1. Sources of Government Revenue

2. The Economics of Taxation : Economic Impact of Taxes
Taxes/Other government revenues affect:
resource allocation,
consumer behavior,
nation’s productivity
Growth

3. Economic Impact of Taxes : Resource Allocation
Affects factors of production
A TAX placed on a good at the factory = rise in production cost
Supply curve shifts to the left
If demand stays the same = equilibrium price goes op

4. Economic Impact of Taxes: Behavior adjustment
TAXES affect the economy
Encourage or discourage certain activities
SIN Tax: high percentage tax that raises revenue while reducing consumption of a socially undesirable product

5. Economic Impact of Taxes: Productivity and Growth
Taxes affect productivity and economic growth:
Change incentives to save, invest, and work
Why people favor lower taxes….

6. Economic Impact of Taxes: The Incidence of a Tax
“Final Burden of the Tax”
I.e. Utility company:
Raise rates: consumer bears the burden
(easy if demand is inelastic)
Rates are regulated =
Shareholders receive smaller dividends; postpone raises
(more elastic = producer will absorb the tax)

8. Criteria for Effective Taxes
TAXES are effective when they are:
Equitable
Simple
Efficient

9. Criteria for Effective Taxes
Criterion 1: Equity or fairness
Taxes should be IMPARTIAL and JUST
Fairness is subjective
Taxes are considered FAIRER
Fewer loopholes: exceptions, deductions, and exemptions

10. Criteria for Effective Taxes
Criterion 2: Simplicity
Tax LAWS should be EASY to understand
Individual income taxes: the taxes on peoples earnings
Complex tax = dislike
Sales tax: general tax levied on most consumer purchases;
paid at the time of purchase
Anyone purchases = pay tax

11. Criteria for Effective Taxes
Criterion 3: Efficiency
Easy to administer and successful at generating revenue
Individual income tax
Less efficient: toll booths
Luxury taxes

12. Two Principles of Taxation
Benefit Principle: those who benefit from government and services should pay in proportion to the amount of benefits received
Gas tax (built in) pay more if you drive more
Two limitations:
Many gov’t services provide the greatest benefits to those who can least afford to pay for them
Benefits are hard to measure

13. Two Principles of Taxation
Ability-to-Pay Principle: people should be taxed according to their ability to pay, regardless of the benefits they receive.
Two factors
Recognizes that societies cannot always measure benefits
Assumes that people with higher incomes suffer less discomfort paying taxes than people with lower income

14. Types of Taxes
Proportional: imposes same percentage rate of taxation on everyone
Progressive: imposes a higher percentage rate of taxation on people with high incomes than on those with low incomes
Regressive: imposes a higher percentage rate of taxation on low incomes than on high incomes

15. Figure 9.3

16. The Federal Tax System

17. IRS (Internal Revenue Service)
part of the Treasury Department

18. Individual Income Taxes
Fed. Gov’t collects 45% of its revenue from Individual income taxes
Paid over time through payroll withholding system
Before April 15th each year, an employee must file a tax return: an annual report to the IRS summarizing total income, deductions, & taxes withheld by employers

19. Individual Income Taxes
Progressive tax
Individuals earning higher incomes pay higher tax rates
Progressive Tax that ranges from 15% -39.6%

20. FICA: What is FICA? And why does it take part of my paycheck
FICA stands for Federal Insurance Contributions Act
FICA tax includes Social Security (6.2% of wages) & Medicare (1.45% of wages)
2nd largest source of Gov’t revenue

21. FICA
Social Security is a proportional tax up to $65,400 (the capping point) and then it is regressive
Medicare is not capped; it’s proportional at all levels of income
Total FICA tax = 7.65%

22. Corporate Income Taxes
3rd largest category of federal taxes
Corporation is recognized as a separate entity
Rates vary from 15% -35% (slightly progressive)

23. Other Federal Taxes
Excise Tax: tax on the manufacture or sale of certain items, such as gasoline and liquor
Estate Tax: tax the gov’t levies on the transfer of property when a person dies
Gift Tax: tax on gift of money/wealth paid by person making gift

24. State and Local Tax Systems

25. State Government Revenue Sources
Intergovernmental Revenues - money from federal gov’t
Sales tax - general tax on consumer purchases
Employee Retirement Contributions
Individual Income Taxes (not all states)

27. STATE SALES TAX States with the Highest Sales Tax: Mississippi
Rhode Island
Washington
Texas
Illinois

28. STATE SALES TAX States Without a State Sales Tax: Alaska Delaware
Montana
New Hampshire
Oregon

29. Advantages of Sales Tax
Effective way to raise large sums of money
Difficult to avoid because it affects large numbers of consumers
Relatively easy to administer - merchant collects at point of sale

30. Local Property Taxes
Second largest source of revenue for local governments
Real Property: includes real estate, buildings, & anything permanently attached

31. Local Property Taxes
Tangible Personal Property: includes tangible items, not permanently attached.
Intangible Personal Property: property with invisible value, such as stock, bond, patent, check

32. Examining Your Paycheck
Payroll withholding statement: the summary statement attached to a paycheck that summaries income, tax withholdings, and other deductions

34. State & local governments rely heavily on sales tax for revenues
QUESTION: WHY ARE STATE & LOCAL GOVERNMENTS LOSING MONEY TO THE INTERNET???
State & local governments rely heavily on sales tax for revenues
State & local governments already lose $3.3 billion each year to untaxed interstate sales
This figure will increase as more sales are made over the Internet
Should there be an Internet sales tax??? How would it work?