Download Sources of Government Re

Sources of Government Revenue
Economic Impact of Taxes
• Resource Allocation
• Factors of
production are
affected
• Raise in production
costs
• Higher prices = less
demand = increase
unemployment
Economic Impact of Taxes
• Behavior Adjustment
• Encourage or
discourage certain
activities
• “sin tax”: high % tax
that raises revenue
while reducing
consumption of a
socially undesirable
product
Economic Impact of Taxes
• Productivity
– Change incentives to save,
invest, and work
• The Incidence of a Tax
– The party being taxed is
not always the one that
bears the burden of a tax.
– Higher taxes on utility
company = higher utility
bills
Criteria for Effective Taxes
• Criterion One: Equity
– Fairness is subjective
– Tax loopholes: Can they be avoided?
– Taxes are generally viewed as fair if there are
fewer exemptions, exceptions, and deductions
Criteria for Effective Taxes
• Criterion Two: Simplicity
• Tax laws should be easy to understand
Criteria for Effective Taxes
• Criterion Three: Efficiency
• Easy to administer and can generate revenue
easily
Two Principles of Taxation
• Benefit Principle
• Those who benefit from the government
should pay in proportion to the amount of
benefits they receive
• Gasoline: If you drive more, then you pay
more gas tax = more $$ for highway upkeep
• Two limitations:
– Most government benefits go to those least able
to pay for them
– Benefits are hard to measure
Two Principles of Taxation
•
•
•
•
•
• Ability-to-Pay Principle
People should be taxed according to their
ability to pay, regardless of benefits received
Ex: individual income tax
Two factors:
Benefits derived from government spending
cannot always be measured
Assumes higher income earners suffer less
discomfort in paying taxes than lower income
earners
Types of
• Proportional
• Imposes the same tax rate %
on everyone, regardless of
income
• As income increases, the % of
income tax stays the same.
• If tax rate is 20%, a person
making $10,000 pays? A
person making $100,000
pays?
Types of Taxes
• Progressive Tax
• Imposes a higher tax
rate % on persons
with higher incomes
• Ex? Income Tax
• As income increases,
the % of income paid
in taxes also goes up
Types of
• Regressive Tax Example?
• State sales tax
• As income goes up, the % of income paid in
taxes goes down
– Someone making $10,000/yr may spend $5,000
on food and clothing
– Someone making $100,000 may spend $20,000 on
same essentials
• If state sales tax is 4%, the lower income
household is paying a higher % of total taxes
Section 2: The Federal Tax System
• Individual Income Taxes
• Gov collects about 48% of revenue from
individual income tax
• W/held from individual’s paychecks, with
employers sending taxes directly to IRS
• Individuals file a tax return on/before April 15
each year.
– If taxes w/held > taxes owed = refund
– If taxes w/held < taxes owed = individual pays
balance
FICA
• Federal Insurance
Contributions Act
– Largest source of
government revenue
– Regressive
• Medicare
• Social Security Taxes:
Partially proportional,
partially regressive
Quiz
1. What are the 3 the criteria for effective taxes?
2. What are the 2 principles of taxation?
3. What are the 3 types of taxes?
4. What two areas or taxes make up FICA?
5. What percentage of revenue is collected by the
Federal Government in the form of income tax?
6. What is a progressive tax?
7. What is a regressive tax?
8. What does FICA stand for?