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Sources of Government Revenue
The Economics of Taxation : Economic Impact of Taxes
Taxes/Other government revenues affect:
– Resource allocation,
– Consumer behavior,
– Nation’s productivity
– Growth
Economic Impact of Taxes : Resource Allocation
Affects _____________________________________
A TAX placed on a good at the factory = ___________________________________
Supply curve shifts to the left
If demand stays the same = _______________________________________________
Economic Impact of Taxes: Behavior adjustment
TAXES affect the economy
– Encourage or discourage certain activities
– __________________________________ high percentage tax that raises revenue
while reducing consumption of a socially undesirable product
Economic Impact of Taxes: Productivity and Growth
Taxes affect productivity and economic growth:
– Change ______________________________________________________
Why people favor lower taxes….
Economic Impact of Taxes: The Incidence of a Tax
“Final Burden of the Tax”
I.e. Utility company:
– Raise rates: ___________________________________________
• (easy if demand is__________________________)
– Rates are regulated =
• _____________________________ receive smaller dividends; postpone raises
• (more _________________________________ = producer will absorb the tax)
Criteria for Effective Taxes
TAXES are effective when they are:
– Equitable
– Simple
– Efficient
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Criteria for Effective Taxes
Criterion 1: _____________________________________________
– Taxes should be IMPARTIAL and JUST
– Fairness is subjective
– Taxes are considered __________________________________
– Fewer loopholes: exceptions, deductions, and exemptions
Criterion 2: Simplicity
– Tax LAWS should be _______________________________to understand
– Individual income taxes: the taxes on peoples earnings
• ___________________________________ = dislike
– Sales tax: general tax levied on most consumer purchases;
• __________________________________________
• Anyone purchases = pay tax
Criterion 3: Efficiency
– Easy to administer and successful at __________________________________
– Individual income tax
– Less efficient: toll booths
– ________________________________________
Two Principles of Taxation
__________________________________________: those who benefit from
government and services should pay in proportion to the amount of benefits received
– Gas tax (built in) pay more if you drive more
Two limitations:
– Many gov’t services provide the greatest benefits to those who can least afford to
pay for them
– Benefits are hard to measure
_____________________________________________: people should be taxed
according to their ability to pay, regardless of the benefits they receive.
Two factors
– Recognizes that societies cannot always ________________________________
– Assumes that people with higher incomes suffer less discomfort paying taxes than
people with lower income
Types of Taxes
• ________________________: imposes same percentage rate of taxation on everyone
• _________________________: imposes a higher percentage rate of taxation on
people with high incomes than on those with low incomes
• ____________________________________ imposes a higher percentage rate of
taxation on low incomes than on high incomes
Figure
9.3
The Federal Tax System
IRS
(Internal Revenue Service)
part of the Treasury Department
Individual Income Taxes
• Fed. Gov’t collects __________________ of its revenue from Individual income taxes
• Paid over time through payroll withholding system
• Before _____________ each year, an employee must file a tax return: an annual report
to the IRS summarizing total income, deductions, & taxes withheld by employers
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Progressive tax
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Progressive Tax that ranges from 15% -39.6%
– Individuals earning higher incomes _____________________________ tax rates
FICA:
What is FICA? And why does it take part of my paycheck?
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FICA stands for Federal Insurance Contributions Act
FICA tax includes ______________________ (6.2% of wages)
&__________________ (1.45% of wages)
_________________________________ source of Gov’t revenue
Social Security is a proportional tax up to $65,400 (the capping point) and then it is
regressive
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_________________________ is not capped; it’s proportional at all levels of income
Total FICA tax = 7.65%
Corporate Income Taxes
_____________________________ category of federal taxes
Corporation is recognized as a separate entity
Rates vary from 15% -35% (slightly progressive)
Other Federal Taxes
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________________ tax on the manufacture or sale of certain items, such as gasoline
and liquor
________________ tax the gov’t levies on the transfer of property when a person dies
__________________: tax on gift of money/wealth paid by person making gift
State and Local Tax Systems
State Government Revenue Sources
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______________________________________ - money from federal gov’t
Sales tax - general tax on consumer purchases
Employee Retirement Contributions
Individual Income Taxes (not all states)
STATE SALES TAX
States with the Highest Sales Tax:
• Mississippi
• Rhode Island
• Washington
• Texas
• Illinois
States Without a State Sales Tax:
• Alaska
• Delaware
• Montana
• New Hampshire
• Oregon
Advantages of Sales Tax
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_____________________________________ to raise large sums of money
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Difficult to avoid because it affects large numbers of consumers
Relatively ________________________________ - merchant collects at point of sale
Local Property Taxes
_______________________________ source of revenue for local governments
Real Property: includes real estate, buildings, & anything permanently attached
_____________________________________ includes tangible items, not
permanently attached.
Intangible Personal Property: property with invisible value, such as stock, bond, patent,
check
Examining Your Paycheck
Payroll withholding statement: the summary statement attached to a paycheck that
summaries income, tax withholdings, and other deductions