More Taxes!

1. More Taxes!

2. Who bears the burden of a tax • Incidence of a tax- The final burden of a tax. • This is determined by the elasticity of the product being taxed • Inelastic demand- describes demand that is not very sensitive to a change in price • Elastic Demand- describes demand that is very sensitive to a change in price

3. Elasticity of Demand • What factors might affect the elasticity of demand. • Are there substitutes? • Will people buy regardless of price? • Brainstorm some products with highly elastic demand and inelastic demand. • Why does elasticity of demand determine who will bear the burden of a tax

4. Business Structures and Taxation • Sole Proprietorship- a business owned and managed by a single individual. • Sole proprietorships are taxed through personal income tax (income of the owner). • Partnerships- a business organization owned by two or more persons who agree on a specific division of responsibilities and profits. • Income of workers taxed under personal income tax (business does not pay special taxes.) • Corporations- A legal entity owned by individual stockholders • Corporations pay income tax (corporations are considered a separate entity) • Stockholders pay tax on dividends and capital gains.

5. Vocabulary Assignment • Tax Base • Progressive tax • Regressive tax • Proportional tax • Elastic demand • Inelastic Demand • Corporation • Corporate Income Tax • Dividends • Capital Gains tax

6. Who Bears The Burden • Who would bear the Burden of a 10 cent tax on pizza? Why? • Who would bear the burden of a 2.00 dollar tax on pizza? Why? • Who would bear the burden of a 2.00 dollar tax on a lifesaving medicine? • Who would bear the burden of a 1.00 dollar tax increase on gas?

7. 3 types of business? • How do they pay taxes • Who bears the burden of corporate income tax.

8. Corporate Income tax • Corporations, like individuals, must pay federal income taxes. • Businesses can take many deductions. • Most Corporations pay an income tax in the ballpark of 35% • Why Incorporate? • Limited liability for stock holders (shared risk) • Transferable ownership • Ability to attract capital • Long life

9. Double Taxation • Capital Gains- Profit made from a stock holder selling shares • 15% rate of taxation • Can discourage capital formation (hiring of educated workers and purchasing of new physical capital to increase efficiency) because it discourages people from investing in our Corporations. • Dividends- corporate profits paid out to stockholders. • Paid through individual income tax

10. Corporate Tax Articles • List all parties likely to bear the burden of a corporate income tax? • Will every corporation spread the burden in the same way? • Explain your answer • What is the reasoning behind Gregory Mankiw’s claim that cutting corporate income taxes would lead to higher wages for workers and lower prices for consumers? • If the United States cut the corporate income tax, how might we make up for the lost government revenue? • Do you agree with Mankiw? Explain.

11. FICA • In addition to withholding money for income taxes, employers withhold money for taxes authorized under the Federal Insurance Contributions Act, or FICA. • FICA taxes fund two large government programs, Social Security and Medicare. • Employees and Employers share payments

12. Social Security • Social Security was founded in 1935 to ease the hardship of the great depression. • Originally, Social Security was simply a retirement fund providing for old age pensions to workers. • Today it also provides benefits to surviving family members of wage earners and to people whose disabilities keep them from working. • Both employee and employer pay 6.2% for SS • Social Security has a cap on payments that is adjusted annually for inflation. The current cap is at 106,800.

13. Medicare • National Health insurance program • Helps pay for health care for people over age 65 • Also covers people with certain disabilities • Tax rate for Medicare is 1.45% • No cap

14. Unemployment • Paid by employers • Gives benefits to people who lose there job through no fault of their own. • Person will receive benefits for a fixed number of weeks. • Reading- What are the problems with the Medicare and Social Security programs?

15. Tell me the tax base and structure of each tax • Medicare tax • Social Security Tax • Income Tax • Social Security (with no cap)

17. Problems with FICA • Both Social Security and Medicare • Decreased Tax Revenue (Recession) • Higher unemployment = less FICA tax revenue • Baby Boomers (lower worker to retiree ratio) • Increased benefits • Medicare • New Technology • Medicare Fraud • Increasing Health Care Costs

18. Is health care a right or a privilege? • How much is a life worth? • Does the answer to this question vary based on circumstance? • Is it economically practical to offer everyone unlimited health care benefit?

19. FICA Videos The Cost of Dying • Explain the issue/problem identified in this video. • List factors that complicate possible solutions. • The primary problem with Medicare is its system of incentives. • Explain how current incentives within this program cause problems with financing Medicare. • As an economist, how could you change the incentives within Medicare to solve the problem? • Each group comes up with a solution and documents it on the white board. • If you had to choose between “rationing care” within the Medicare system or raising taxes on tax payers to pay for the current system, which would you choose? Medicare Fraud • Explain how criminals are able to steal from Medicare. • If Medicare were run by a private insurance provider, do you believe they would have handled the situation differently than the govt.? • Why would the Govt. choose not to hire more workers to monitor the validity of Medicare claims?

20. The Medicare Problem • As an economist, how could you change the incentives/rules within Medicare to solve the problem? • Each group comes up with a solution and documents it on the white board. • If you had to choose between “rationing care” within the Medicare system or raising taxes on tax payers to pay for the current system, which would you choose?

21. Other Taxes (Non FICA) • Estate tax- Tax on the estate, or total value of the money and property of a person who has died. It is paid out of a person’s estate before the heirs receive their share. • Gift tax • Tax on money or property that one person gives to another • Can give up to 12,000 dollars tax free to a person per year under current law.

23. Estate Tax • What affect might the estate tax have on small business owners and farmers? • What is Obama’s plan for the estate tax?

24. Excise Tax • Excise Tax- general revenue tax on the sale or manufacture of a good. Some examples would be taxes on gasoline, cigarettes, alcoholic beverages, telephone services and cable television.

25. Federal Income Tax • Corporate Income Tax • Social Security tax • Medicare tax • Excise tax • Estate tax • Gift tax • Review term

26. Gas Tax a Good Idea? • Why does Thomas Friedman claim that the gas tax is a “win, win, win, win, win”? • Obviously gas is a big part of how we function in our economy. • What good effects might a gas tax have? • What negative effects might it have? • Do you agree that we should have a higher gas tax? Explain your answer.

27. Vocabulary Assignment • Gift Tax • Estate Tax • Excise Tax • Social Security • Medicare • Elastic demand • Inelastic demand • FICA taxes

28. Tax Credits • Refundable- will receive money if their income tax goes below zero. • Non- refundable- only applies to taxes owed.

29. Quiz • Mario and Luigi both pay a 1.65% FICA tax on all of their income. What is the tax structure of this tax? What is the tax base? •  There is a 10% tax on pizza. Mario makes 20,000 dollars a year. He spends 5,000 dollars a year on pizza. Luigi makes a million dollars a year. He spends 8,000 dollars a year on pizza. What is the tax base of this tax? Who will pay more in pizza tax, Mario or Luigi? What is the tax structure of this tax? Why?

30. Quiz • Tobacco companies have been subject to many tax increases, fines and penalties. How have they stayed profitable as a business? •  Why are social security and Medicare becoming a problem? Why don’t politicians do something to solve the problem? • Why should we be concerned about the high corporate income tax rates in the US?

31. "If a nation expects to be ignorant and free, in a state of civilization, it expects what never was and never will be." --Thomas Jefferson to Charles Yancey, 1816.

32. Things to Consider • How do the tax decisions affect you? • How do they effect people of various income levels? • Do the tax proposals meet your idea of fairness? • How will the tax proposals effect the overall economy? • What incentives do the proposals provide?