Why do we need TAXES?In this world, nothing can be said to be certain, except death and taxes – Ben Franklin

OBJECTIVES

Recognize that governments impose many different types of taxes in order to collect revenue.

Identify and apply criteria for judging what constitutes a fair tax, including ability to pay, efficiency, simplicity, and benefit received.

Predict how people will respond when the incentive structure is changed by tax changes

PUBLIC GOODS ARE PAID FOR BY TAXES

How are taxes used? Maintaining the Legal and Social

Framework. The government uses tax revenue to pay for the country’s law enforcement and judicial system.

Providing Public Goods and Services.The government uses tax revenue to provide for national defense, one example of a public good.

Maintaining Competition. The government uses tax revenue in the enforcement of anti-trust laws.

How are taxes used?

Redistributing Income. provide services—health care

through the Medicaid program, for example—to people who might not be able to obtain these services on their own.

Has the effect of redistributing income from those who pay relatively more in taxes to those who receive benefits of the government programs.

What will happen?

Air pollution is caused in part by emissions from automobile engines. Suppose the government tripled the current tax on gasoline. What might this action accomplish, apart from the impact it would have on tax revenue?More efficient cars?

What will happen?

Suppose the government decreased income tax rates dramatically at a time when the economy was in a slump. What might this action accomplish, apart from the impact it would have on tax revenue?

Why do you think that people often dislike paying taxes?

List 3 reasons in your notes.

CRITERIA FOR ASSESSING A FAIR TAX

Ability to payEfficiencySimplicityBenefits received

WHAT IS FAIR?

Progressive tax – people with low income pay a smaller proportion their incomes

Proportional tax – flat tax. Everyone pays the same percent of their income

Regressive tax – people with low income pay a larger proportion of their income in taxesExcise tax (user tax – why?)Sales tax (proportional tax – why)

EFFICIENCY

Deadweight loss – add a tax and equilibrium shifts to the left (less) consumers buy less, producers produce less

Taxes on inelastic products and services have less of an effect

Lump-sum tax – collect tax without associating it with any particular behavior, that way you can’t adjust your behavior with substitutes.

TAXES DEFINED

Income tax – a percentage of earnings, more than $1 trillion in revenue

Sales tax – a percentage of payments for purchase (currently 9.1% in AZ) No national sales tax Considered a regressive tax

Excise tax – imposed on particular goods and services Unit taxes - certain amount per unit Ad valorem tax - percentage of sales price

TAXES DEFINED CONTINUED

Value-added taxes (VAT) – imposed on every step along the path to market

Poll tax – lump-sum tax requires a specific payment from each adult Considered a regressive tax Example, make people pay to vote, now illegal

Property tax – percentage of value of home, car, inheritance, land, etc.

Capital gains tax – profits from sale of an asset such as a home or shares of stock

"DID YOU EVER NOTICE THAT WHEN YOU PUT THE WORDS "THE" AND "IRS" TOGETHER, IT SPELLS "THEIRS?“ – AUTHOR UNKNOWN

Taxes help prevent freeloading Two reasons people don’t like to pay taxes:

Since the exchange of taxes for government services is not voluntary, it may not be of equal benefit for all taxpayers

The nature of taxation diminished the link between payment and consumption – individuals pay their taxes but do not see much direct benefit for their payment.The cost is obvious but the benefit is not