Types of Taxes personal income tax (all types of income) payroll tax (15.3 % of wage and salary income) corporate income tax (corporate profits) excise tax (gasoline, liquor, sales) estate and gift tax tariffs on imports property taxes

Federal Taxes

Income Tax Terminology taxable income = income less exemptions ($2550 per person) deductions (e.g. $4000 for single taxpayer marginal tax rate – tax paid on an additional dollar earned average tax rate – total taxes as a percent of total income

Progressive, Regressive, or Proportional?

What is the Flat Tax? Big exemption –$35000 would be the “zero-bracket” amount for a family of four Flat rate for all income above Hall-Rabushka version: –Tax wage and salary income at the household level –Interest, dividends taxed at the firm level

Review of the Effect of Putting a Tax on a Commodity Price rises, but by less than the tax Quantity declines Deadweight loss –size depends on how much quantity declines Incidence of the Tax –who bears more of the burden of the tax consumers or firms? –Depends on how much the price rises

Effect of a Tax on Labor Income

Payroll Tax: Firm versus Worker

Effects of Tax Rate Changes on Tax Revenues (T14.1 Modified)

The Laffer Curve

The Dynamic Scoring Debate Consider cutting the tax rate from.6 to.4 Before the tax cut, L = 700 hours –thus: 0.6 times $14000 = $8400 Static scoring, L stays at 700 hours –thus: 0.4 times $14000 = $5400 Dynamic scoring, L rises to 1000 hours –thus: 0.4 times $20000 = $8000

The Equality-Efficiency Trade-Off: As tax rates get higher (in an effort to improve equity) there is less production (less efficiency) and perhaps less revenue to redistribute

Transfer Payments Means-tested programs –family support programs (formerly AFDC until welfare reform of 1996) –medicaid –food stamps –Earned Income Tax Credit (EITC) Social Insurance Programs –social security –medicare –unemployment insurance

Two Welfare Reform Options

Income Distribution in the U.S.

Lorenz Curve

Recent increase in income inequality (Gini Coefficient) But why? –return to education is rising? –international trade? –productivity growth?

Poverty Rate in the United States

A View of World Income Inequality

People Moving from Quintile to Quintile About 60 percent of households move from one quintile to another quintile over a ten year span –About one-half of those in the bottom quintile move out of the bottom quintile –About one-half of those in the top quintile move out of the top quintile

1000 Points of Light?