Transcript More Taxes!

MORE TAXES!
Who bears the burden of a
tax
 Incidence of a tax- The final burden of a tax.
 This is determined by the elasticity of the
product being taxed
 Inelastic demand- describes demand that is
not very sensitive to a change in price
 Elastic Demand- describes demand that is
very sensitive to a change in price
Elasticity of Demand
 What factors might affect the elasticity of
demand.
 Are there substitutes?
 Will people buy regardless of price?
 Brainstorm some products with highly elastic
demand and inelastic demand.
 Why does elasticity of demand determine
who will bear the burden of a tax
Business Structures and
Taxation
 Sole Proprietorship- a business owned and managed by a
single individual.
 Sole proprietorships are taxed through personal income tax
(income of the owner).
 Partnerships- a business organization owned by two or
more persons who agree on a specific division of
responsibilities and profits.
 Income of workers taxed under personal income tax (business
does not pay special taxes.)
 Corporations- A legal entity owned by individual
stockholders
 Corporations pay income tax (corporations are considered a
separate entity)
 Stockholders pay tax on dividends and capital gains.
Vocabulary Assignment
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Tax Base
Progressive tax
Regressive tax
Proportional tax
Elastic demand
Inelastic Demand
Corporation
Corporate Income Tax
Dividends
Capital Gains tax
Who Bears The Burden
 Who would bear the Burden of a 10 cent tax
on pizza? Why?
 Who would bear the burden of a 2.00 dollar
tax on pizza? Why?
 Who would bear the burden of a 2.00 dollar
tax on a lifesaving medicine?
 Who would bear the burden of a 1.00 dollar
tax increase on gas?
 3 types of business?
 How do they pay taxes
 Who bears the burden of corporate income
tax.
Corporate Income tax
 Corporations, like individuals, must pay
federal income taxes.
 Businesses can take many deductions.
 Most Corporations pay an income tax in the
ballpark of 35%
 Why Incorporate?
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Limited liability for stock holders (shared risk)
Transferable ownership
Ability to attract capital
Long life
Double Taxation
 Capital Gains- Profit made from a stock
holder selling shares
 15% rate of taxation
 Can discourage capital formation (hiring of
educated workers and purchasing of new physical
capital to increase efficiency) because it
discourages people from investing in our
Corporations.
 Dividends- corporate profits paid out to
stockholders.
 Paid through individual income tax
Corporate Tax Articles
 List all parties likely to bear the burden of a
corporate income tax?
 Will every corporation spread the burden in the same way?
 Explain your answer
 What is the reasoning behind Gregory Mankiw’s
claim that cutting corporate income taxes would
lead to higher wages for workers and lower prices for
consumers?
 If the United States cut the corporate income tax,
how might we make up for the lost government
revenue?
 Do you agree with Mankiw? Explain.
FICA
 In addition to withholding money for income
taxes, employers withhold money for taxes
authorized under the Federal Insurance
Contributions Act, or FICA.
 FICA taxes fund two large government
programs, Social Security and Medicare.
 Employees and Employers share payments
Social Security
 Social Security was founded in 1935 to ease the
hardship of the great depression.
 Originally, Social Security was simply a
retirement fund providing for old age pensions
to workers.
 Today it also provides benefits to surviving
family members of wage earners and to people
whose disabilities keep them from working.
 Both employee and employer pay 6.2% for SS
 Social Security has a cap on payments that is
adjusted annually for inflation. The current cap is
at 106,800.
Medicare
 National Health insurance program
 Helps pay for health care for people over age
65
 Also covers people with certain disabilities
 Tax rate for Medicare is 1.45%
 No cap
Unemployment
 Paid by employers
 Gives benefits to people who lose there job
through no fault of their own.
 Person will receive benefits for a fixed
number of weeks.
 Reading- What are the problems with the
Medicare and Social Security programs?
