Bell Work What are some examples of taxes that people pay? Why do you think we have to pay taxes?

In Lak’ech by Luis Valdez Tu eres me otro yo Si te hago daño a ti, Me hago daño a mi mismo Si te amo y respeto Me amo y respeto yo You are my other me If I do harm to you, I do harm to myself If I love and respect you I love and respect myself

Bell Work What are some examples of taxes that people pay? Why do you think we have to pay taxes?

Today I will Discuss the effects of taxes on resources, behavior, productivity and growth in a society Describe the three general criteria for effective taxes Summarize the two principles of taxation that are currently in use in the U.S. Name the three types of taxes that exist in the U.S. today Analyze the potential effects of alternative tax approaches Summarize tax reform attempts since 1981

Key Vocabulary Tax Distribution of income Loophole Internal Revenue Service

Taxes Chapter 14, Lesson 1

Economic Impact of Taxes Resource Allocation A tax placed on a good raises its price Price increase causes lower demand Lower demand reduces production Lower production moves those resources into other industries

Economic Impact of Taxes Behavior Adjustment Mortgage interest deduction encourages home ownership Sin Tax A relatively high tax designed to raise revenue and reduce consumption of a socially undesirable product

Economic Impact of Taxes Income Redistribution Distribution of Income The way in which income is allocated among families, individuals and other groups Can be affected by taxes Tax money that gets distributed to needier regions of the country

Economic Impact of Taxes Productivity and Growth Changes the incentives to save, invest and work At some point, we could reach a level of taxes at which productivity and growth would suffer

Economic Impact of Taxes Incidence of a Tax The final burden of the tax Who actually pays the tax A tax on a producer increases the cost of production and causes a change in supply If demand is elastic, it is more difficult for the producer to shift the incidence of the tax to the consumer If demand is inelastic, more of the tax can be shifted to the consumer

Characteristics and Types of Taxes Criteria for Effective Taxes Equity – fairness. Taxes should be impartial and just. Tax loopholes (exceptions) should be avoided. Simplicity – people are more willing to tolerate taxes when they understand them Efficiency – easy to administer and successful at generating revenue

Characteristics and Types of Taxes Two Principles of Taxation Benefit Principle Those who benefit from government goods and services should pay in proportion to the amount of benefit they receive Benefits are hard to measure Those who receive some benefits may be the least able to pay Ability to Pay People should be taxed according to their ability to pay, regardless of the benefits they receive

Characteristics and Types of Taxes Three Types of Taxes Proportional Tax AKA flat tax. Everyone pays the same rate regardless of income. Tends to have a larger impact on people with lower income levels Example – Medicare is 1.45% of income for everyone

Characteristics and Types of Taxes Three Types of Taxes Progressive Tax Imposes a higher percentage rate of tax on higher incomes than on lower incomes Tends to have a larger impact on people with higher income levels Example – individual income taxes

Characteristics and Types of Taxes Three Types of Taxes Regressive Tax Imposes a higher percentage rate of taxation on lower incomes than on high incomes Tends to have larger impact on people with lower incomes Example – Sales tax

Alternative Tax Approaches The Flat Tax Proportional tax. Everyone pays the same percentage rate Advantages Simplicity Close loopholes Disadvantages Removes incentives built into current tax code (home ownership, charitable giving) Regressive – shifts more of the tax burden onto lower income groups No evidence that it would stimulate economic growth

Alternative Tax Approaches The Value-Added Tax Adopting a national sales tax by taxing consumption rather than income Tax is added to the value that manufaturers add at each stage of production Advantages Built into the price of every product produced Tax incidence is widely spread Easy to collect Disadvantages Virtually invisible Regressive

Tax Reform Highlights 1981 Ronald Reagan believed that high taxes were the main stumbling block to economic growth Economic Recovery Tax Act Lowered the marginal rates in all 16 tax brackets Reduced the highest rate from 70% to 50%

Tax Reform Highlights 1986 1993 Alternative Minimum Tax The personal income tax rate that applies whenever the amount of taxes falls below a designated level Makes it harder for the rich to avoid paying taxes altogether 1993 More than a decade of tax cuts had driven up the national deficit Two top tax brackets of 35% and 39.6% were added to increase revenues

Tax Reform Highlights 1997 Tax revenues were up Republicans gained control of Congress and fulfilled campaign promises Capital gains tax reduced from 28% to 20% Estate tax reduced Numerous loopholes for high income earners were created Became the most complicated tax law ever

Tax Reform Highlights 2001 Revenues were exceeding spending Expected to continue through 2010 Options: Pay some of the money borrowed in the 1980s Fund new programs Reduce taxes Bush administration opted to cut taxes by $1.35 billion Reduced the top 4 tax brackets of 27, 30, 35, and 39.6% to 25, 28, 33, and 35% - set to take effect in 2006 Created a 10% tax bracket for people who earned $0 - $9,275 Eliminated the estate tax on the top 2% of taxpayers

Tax Reform Highlights 2003 Accelerated the start of the reduced top 4 tax brackets (implemented immediately instead of the scheduled 2006) Child tax credit increased from $600 to $1000 Capital gains tax reduced from 20% to 15% Resulted in a return to deficit spending We went from having a surplus to the largest deficit in history

Tax Reform Highlights The “Permanent” Tax Cuts of 2011 Republicans in Congress wanted to make the Bush Era tax cuts permanent The Great Recession and increased spending by the Obama Administration needed to resolve it increased the deficits even further Made making the cuts permanent impossible

Tax Reform Highlights 2013 Reinstated a 35% and 39.6% tax bracket as a way of reducing the deficit

Activity Working in pairs, calculate the taxes you would owe under each of the different tax systems in each scenario. Then answer the questions to analyze the different outcomes.