Taxation Introduction

Taxation Tax: a required payment to a government. Revenue: the income the government receives from taxes.

Why tax? We expect the government to handle all of the following and more: – National defense, highways, education, law enforcement – List 5 more things the government provides

Limits to taxation in the US Tax money must be used for “the common defense and general welfare” and not for just individuals Church services cannot be taxed (violates 1 st amendment) Exports cannot be taxed

Tax bases and structures Tax base: when enacting a tax first a government decides what will be taxed (e.g. sales, income, etc.). Proportional tax: a tax where the percentage of income paid remains the same for all income levels. – Think sales tax: CA: starts at 7.5% + local taxes Corona: 8% Progressive tax: a tax where the percentage of income paid in taxes increases as income increases. – Think income tax Regressive tax: a tax where the percentage of income paid in taxes decreases as income increases. – A high-income household spends a lesser proportion of their money on sales tax.

Tax bases and structures Progressive tax: a tax where the percentage of income paid in taxes increases as income increases. – Think income tax Taxable IncomeTax Rate $0 to $9,22510% $9,226 to $37,450 $ plus 15% of the amount over $9,225 $37,451 to $90,750 $5, plus 25% of the amount over $37,450 $90,751 to $189,300 $18, plus 28% of the amount over $90,750 $189,301 to $411,500 $46, plus 33% of the amount over $189,300 $411,501 to $413,200 $119, plus 35% of the amount over $411,500 $413,201 or more $119, plus 39.6% of the amount over $413,200 Federal tax rate

Tax bases and structures Progressive tax: a tax where the percentage of income paid in taxes increases as income increases. – Think income tax State tax rate Tax Bracket (Single) Marginal Tax Rate $0+1.00% $7, % $17, % $28, % $39, % $49, % $254, % $305, % $508, % $1,000, %

Tax bases and structures Regressive tax: a tax where the percentage of income paid in taxes decreases as income increases. – A high-income household spends a lesser proportion of their money on sales tax. Person A: salary of $50,000 buys a car with an 8% sales tax for $10,000 = $800 in tax which is 1.6% of person A’s income Person B: salary of $1,000,000 buys a car with an 8% sales tax for $100,000 = $8000 in tax but this is only.8% of person B’s income If person B buys the $50,000 car…that $800 in sales tax is only.08% of person B’s income

Characteristics of a Good Tax Simplicity: Taxpayers and businesses should be able to keep records and prepare their own taxes Efficiency: it should not cost a lot for the government to collect this. Certainty: taxpayers should have a clear understanding of how, when, and how much money they must pay. Equity: no tax payer should bear too much or too little of the burden.

Which tax method is fairest? Benefits-received principle A person should pay taxes based on the benefits he/she recieve… – E.g.: People who drive should pay a gas tax which goes to road upkeep Ability-to-pay priniciple People should pay taxes according to how able they are to pay taxes… – E.g. : Progressive tax rate