Taxes and the Economy
Two Basic Principles of Taxation

Benefits received principle – people benefit
from the taxes they pay
Two Basic Principles of Taxation

Benefits received principle – people benefit
from the taxes they pay
–
Ex. We pay a large tax on gas, and that tax foes to
maintain the roads which we use to drive on
Two Basic Principles of Taxation

Benefits received principle – people benefit
from the taxes they pay
–

Ex. We pay a large tax on gas, and that tax foes to
maintain the roads which we use to drive on
Ability to pay principle – those who have the
greatest income should pay the highest tax
rates
Two Basic Principles of Taxation

Benefits received principle – people benefit
from the taxes they pay
–

Ex. We pay a large tax on gas, and that tax foes to
maintain the roads which we use to drive on
Ability to pay principle – those who have the
greatest income should pay the highest tax
rates
–
Ex. Our income tax system
Two Other Characteristics

Sometimes the gov’t will give tax breaks to
encourage growth, this is known as the
productivity principle
Two Other Characteristics

Sometimes the gov’t will give tax breaks to
encourage growth, this is known as the
productivity principle
–
Ex. Gov’t will cut 10% of taxes if business upgrades
equipment
Two Other Characteristics

Sometimes the gov’t will give tax breaks to
encourage growth, this is known as the
productivity principle
–

Ex. Gov’t will cut 10% of taxes if business upgrades
equipment
Because the gov’t creates the taxes, they try to
be hush-hush
Two Other Characteristics

Sometimes the gov’t will give tax breaks to
encourage growth, this is known as the
productivity principle
–

Ex. Gov’t will cut 10% of taxes if business upgrades
equipment
Because the gov’t creates the taxes, they try to
be hush-hush
–
They will pass taxes upon those who are least likely
to be offended
Two Other Characteristics

Sometimes the gov’t will give tax breaks to
encourage growth, this is known as the
productivity principle
–

Ex. Gov’t will cut 10% of taxes if business upgrades
equipment
Because the gov’t creates the taxes, they try to
be hush-hush
–
–
They will pass taxes upon those who are least likely
to be offended
Ex. Taxes on sale of alcohol and liquor “sin taxes”
The Burden of Taxes

Three ways to classify taxes
The Burden of Taxes

Three ways to classify taxes
–
Progressive – more you make, the more they take
The Burden of Taxes

Three ways to classify taxes
–
–
Progressive – more you make, the more they take
Regressive – less you make the more they take
The Burden of Taxes

Three ways to classify taxes
–
–
–
Progressive – more you make, the more they take
Regressive – less you make the more they take
Proportional – all pay the same percentage of their
income
Types of Taxes

Personal income tax, there are 3 brackets in
this progressive system
Types of Taxes

Personal income tax, there are 3 brackets in
this progressive system
–
15%, 28%, and 31%
Types of Taxes

Personal income tax, there are 3 brackets in
this progressive system
–
–
15%, 28%, and 31%
Greatest source of income
Types of Taxes

Personal income tax, there are 3 brackets in
this progressive system
–
–

15%, 28%, and 31%
Greatest source of income
Social Insurance Taxes, proportional tax is the
2nd greatest source of income
Types of Taxes

Personal income tax, there are 3 brackets in
this progressive system
–
–


15%, 28%, and 31%
Greatest source of income
Social Insurance Taxes, proportional tax is the
2nd greatest source of income
Corporate income tax, 3rd greatest, range up to
36% of profits
State and Local Taxes

Sales tax is most important for the state
State and Local Taxes


Sales tax is most important for the state
Property tax for the local
Where does the money go?
Where does the money go?

Remember, the gov’t is not out to turn a profit
Where does the money go?


Remember, the gov’t is not out to turn a profit
Also, elected officials are try to please voters
(what is good politically is not always good
economically)
Where does the money go?



Remember, the gov’t is not out to turn a profit
Also, elected officials are try to please voters
(what is good politically is not always good
economically)
About $1 out of $5 of the GDP is spent by the
gov’t
Where does the money go?




Remember, the gov’t is not out to turn a profit
Also, elected officials are try to please voters
(what is good politically is not always good
economically)
About $1 out of $5 of the GDP is spent by the
gov’t
Graphs pg. 251
President and the Budget

President prepares and delivers the budget to
Congress
President and the Budget


President prepares and delivers the budget to
Congress
By October 1st , that must be passed
President and the Budget



President prepares and delivers the budget to
Congress
By October 1st , that must be passed
Problem: In the 20th century, the gov’t
generally spent more money that it took in
(deficit)
President and the Budget



President prepares and delivers the budget to
Congress
By October 1st , that must be passed
Problem: In the 20th century, the gov’t
generally spent more money that it took in
(deficit)
–
Now they must collect more in taxes to begin to pay
off debts
President and the Budget



President prepares and delivers the budget to
Congress
By October 1st , that must be passed
Problem: In the 20th century, the gov’t
generally spent more money that it took in
(deficit)
–
–
Now they must collect more in taxes to begin to pay
off debts
However, we have problems meeting the budget
each year (war on terror)