Chapter 9 Sources of Government Revenue
Section 1
• Sin tax
• a relatively high tax
• Raise revenue
– Used to fund treatment and prevention
• Discourage an undesirable product
– Liquor
– Tobacco
• Incidence of a tax
• the final burden of the tax
Tax loopholes
• exceptions or oversights in the tax law that
allow select individuals and businesses to
avoid paying taxes.
• Raise a question of fairness.
Individual income tax
• tax on a person annual earnings (salary,
wages, tips, etc.)
• A complex tax
• Many rules apply to
– how much is taxable
– How much is deductible
Marginal and Average Taxes
Worksheet
• Marginal tax rate- the rate at which the last dollar of income is
taxed. (Not a flat rate across entire income.)
• Average Tax- average tax burden across entire income.
• Personal Exemption- a dollar amount provided by the Federal
Government that is deducted from income for yourself and
each dependent. Government provides deductions to help
the economy.
• Examples
– Yourself
– Child (each)
– Mortgage
Sales tax
• levied on most consumer products
• Simple tax
– Paid on time of purchase
– Uniform for all products
• CA = 7.5%
• Exemptions include:
– Basic foods (not processed)
– Child care
– medicine
Benefit principles of taxation
• those who benefit from government goods
and services should pay in proportion to the
amount of benefits they receive
• A guiding principle of taxation.
– Ex: Gas tax paid only by users at gas stations
• Pays for interests of users of gasoline
• Highways
Ability-to-pay principle of taxation
• the belief that people should be taxed
according to their ability to pay.
• Recognizes
– That society cannot measure the benefits derived
from government spending.
– The assumption is that people with higher
incomes suffer less discomfort paying taxes than
people with lower incomes.
Proportional tax
• imposes the same percentage of taxation on
everyone, regardless of income.
– A 20% tax would mean
• $10,000 income, tax would be $2000.
• $100,000 income, tax would be $20,000
– Examples
• Some states have a proportional income tax.
• Tithe- a payment of 10% of your income to a religious
organization.
Average tax rate
• total taxable income divided by the total
income
• Constant, regardless of income
– If income increases, the percentage stays the
same.
Progressive tax
• imposes a tax with a higher rate of taxation on
person with higher income.
• Marginal tax rate
• Applies a levy to the next dollar of taxable income
• The rate increases as the amount of taxable income
increases
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$10,000 income, tax is $1000
$20,000 income, tax is $2000
$100,000 income, tax is $20,000
Points of percentage increase are called “brackets”
Regressive tax
• A tax that imposes a higher percentage rate of
taxation on low incomes than on high incomes.
• Sales tax is harder on lower income people than
higher income people.
• Examples:
– Sin Taxes
– Sales Tax
– Social Security (caps out at higher levels of income)
Section 2:
• Payroll withholding system
• requires the employer to automatically deduct
income taxes from an employee’s paycheck.
– W-2 form starts the process
– W-2 statement informs employee
• total annual gross income,
• net income,
• taxes withheld.
Internal Revenue Service (IRS)
• Branch of the US government that collects
taxes.
• Part of the Department of the Treasury
Tax return
• an annual report filed by the employee to the
IRS
– Total income
– Deductions
– Taxes withheld by employers
• Must be submitted by April 15th if employee
owes any more taxes.
– If employer paid more taxes, the employee will
receive a payment from the government.
Indexing
• an upward revision of the tax brackets to keep
workers from paying more in taxes just
because of inflation.
FICA
• Federal Insurance Contributions Act
– Tax levied on both employers and employees to pay for
Social Security and
• Medicare
• A federal health-care program available to all senior
citizens
– Regardless of paying the tax for Social Security and
Medicare
• Payroll tax
– Revenue deducted from a person’s paycheck by the
government.
• FICA
Corporate tax
• a corporation pays an income tax as if it were
an individual.
• Based on profits
• Brackets as of printing were:
– 15% up to $50,000
– 25% $50,001 to $75,000
– 34% $75,001 to $18.3 million
– 35% $18.3 million and over.
Excise tax
• A tax on the manufacture or sale of selected items
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–
–
–
–
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Gasoline
Liquor
Telephone service
Tires
Legal betting
Coal
Luxury goods
• A regressive tax as lower-income people pay more of
their income than higher income people.
Luxury good
• good or service where demand for the good
rises faster than income, when income grows.
– Vehicles over $40,000
– Large pleasure boats
– Private planes
– Jewelry
– Furs
• Phased out by Congress in 2002
Estate tax
• tax levied on the transfer of property when a
person dies.
• Usually on property OVER $2 million.
• Aka, “death tax”
Gift tax
• tax on large amount of money or wealth
“donated” by a person to others to avoid
paying larger income taxes.
Customs duty
• tax on imported goods or goods brought in by
travelers from other countries.
– Automobiles
– Jewelry
– Metals
• Until 1913, the main source of revenue of the
United States
– Replaced by income tax that year.
User fees
• Charges for the use of a good or service.
• Ex: National park fees
Assessments: Checking for Understanding
• 1 List the ways that taxes influence the
economy.
• Resource allocation
• Behavior adjustment
• Productivity and growth
• Incidence of a tax
• 3 Describe the economic impact of taxes
• They affect
– resource allocation
– Consumer behavior
– The nation’s productivity and growth
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•
•
•
4 List three criteria to evaluate taxes.
Equity
Simplicity
Efficiency
• 5 The two main principles of taxation. (just
list them)
• Benefit principle
• Ability-to-pay principle
• 6 Explain the characteristics of proportional,
progressive, and regressive taxes.
• Proportional:
– Same percentage rate of taxation on everyone
• Progressive:
– Imposes higher percentage rate on person with higher
incomes
• Regressive:
– Imposes a higher percentage rate on lower incomes as
compared to high incomes.
Assessments: Checking for Understanding
• 1 List the federal government’s most
important revenue sources.
• Individual income taxes
• FICA taxes
• Corporate income taxes
• 3 Describe the progressive nature of the
individual income tax.
• It imposes a higher percentage rate of taxation
on persons with higher income.
• 4 Identify the main marginal tax brackets in
the corporate income tax structure .
• 15%
• 25%
• 34%
• 35%
• 5 Describe the other sources of government
revenue.
• Excise taxes
• Estate taxes
• Gift taxes
• Customs duties
• User fees for the use of a good or service.
image, p. 224
• What information does the graph show for the
period 1980 to 2000?
• Total government receipts grew from 500% of
the 1940 level to over 700%
Image, p. 225
• Who is likely to bear the greater burden- the
producer or consumer- if a tax is placed on
medicine?
• The demand for medicine is generally inelastic
• The consumer will bear the greater burden of
a tax on medicine.
images, p. 227
• According to the ability-to-pay principle, how
is the amount each person has to pay
determined?
• The amount each pays depends on how much
income each earns
images, p. 228
• Under which type of tax do individuals with
lower incomes pay a smaller percentage than
do those with higher incomes?
• Progressive tax
image, p. 232
• How did these occurrences change the
composition of government revenues
between 1990 and 2004?
• Borrowing decreased and taxes increased
Image, p. 233
• How much in taxes would an individual with
$40,000 of taxable income pay?
• $6,810.00
• Solution:
• $3,910 + .25 ($40,000 – $28,400) =
• $3,910 + $2,900 = $6,810
image, p. 234
• Is the FICA tax a progressive or regressive tax?
Explain your reasoning.
• A regressive tax
• Because the Social Security portion of FICA is
capped at a certain income level
– The higher the income, the lower the FICA tax.
image, p. 235
• What are luxury Goods?
• Goods or services for which the demand rises
faster than income when income grows.