Taxes & Fiscal Policy Test Review
Use your notes, handouts, worksheets and textbook to prepare:(Topics 8 - 9).
I.. The role of the GOV’T in the Economy (notes)
Establish and enforce private property rights
Deal with external costs and benefits
Protect consumers
Stabilize the economy
Promote economic security
Provide public goods and services
II. Business Cycle “Booms and Busts”-handout
Economic indicators
Housing starts and stops
Unemployment rate
Condition of the stock market
Interest rates
III. Economic growth (WAVES)
Real GDP/ by total population = Real GDP per capita (adjusted for inflation)
Summarize the impact of population growth, government,
and foreign trade (deficit – China) on economic growth.
(Opposite of capital deepening – decreases living standards))
How are savings and investments related to economic growth?
What is Capital Deepening? (Domino effect) Increases standard of living
Standard of Living (How well we live)
What is production, productivity?
IV. What is inflation?
What causes inflation? (Theories)
Quantity
Demand-pull
Cost-push (wage-price spiral)
What are the effects of inflation?
Who is helped(Borrowers) or hurt( People on Fixed-incomes)?
Purchasing power = (Per capita income / CPI )
CPI
V. Fiscal Policy: (notes) Needs a law.
Who is John Maynard Keynes
Ability of the government to Tax & Spend
What are taxes?
Why do we pay taxes?
What are the two theories of taxation?
What are the characteristics of a good tax?
What are the three categories of taxes? (p. 360)
Who bears the burden of a tax? (incidence of taxation)
What federal taxes do we pay?
How does the federal government spend your tax dollars?
How does a state or local government raise funds to support its’ budget?
How does a state or local government spend those funds?
inflation. By making money more expensive to borrow, consumers would be more likely
to save money rather than spend it. This could also lead to lower prices.
V1. TAXES
What are taxes?
Tax- a required payment to a local state or national
government.
It is the primary way that the government collects money!
Revenue- income received by a government from taxes and non tax
sources.
Limits on the power to tax:
1) Purpose of tax must be for the “common defense and
general welfare.”
 So, taxes cannot be conducted for individual interests.
2) Federal taxes must be the same in every State.
Tax Base- income, property, good, or service that is subject to a
tax.
Examples: income tax, sales tax, property tax, and corporate income
tax.
Tax Structures:
Proportional Taxes- percentage of income paid in taxes remains the
same for all income levels. (Everyone equal)
Progressive Taxes- percentage of income paid in taxes increases as
income increases. (Rich pay more)
Regressive Taxes- percentage of income paid decreases as income
increases. (Poor pay more)
What makes a Good Tax?
Simplicity
Efficiency
Certainty
Equity
Fairness of Taxes:
Benefits received principle- taxes should be paid by those
people who benefit from the good or service.
Example- if you use the bridge or road then you should pay tax!
Ability to pay principle- pay according to what you can.
Example- people pay what they can afford.
http://www.irs.gov/pub/irs-pdf/f1040ez.pdf
What Do People Pay In Taxes?
by Richard Kogan
1) Different incomes pay at different rates — taxes are not flat.


Federal taxes are progressive, despite payroll and excise taxes.
State and local taxes are regressive.
Therefore, it matters whether "people" means "all people" or just "some people."
2) Which people?
Median Income
All American Households?
$35,500*
Households with children?
$47,500*
Two-worker families with
children
$52,500**
* Source: Congressional Budget Office
** Tax Foundation (they called this "a typical American family")
3) Which "average:" Mean or Median?
The median household is the one in the middle — half richer, half poorer.
The mean household has average income, i.e. total national income divided by
total number of households.


Table 1: Hypothetical Example:
Household
Income
Taxes
Tax Rate
#1
$ 20,000
$ 2,000
10%
#2
$ 22,000
$ 2,420
11%
#3
$ 24,000
$ 2,880
12% - Median
#4
$ 26,000
$ 3,380
13%
#5
$108,000
$31,000
29%
Total
$200,000
$43,000
21%
Average
$ 40,000
$ 8,400
21% - Mean or Avg.
Suppose taxes on household #5 were increased by $10,000 (from $31,320 to $41,320).
Total taxes would also increase $10,000 so average taxes would increase $2,000 per
household. The new mean would be $10,400 in taxes and the new mean tax rate would be
26%.
Their story: "Taxes on the average household increased $2,000, from 21% to 26% of
income."
Reality: Only the rich paid more taxes; median taxes were unchanged.
Center on Budget and Policy Priorities uses "Average" for "Mean"
Center on Budget and Policy Priorities uses "Typical" for "Median"
For federal and state taxes combined, the median tax rate is about 3 percentage points
lower than the average tax rate, because federal taxes are progressive.
4) Which taxes?