Tell me the tax base and
structure of each tax
 Medicare tax
 Social Security Tax
 Income Tax
 Social Security (with no cap)
Problems with FICA
 Both Social Security and Medicare
 Decreased Tax Revenue (Recession)
 Higher unemployment = less FICA tax revenue
 Baby Boomers (lower worker to retiree ratio)
 Increased benefits
 Medicare
 New Technology
 Medicare Fraud
 Increasing Health Care Costs
Is health care a right or a
privilege?
 How much is a life worth?
 Does the answer to this question vary based on
circumstance?
 Is it economically practical to offer everyone
unlimited health care benefit?
FICA Videos
The Cost of Dying
 Explain the issue/problem identified in this video.
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List factors that complicate possible solutions.
 The primary problem with Medicare is its system of incentives.
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Explain how current incentives within this program cause problems with financing
Medicare.
 As an economist, how could you change the incentives within Medicare to
solve the problem?
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Each group comes up with a solution and documents it on the white board.
 If you had to choose between “rationing care” within the Medicare system
or raising taxes on tax payers to pay for the current system, which would
you choose?
Medicare Fraud
 Explain how criminals are able to steal from Medicare.
 If Medicare were run by a private insurance provider, do you believe they
would have handled the situation differently than the govt.?
 Why would the Govt. choose not to hire more workers to monitor the
validity of Medicare claims?
The Medicare Problem
 As an economist, how could you change the
incentives/rules within Medicare to solve the
problem?
 Each group comes up with a solution and
documents it on the white board.
 If you had to choose between “rationing care”
within the Medicare system or raising taxes
on tax payers to pay for the current system,
which would you choose?
Other Taxes (Non FICA)
 Estate tax- Tax on the estate, or total value of
the money and property of a person who has
died. It is paid out of a person’s estate before
the heirs receive their share.
 Gift tax
 Tax on money or property that one person
gives to another
 Can give up to 12,000 dollars tax free to a
person per year under current law.
Estate Tax
 What affect might the estate tax have on
small business owners and farmers?
 What is Obama’s plan for the estate tax?
Excise Tax
 Excise Tax- general revenue tax on the sale or
manufacture of a good. Some examples
would be taxes on gasoline, cigarettes,
alcoholic beverages, telephone services and
cable television.
 Federal Income Tax
 Corporate Income Tax
 Social Security tax
 Medicare tax
 Excise tax
 Estate tax
 Gift tax
 Review term
Gas Tax a Good Idea?
 Why does Thomas Friedman claim that the gas
tax is a “win, win, win, win, win”?
 Obviously gas is a big part of how we function in
our economy.
 What good effects might a gas tax
have?
 What negative effects might it have?
 Do you agree that we should have a
higher gas tax? Explain your answer.
Vocabulary Assignment
 Gift Tax
 Estate Tax
 Excise Tax
 Social Security
 Medicare
 Elastic demand
 Inelastic demand
 FICA taxes
Tax Credits
 Refundable- will receive money if their
income tax goes below zero.
 Non- refundable- only applies to taxes owed.
Quiz
 Mario and Luigi both pay a 1.65% FICA tax on
all of their income. What is the tax structure of
this tax? What is the tax base?
 There is a 10% tax on pizza. Mario makes
20,000 dollars a year. He spends 5,000 dollars
a year on pizza. Luigi makes a million dollars a
year. He spends 8,000 dollars a year on pizza.
What is the tax base of this tax? Who will pay
more in pizza tax, Mario or Luigi? What is the
tax structure of this tax? Why?
Quiz
 Tobacco companies have been subject to
many tax increases, fines and penalties. How
have they stayed profitable as a business?
 Why are social security and Medicare
becoming a problem? Why don’t politicians
do something to solve the problem?
 Why should we be concerned about the high
corporate income tax rates in the US?
 "If a nation expects to be ignorant and free, in
a state of civilization, it expects what never
was and never will be." --Thomas Jefferson to
Charles Yancey, 1816.
Things to Consider
 How do the tax decisions affect you?
 How do they effect people of various income
levels?
 Do the tax proposals meet your idea of
fairness?
 How will the tax proposals effect the overall
economy?
 What incentives do the proposals provide?