALUE ADDED TAX - PRO • Can’t be avoided. • Taxes the underground economy. • No loopholes are possible. • Invisible, unlike the sales tax. • No longer a problem that the government has money owed to it, but is unable to collect.
VALUE ADDED TAX - CON • Highly regressive, since it is really a giant sales tax.
FLAT TAX • A single tax rate for all levels of income. • Usually 10% of income is the proposed figure. • As proposed in Congress, it would: • Exclude all interest, dividends, rent or capital gains income. • Not raised on businesses.
FLAT TAX - PRO • The appeal is the simplicity and fairness. • It appears so easy: just add up all of your income and multiply by 10%. • It appears fair: EVERYBODY has to pay 10% of their income.
FLAT TAX - CON • It doesn’t tax businesses. • It excludes most of the incomes of the wealthy: their capital gains, dividends, interest and rent. • It would drastically worsen the federal budget deficit.
FLAT TAX – BUDGET BUSTER • Eliminating the current income tax and replacing it with the flat tax, as proposed, would lead to a fall in federal government revenues. • To use the flat tax, and NOT lower government revenues, the rate would have to be between 17% and 20%.
CURRENT TAX CHANGES • Estate tax • Capital gains tax • Dividends tax
CURRENT TAX CHANGES A. ESTATE TAX • A tax on a person’s wealth at the time of their death. • Previous ceiling: $600,000. No estate below that amount would pay the tax.
CURRENT TAX CHANGES A. ESTATE TAX • Has been abolished. • What percentage of households have benefited from its abolition? • The richest 5%.
CURRENT TAX CHANGES B. CAPITAL GAINS TAX • A tax on the difference between buying low and selling high. • Examples: purchase/sale of stock, purchase/sale of houses
CURRENT TAX CHANGES B. CAPITAL GAINS TAX • Reduced from 20% to 15% for the top tax brackets. • Reduced from 10% to 5% for the bottom two tax brackets.
CURRENT TAX CHANGES B. CAPITAL GAINS TAX • Who benefits? • The richest 10% of households own 77% of all stocks, and 89% of all bonds.
CURRENT TAX CHANGES C. DIVIDENDS TAX • Reduced from 20% to 15% for the top tax brackets. • Reduced from 10% to 5% for the bottom two tax brackets.
CURRENT TAX CHANGES C. DIVIDENDS TAX • Who benefits? • The richest 10% of households own 77% of all stocks, and 89% of all bonds.