Review What is the fundamental economic problem? What are the requirements for something to be scarce? What are the three questions that all societies must face? What are the four factors of production? What are the three major economic systems? Who answers the questions in each? What type of economic system is the U.S.? Explain? What are fixed costs? What are variable costs? Pepsi and coke are ___________________ goods. Peanut butter and jelly are ____________ goods. What are the three major types of unemployment? Explain each.

The source of government revenue Taxes The source of government revenue

What does this mean?

Why tax? Source of government revenue What does the Government spend money on???? Public Goods (Nat. Defense, Schools, Parks, Roads, Social Programs, Police, Firemen) Repayment of debt with interest Research and Development (technology) Entitlements – Medicare, Medicaid, and Social Security

Where does all the money go? http://www.nytimes.com/interactive/2012/02/13/u s/politics/2013-budget-proposal-graphic.html

What are the Types of Taxes? Proportional Taxes A tax with a constant % paid regardless of income Flat tax Progressive Taxes A tax where the % paid in taxes increases as income increases U.S. Personal Income Tax Regressive Taxes The lower your income the higher % you pay in taxes Sales Tax

Proportional, regressive, or progressive?

sales tax – two families? Family of 4 with income of $100,000 annually If they save 30% of their income, how much do they spend on consumer goods (assume they spend the rest for purposes of simplicity)? $70,000 Suppose there is a 5% sales tax – how much do they pay in taxes .05 x 70,000 = $3,500 What percentage of their total income do they pay in taxes? $3,500/100,000 x 100 = 3.5% Family of 4 with income of $20,000 annually At this income level, how much will this family be able to save? How much do they spend on consumer goods? $20,000 Suppose there is a 5% sales tax – how much do they pay in taxes .05 x 20,000 = $1,000 What percentage of their total income do they pay in taxes? $1,00/20,000 x 100 = 5%

Who should pay taxes?

Principles of taxation – Who should pay? Ability to Pay Principle A citizen will pay more tax if he or she is able to pay more Income Tax- Wealthy more taxes, impoverished pay less Benefit Principle Citizens who will benefit from the use of the tax will pay for it. Excise taxes on gas go to fund road work and other projects Sales tax / Property tax in an area go to fund schools in that area

Criteria for Effective Taxes Equity- Tax must be fair and not discriminate or target individuals based on race or gender or age Simplicity The Tax must be some what easy and understandable for citizens Tax loopholes?? Efficiency The tax must generate an acceptable flow of income for the government.

Impact of Taxes Generate Income Adjust Behavior – How? Sin Tax- high tax placed on a product that has is viewed negatively in society Tobacco, Liquor, fast foot Allocate Resources Taxes change the price of products and will change the QD of the product and the S of the product

WHY? Impact of Taxes Productivity and Growth High taxes will stunt economic growth Low taxes will limit ability of government to function WHY?

Federal Tax System Income Tax- Personal Corporate Capital Gains Tax Excise Tax- Flat tax placed on the production and sale of specific items Tariff- Tax on imported goods

Federal Tax System Payroll deductions- taxes that automatically come out of your pay check FICA Taxes Medicare and Social Security Taxes The Internal Revenue Service (IRS) Federal Agency that collects taxes Tax Returns Tax Evasion

State and Local taxes Property Tax Sales Tax “Splost”

The State Dollar- Where It Comes From Property Tax 32% Individual Income Tax 22% Alcoholic Beverages Sales Tax 1% Tobacco Product Sales Tax 1% States have the power to make, collect, and spend their own taxes. Each state is unique, its laws are made by the state legislatures and governors. There are 51 different tax programs (one for each of the 50 states and one for the District of Columbia). Sources of state tax revenue: Sales taxes Income taxes Excise taxes States cannot make any laws that interfere with interstate commerce. Some states do not have individual income taxes on wages. Some do not have sales tax. Individual donations from private citizens often provide a significant source of revenue for many hospitals, schools, and libraries. Local taxes are under the authority of the state and may vary from city to city. The federal government often gives local governments additional tax revenue for schools and highways, among other services. Motor Vehicle License 2% Corporate Income Tax 3% General Sales Tax & Gross Receipts 25% Motor Fuel Sales Tax 4% All Other 10%

Government Administrative Environment and Housing The State Dollar- Where It Goes Education 30% Social Services 21% Insurance Trust Expenditure 7% Transportation 7% Government Administrative 4% State highways and transportation projects, such as building bridges, are supported through tax dollars. Universities and schools also get state funding. State monies pay for the state law enforcement system, including state courts, prisons and the police. States fund state parks and recreation and pay for welfare and special services. Tax revenue is also used to oversee professional license programs given to such groups as drivers, doctors, lawyers, and barbers to ensure that proper standards of conduct and safety are maintained. Local tax dollars are used in many different ways. Local services supported by tax dollars include Schools and local libraries Maintenance of local roads and city streets Streetlights, garbage collection, and recycling Local police and fire protection City and county jails; local courts Enforcement of zoning laws Local parks and recreation Utility Expenditure 7% Interest on General Debt 4% General Expenditure 5% Public Safety 8% Environment and Housing 7%

What Tax am I???? http://www.youtube.com/watch?v=lafDykKJ_9I The only reason I exist is to get people to stop people using specific product. The % I take gets bigger as you make more money. I am a special tax, I am not on everything just one specific product, the product is good to use and the money I generate goes to specific cause like roads or education. I am a constant, as your income goes up or down I stay the same %. I am everywhere, where ever there is a market I am there. If you are making legal money I get a cut. If your income is big then I am small, and if your is small I seem larger than life. If you want something from over the seas it has to get past me. I am the basic economic problem that everyone faces. When someone does not pay their taxes they have committed ________