TAXES: The Main Source of Government Revenue

Economics for the 21 st Century

Two Views from the Top

Taxes, after all, are dues that we pay for the privileges of membership in an organized society. ~Franklin D. Roosevelt The government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it. ~Ronald Reagan

Definitions

Tax: A contribution for the support of a government required of persons, groups, or businesses within the domain of that government

Definitions

Marginal Tax Rate: Amount of tax paid on the last dollar earned Average Tax Rate: Total tax paid as a percentage of total income earned

Four Principle Objectives of Taxation • Raise revenue • Address externalities • Re-pricing • Representation

Incidence of a Tax

• • Who bears the final burden of this tax?

If there is a relatively inelastic demand curve the burden can be shifted to the consumer .

If there is a relatively elastic demand curve, the producer will absorb the tax.

To be effective, taxes must meet the following criteria: • Equity • Simplicity • Efficiency

TWO PRINCIPLES of TAXATION (There are Others!) • • “Who pays What” is based on two principles: Benefit Principle Ability to Pay

Types of Taxes

• • • Taxes are classified according to the way in which the tax burden changes as income changes.

Proportional Tax Progressive Tax Regressive Tax

• • • •

Proportional Taxes

Regardless of Income , the same tax rate is imposed upon everyone . Another term for a proportional tax is a flat tax.

If there is a 20% flat tax, how much do you pay in taxes if you earn $10,000? What if you earn $100,000?

Note as a person’s income increases, the percentage of total income paid in taxes remains the same.

Property Tax is a proportional tax .

Proportional Tax

40% Tax Rate 20% 10% 10,000 50,000 Income 100,000

Progressive Tax

• People with higher incomes pay a higher percentage in taxes. Federal and State income tax are progressive taxes.

INCOME $10,000 $50,000 $100,000 Amount Paid in Taxes $1,000 $ 10,000 $ 30,000 Amount Paid as a percentage of Income 10% 20% 30%

Progressive Tax

40% Tax Rate 20% 10% 10,000 50,000 Income 100,000

• •

Regressive Taxes

The lower the income, the higher the percentage paid in taxes. Sales tax is an example of a regressive tax. Assume two families paid $1000 in sales tax by the end of the year. Which family spent a higher percent of their income on taxes?

Income Amount paid in taxes Amount paid in taxes as a percentage of their income.

$10,000 $50,000 $1000.00

$1000.00

10% 5%

Regressive Tax

40% Tax Rate 20% 10% 10,000 50,000 Income 100,000

FEDERAL TAXES

Amendment XVI gives Congress the power to lay and collect taxes on individual incomes.

Income Tax

• The psychological game of withholding • From an economist’s point of view, is it better to owe money to the IRS or receive a refund check? WHY?

• • • • • •

More Federal Taxes

FICA - Federal Insurance Contributions Act – Social Security and Medicare Corporate Income Tax - As a separate legal entity, corporations are taxed.

Excise Tax - tax on the manufacture or sale of selected items Estate Tax - tax on the transfer of property upon a death. Repealed for 2010, but scheduled for 55% in 2011 – exempt up to $1,000,000.

Gift Tax - Tax on money donations, paid by the person donating.

Customs Duties: Tax on imported goods. Exported goods may not be taxed.

State Taxes and Local Taxes

• • • • Intergovernmental Revenues - transfer of money from the federal government Sales Tax Employee Retirement Contributions Individual Income Tax • • • • Intergovernmental Revenues -from state level Property Tax Public Utility or State owned liquor stores Sales Tax - this varies from city to city

Tax Freedom Day!

When was national tax Freedom Day in 2012?

Ohio Tax Freedom Day?

Why the difference?

Tax Freedom Day, Adjusted for the Budget Deficit

• I like to pay taxes. With them I buy civilization. ~Oliver Wendell Holmes, Jr.

• A fine is a tax for doing something wrong. A tax is a fine for doing something right. Author Unknown