Sources of Gov’t Sources of Gov’t Revenue--TAXESRevenue--TAXES

Chapter 9

Criteria for Effective TaxesCriteria for Effective Taxes• 1. Equity1. Equity

– Must be fairMust be fair– Want to avoid Want to avoid tax loopholestax loopholes —when —when

people find a flaw in tax laws that allow people find a flaw in tax laws that allow some people to avoid paying taxessome people to avoid paying taxes

– The belief of “fairness” is different for The belief of “fairness” is different for each personeach person

• 2. Simplicity2. Simplicity– Written so anyone can understand itWritten so anyone can understand it– Ex. Ex. Individual income taxIndividual income tax —a tax on —a tax on

peoples earnings is actually 1,000 of peoples earnings is actually 1,000 of pages long but the IRS puts it in terms pages long but the IRS puts it in terms everyone can understandeveryone can understand•Sales taxSales tax —tax on most consumer goods —tax on most consumer goods

– Different for each stateDifferent for each state

• 3. Efficiency3. Efficiency– Must be easy to collectMust be easy to collect– Must be cost efficientMust be cost efficient

ex. Toll booths collect a tax. Toll must ex. Toll booths collect a tax. Toll must be = or > the cost of employment and be = or > the cost of employment and upkeep of boothsupkeep of booths

2 Principles of Taxation2 Principles of Taxation

• 1. Benefit Principle1. Benefit Principle– Those who benefit from the g or s Those who benefit from the g or s

should pay in proportion to the amount should pay in proportion to the amount of benefit receivedof benefit received•Example: gasoline. Tax is included in price Example: gasoline. Tax is included in price

of gas. If you drive more, you pay more of gas. If you drive more, you pay more taxes because you receive the benefit of taxes because you receive the benefit of better roads, more police protection, etc.better roads, more police protection, etc.

• 2. Ability to Pay2. Ability to Pay– Belief that people should be taxed on Belief that people should be taxed on

their ability to paytheir ability to pay•Example: indiv. income tax—people who Example: indiv. income tax—people who

have a higher income are taxed at a higher have a higher income are taxed at a higher percentagepercentage

Types of TaxesTypes of Taxes

• ProportionalProportional– The same % of tax on everyone The same % of tax on everyone

regardless of incomeregardless of income•Example: if tax is 20%, a person with a Example: if tax is 20%, a person with a

$10,000 income pays $2,000. $10,000 income pays $2,000.

A person with a $100,000 income pays A person with a $100,000 income pays $20,000$20,000

• 2. Progressive2. Progressive– Imposes a higher % of tax on people w/ Imposes a higher % of tax on people w/

a higher incomea higher income– Claims a larger $ amount and larger % Claims a larger $ amount and larger %

of incomeof income•Example: income taxExample: income tax

• 3. Regressive3. Regressive– Tax that imposes a higher rate on low Tax that imposes a higher rate on low

incomes than on high incomesincomes than on high incomes•Social Security TaxSocial Security Tax

– Tax on income up to $80,400. If you Tax on income up to $80,400. If you make more than this, you do not have to make more than this, you do not have to pay a tax on the amount above $80,400.pay a tax on the amount above $80,400.

Example: if you made $80,400 or less Example: if you made $80,400 or less you would pay around 7.5 cents per you would pay around 7.5 cents per dollar earned in SS taxdollar earned in SS tax

If you earned 300,000 you would only If you earned 300,000 you would only be paying 1.7 cents per dollar earned be paying 1.7 cents per dollar earned

Federal TaxesFederal Taxes

• Income taxIncome tax

• Collected through Collected through payroll withholdingpayroll withholding (automatically deducted)(automatically deducted)

• IRSIRS is the branch of government in is the branch of government in charge of collecting taxescharge of collecting taxes–File a tax return in

April—an annual report

• FICAFICA (fed. Insurance contributions (fed. Insurance contributions act)act)– SS and SS and MedicareMedicare (fed. health care (fed. health care

program available for all senior citizens)program available for all senior citizens)

• Corporate Income TaxCorporate Income Tax--tax on corporate profit--tax on corporate profit

• Sin TaxSin Tax– Heavy tax on goods in order to reduce Heavy tax on goods in order to reduce

consumption (cigarettes and alcohol)consumption (cigarettes and alcohol)

• Estate TaxEstate Tax--tax on transfer of property when a --tax on transfer of property when a

person diesperson dies

• Gift TaxGift Tax– Tax on donations of money or wealth Tax on donations of money or wealth

paid by the giver. This is done to make paid by the giver. This is done to make sure the wealthy do not give away their sure the wealthy do not give away their estates before their death.estates before their death.

• Custom DutyCustom Duty– Tax paid on goods brought in from other Tax paid on goods brought in from other

countriescountries