1. Sources of Gov’t Revenue--TAXES Chapter 9

2. Criteria for Effective Taxes 1. Equity 1. Equity –Must be fair –Want to avoid tax loopholes —when people find a flaw in tax laws that allow some people to avoid paying taxes –The belief of “fairness” is different for each person

3. 2. Simplicity 2. Simplicity –Written so anyone can understand it –Ex. Individual income tax —a tax on peoples earnings is actually 1,000 of pages long but the IRS puts it in terms everyone can understand Sales tax —tax on most consumer goods Sales tax —tax on most consumer goods –Different for each state

5. 3. Efficiency 3. Efficiency –Must be easy to collect –Must be cost efficient ex. Toll booths collect a tax. Toll must be = or > the cost of employment and upkeep of booths

6. 2 Principles of Taxation 1. Benefit Principle 1. Benefit Principle –Those who benefit from the g or s should pay in proportion to the amount of benefit received Example: gasoline. Tax is included in price of gas. If you drive more, you pay more taxes because you receive the benefit of better roads, more police protection, etc. Example: gasoline. Tax is included in price of gas. If you drive more, you pay more taxes because you receive the benefit of better roads, more police protection, etc.

8. 2. Ability to Pay 2. Ability to Pay –Belief that people should be taxed on their ability to pay Example: indiv. income tax—people who have a higher income are taxed at a higher percentage Example: indiv. income tax—people who have a higher income are taxed at a higher percentage

9. Types of Taxes Proportional Proportional –The same % of tax on everyone regardless of income Example: if tax is 20%, a person with a $10,000 income pays $2,000. Example: if tax is 20%, a person with a $10,000 income pays $2,000. A person with a $100,000 income pays $20,000 A person with a $100,000 income pays $20,000

10. 2. Progressive 2. Progressive –Imposes a higher % of tax on people w/ a higher income –Claims a larger $ amount and larger % of income Example: income tax Example: income tax

11. 3. Regressive 3. Regressive –Tax that imposes a higher rate on low incomes than on high incomes Social Security Tax Social Security Tax –Tax on income up to $80,400. If you make more than this, you do not have to pay a tax on the amount above $80,400.  Example: if you made $80,400 or less you would pay around 7.5 cents per dollar earned in SS tax  If you earned 300,000 you would only be paying 1.7 cents per dollar earned

12. Federal Taxes Income tax Income tax Collected through payroll withholding (automatically deducted) Collected through payroll withholding (automatically deducted) IRS is the branch of government in charge of collecting taxes IRS is the branch of government in charge of collecting taxes –File a tax return in April—an annual report

13. FICA (fed. Insurance contributions act) FICA (fed. Insurance contributions act) –SS and Medicare (fed. health care program available for all senior citizens)

14. Corporate Income Tax Corporate Income Tax --tax on corporate profit Sin Tax Sin Tax –Heavy tax on goods in order to reduce consumption (cigarettes and alcohol) Estate Tax Estate Tax --tax on transfer of property when a person dies

15. Gift Tax Gift Tax –Tax on donations of money or wealth paid by the giver. This is done to make sure the wealthy do not give away their estates before their death. Custom Duty Custom Duty –Tax paid on goods brought in from other countries