Ap u.s. government & politics Wednesday, February 28, 2018

Current events discussion 7 Minutes

Tax Policy

Taxes on Goods

Excise Taxes Taxes on the production of particular goods Typically are imposed on “luxury” items, and on goods that the government wants to discourage the use of (examples: alcohol, tobacco)

Import Taxes Also known as tariffs Taxes placed on goods that are manufactured in foreign countries; Paid when the goods enter the country Historically, excise taxes and tariffs accounted for the majority of federal government revenue

Sales Taxes Flat tax on the sale of all goods (and sometimes services) Enacted by most of the states; There is no federal sales tax

Taxes on Income

Personal Income Tax Tax paid by individuals; percentage of total income (minus deductions, exemptions, credits) Current top tax rate is 39.6% This is historically low; during the Eisenhower administration the top rate was 90% Investment Income (aka, Capital Gains) is taxed at a different (generally lower) rate than income from work Currently 15% for the highest tax bracket

Corporate Income Tax Tax on corporate profits The official corporate tax rate in the U.S. was relatively high (3rd highest in the world) But—the corporate tax code, even more than the personal income tax code, is full of loopholes Can you guess why? The 2017 Tax Reform Act changed the first point, but not the second Can you guess why Biggest change in the 2017 law: The base corporate tax rate was reduced from 35% to 21%

Gift Taxes and Estate Tax “Gifts”—Transfer of assets from one person/entity to another without consideration Income from gambling is also considered “gift” income Estate tax—Tax on large inheritances (aka, the “death tax”) Applies to estates of $5.4 million or more (0.2% of all inheritances)

Impact of Taxation

How much should people pay? Progressive Tax: People with higher incomes pay a higher tax rate U.S. Income Tax Estate Tax Flat Tax (Proportional Tax): Everyone pays the same tax rate A popular proposal among conservative politicians is to convert the U.S. income tax to a flat tax, while at the same time eliminating many loopholes and exemptions Regressive Tax: People with lower incomes pay a higher tax rate Sales tax are functionally regressive Excises taxes may be as well The overall effective income tax rate may actually be somewhat regressive, when the lower rate for investment income is incorporated

The 2017 tax bill: ignatius vs. von drehle Class Reading and Seminar Discussion

Homework Textbook, Chapter 16: Reading and Outline due Tomorrow