Government Taxation

The Purpose of Taxes Taxes are designed to provide revenue for government programs. For example, California property taxes pay for schools. The federal income taxes pay for our national military and social programs. The Social Security Tax (FICA) pays for Social Security pensions in old age.

The Benefit Principle of Taxation The Benefit principle of taxation is that people should pay a tax if they benefit from the government service For example, gasoline tax is paid by drivers to provide revenue to pay for roads.

The Ability-to-pay Principle of Taxation The ability-to-pay principle is based on the idea that people should be taxed based on their ability to pay, regardless of benefits they receive. The federal income tax rate goes up, as people make more money.

Progressive Taxation As a person’s income rises, he or she pays a higher percentage of income tax. Each person has a tax bracket, indicating whether they will pay 15%, 28% or perhaps 33% of their income to the federal government

Proportional Taxation A proportional tax imposes the same percentage rate of taxation on everyone, regardless of income. For example, some candidates for President are proposing that everyone pay a “flat tax” of 10% of their income.

Regressive Taxation A regressive tax is one that imposes a higher percentage rate of taxation on low incomes than high incomes. A bridge toll is a good example of this type of tax since a $15 toll is a higher percentage of a poor person’s income than that of a rich person.

Types of Federal Taxes Federal Income tax – withheld monthly. Amount paid depends upon income. FICA is the Social Security tax withheld monthly at 6.2% Medicare tax withheld monthly at 1.45%

Corporate Taxes Almost half of all revenue for federal government comes from individual income tax. Corporate income taxes creates about 11% of total revenues. Corporations pay a 35% tax rate, but also find many loopholes to avoid paying taxes. They may also pass along taxes to consumers in the form of price hikes.

Excise Taxes These are taxes paid at the point of purchase. For example, the gas tax paid by motorists pays for our roads. Government may also discourage certain activities with a sin tax on cigarettes, liquor etc.

Type of State Taxes State income tax – paid in CA. based on income level. State sales tax – approx. 7.25% in addition to what Alameda Co. adds (10% total) Property tax in CA = 1% of assessed value

Should the Federal income tax remain progressive or become proportional? The Federal income tax is progressive, with higher income groups paying higher percentages of their income in taxes. Several candidates, including Ted Cruz, are calling for a proportional or “flat tax” for every American. What do you think?

The Impact of Taxes A tax placed on a factor of production reduces the supply of a product. For example, we learned a carbon tax would reduce the supply of fossil fuels Conversely, a tax cut for homeowners will stimulate the purchase of homes.