Taxes and Taxation “In this world, nothing is certain but death and taxes.” Ben Franklin

Four Maxims (guiding principles) of Taxation Written by Adam Smith: 1. Equity: The rich should be able and willing to pay a higher percentage of taxes because they benefit the most from government 2. Certainty: The amount and how to pay should be clear, and not set arbitrarily 3. Convenience: Tax system should not be overcomplicated; it should be straightforward and predictable 4. Efficiency: taxes should produce maximum gain for the government while causing minimum loss to the taxpayers

Who should pay and why?  Ability-to-pay principle : Citizens should be taxed according to their income or wealth; the more you make, the higher the taxes (Federal and State income taxes, luxury items tax)  Benefits-received principle: Those who use the services should pay for it (gas tax with money going towards roads and toll booths

Taxation Basics: tax base and tax rates  Tax base : is the thing that is taxed. This could include private property, goods sold at a store, or personal income  Tax rate: percentage of income that is paid in tax.

Tax Structures: Proportional, Progressive, and Regressive  Proportional: tax that takes the same share of income at all income levels (examples: flat tax, medicare tax, property taxes, user fees and tolls)  Progressive : tax that takes a larger share of income as income increases (examples: Income tax, corporate income taxes, luxury tax, estate and inheritance taxes)  Regressive : tax that takes a smaller share of income as income increases (examples: sales tax, social security tax, excise taxes (alcohol, cigarettes, gambling))

How Income Taxes Work:  Internal Revenue Service (IRS) is in charge of issuing federal income tax forms, and processing tax returns; they also make sure taxpayers are in compliance with the tax code (set of laws that govern federal taxes)  In each paycheck a certain amount is withheld for federal taxes; at the end of the year, a W-2 form is sent to the worker that details how much taxes were withheld and how much the person earned in the year  Taxpayers must submit their tax returns from Jan. 1 – April 15 th ; If the IRS has questions or concerns about a return, they can order an audit, which is a formal review of all claims and information on the return.  A taxpayer’s m arginal tax rate is determined based on the last dollar a person earned is a given period

How does the Federal Government spend the revenue they raise?  U.S. debt Clock U.S. debt Clock  Federal Deficit: difference between tax revenues and government expenditures  To make up the deficit, government borrows money by issuing the sale of government bonds; still adds to the National Debt (total amt. owed by a nation’s government as a result of borrowing

Mandatory v. Discretionary Spending  Fiscal Year : October 1 st to September 30th  Mandatory Spending: Spending that is fixed by the law; interest on national debts and Entitlements (Social Security, Medicare and Welfare)  Discretionary Spending: expenditures that can be raised or lowered as Congress sees fit (biggest item includes defense)