The right-wing agenda is to repeal the progressive income tax.
Hence, their discussions will imply that the federal income tax is at issue. E.g.,
someone will pick April 15th to complain about the total level of taxation.
Reality: Table 2 shows taxes typically paid in 1996 by a household of median income.
Note that the federal individual income tax is about one-fifth of taxes paid by median
households. 72% of households pay more payroll taxes than federal income taxes. The
median household pays about $3,700 in state and local taxes.
Table 2: Median Household (1996 data, approx.)
Taxes
Share
Source
Federal income
tax
$ 2,150
20%
CBO
Federal payroll
tax*
$ 3,600
34%
CBO
All other federal
taxes**
$ 1,250
12%
CBO
State and local
taxes
$ 3,700
34%
ITEP***
TOTAL
$10,700
100%
* This includes the employer share, since that tax is passed on to employees.
** This includes direct and indirect business taxes, attributed to households.
*** CBPP estimate from data by the Institute on Taxation and Economic Policy (ITEP).
5) What income?
Calculations based on IRS and Census samples measure less total income than really
exists. Those samples miss imputed income (e.g. tax-free employer-provided health
insurance) because respondents don't know they have it. Further, the Census doesn't
collect income data for the super-rich. Also, respondents sometimes knowingly underreport income. Hence, calculations based on survey data overstate tax rates.
Note that Table 2 implies a 30% tax rate for a median income household ($10,700 in total
taxes; $35,500 in household income). Because of missed income, I estimate the median
tax rate at 25% - 27%.
6) How about the rich?
The richest 1% of households ($650,000 in income, says CBO):
Federal tax rate
32.7% - (CBO)
State and Local tax rate
5.8% - (ITEP)
TOTAL
38.5%*
* Because of missed income, this total should be 32% - 35%.
For these households, the federal personal income tax represents about 63% of the total
tax bill. Contrast this with the 20% share for median households.
12 different taxes Americans Pay
1) Income Taxes (federal and some states)
The United States income tax is usually the first
thing people think of when they hear the word tax. That is because between Federal and State
taxes some Americans loose as much as 35% of their paychecks to income taxes.
2) Business (federal, states)
Also known as corporate taxes, these are direct taxes levied on the profits of businesses.
Expenses that are deemed necessary to the business can usually be deducted to lower the
amount of profits subject to taxation.
3) Payroll Taxes
These are the taxes that must be deducted from wages paid to employees, and the employer
usually must match the amounts. Some payroll taxes include federal withholdings, disability
insurance, Medicare, and other state withholdings.
4) Capital Gains Taxes (federal)
In the United States a tax is levied on all income generated from a taxpayer’s capital gains, which
are profits from the sale of an asset that was purchased at a lower price. Alternatively, if a
taxpayer suffers from capital losses they can deduct the full loss amounts. The most common
capital gains are created from the sale of stocks, bonds, and property.
5) Inheritance Taxes ( Estate tax ) (federal and state)
The inheritance tax – a/k/a the “death tax” – is a tax that arises from the death of a taxpayer. It is
imposed on the transfer of any property or asset transferred as the result of a death. However,
when they are left to a spouse or a charity, the tax usually does not apply.
6) Sales Taxes (states and local)
Consumption taxes – a/k/a sales tax – are levied at the point of purchase for specific goods and
services. It is usually a percentage determine by the levels of government charging the tax. Due
to individual state and local taxes, the exact rate you pay will vary widely by location.
7) Property Taxes (local)
Property taxes are imposed on property by reason of its ownership. Typically, these taxes are
paid on real estate. However, property taxes can also be paid on personal property, such as
boats, automobiles, recreational vehicles, and other business inventories.
8) Excise Taxes (federal)
Any tax that is based on the value of the product being taxed is considered an excise tax. They
are based on the quantity of the product. Charged to manufacturer who passes it on to their
customers. Common examples include those levied on gasoline, cigarettes, taxes, airline tickets,
tires, fishing equipment, firearms, alcoholic beverages, your phone bill and even on CD-R's and
DVD-R's that are paid to copyright owners.
9) Gift Taxes (federal)
A gift tax is a one that is levied on the transfer of property by one taxpayer to another while
receiving either nothing or something with a less than equal value in return. Selling something at
less than it’s full value or making an interest-free or reduced interest loan, may qualify as making
a gift. The IRS’s general rule is that any gift is a taxable gift. However, there are many exceptions.
10) Retirement Taxes (Social Security) (federal)
All taxes levied by the government to plan for a taxpayer’s retirement could be considered
retirement taxes. In the United States we pay into a social security system that provides income
to retired workers from the general fund. Our tax is regressive as we all pay the same rate up to a
specific cap. Then all income above the cap is not taxes.
11) Tariffs (federal)
An import or export tariff is one that is paid by the movers of any good through a political border.
Typically, it is used to “encourage” local businesses and “discourage” the purchase of foreign
goods, by increasing the price for the foreign goods. Consider this when you are looking at buying
a car as tariffs can increase the cost of a vehicle manufactured outside the U.S.
12) Tolls (county, local)
Tolls are fees charged to drivers who cross through designated bridges, tunnels, and even some
roads. They are almost always paid in fixed amounts each time you drive pass through the
restricted area. Tolls are typically used fund state projects but can also be used for privately
funded projects.