Sources of Government Revenue Chapter 9

Goals & Objectives Economic impact of taxes. 3 criteria for effective taxation. 2 primary principles of taxation. How taxes are classified. Progressive nature of income taxes. Sources of federal revenue. State revenues. Local revenues. Paycheck/payroll deductions. Tax Reforms. VAT & Flat taxes.

2013 Tax Payers

The Economics of Taxation 2012: Federal Revenue: 2.4 Trillion Rate of Government Growth 1940-2013 an 1000 +% increase in federal revenues 1942 Public Revenue Act?

Federal Revenue 2012

What is a Trillion?

Economic Impact of Taxes & Who really pays the tax? 1. Resource Allocation: Tax on a good or service raises the price or lessens the supply Luxury Tax (1991)? Vehicles over $35,000.00 or more, yachts, private aircraft, etc…. “Soak the rich tax” Result: Less luxury production results in fewer jobs for workers & higher prices for consumers

Health Care Luxury Tax 2014

Economic Impact of Taxes 2. Behavior Adjustment: Taxes which encourage or discourage certain types of “behavior”. 1. Sin Tax: Alcohol and Tobacco 2. Mortgage Tax Deductions: Buy a second home “tax loophole” 3. Sugar Tax? 4. Affordable Health Care Act: Smokers, Obese, & young males in good health.

Excise Tax & Tanning Booth Behavior Adjustment

Economic Impact of Taxes 3. Productivity and Growth: Taxes can encourage people to save more, invest more, work less, or spend less of their money. A. Capital Gains Taxes: B. Diminished Incentive: Progressive Taxes C. Entitlements:

Taxes & Productivity

Economic Impact of Taxes 4. The Incidence of a Tax: Who really pays taxes? “The party being taxed is not always the one that bears the burden of taxes?” A. Property Taxes? B. Sales Taxes? C. Corporate Taxes? D. Utility Taxes, Severance Taxes

Who pays Sin Taxes?

Criteria for Effective Taxes 1. Equity--- Tax fairness. Who decides fairness? What is fairness? a. Just, Impartial b. Tax Loopholes 2. Simplicity--- Individual Income Taxes, Sales Taxes 3. Efficiency –3 Trillion Dollars $$$$$$

Tax Loopholes

Two Principles of Taxation 1. Benefit Received Principle: --those who benefit should pay in proportion to the amount they receive Duties, Imposts, Excises: Article I Section 8 clause 1 Article I, section 9 Clause 4: No direct taxes without apportionment and enumeration regard to census

Education level & tax collection

Two Principles of Taxation 2. Ability to Pay Principle: “People should pay according to their ability to pay regardless of benefits received”. Karl Marx: “From each according to his ability to each according to his need” Communism LBJ: “We will take from the haves and give to it to the have-nots” Socialism

Spending vs Taxes Paid

3 Types of Taxes 1. Proportional: Everyone pays the same percentage regardless on income. Benefits received principle----Flat Taxes: no loopholes, no subsidies, no entitlements

3 Types of Taxes 2. Progressive Taxes: Higher taxes are placed on higher incomes “The more you make the more they take” Karl Marx: “the redistribution of wealth” The more able, smarter, productive you are, the more taxes you must pay….diminished incentive

3 Types of Taxes 3. Regressive Taxes: a higher percentage of taxes on lower incomes… Sales Taxes on Food, Medicine, “needs” Property Taxes on homes, cars, trailers, etc..

State Regressive Taxation

The Federal Tax System 1. Individual Income Taxes: 1913---16th amendment: 1787-1913… Business Foreign and Domestic paid 89% of taxes see pie chart 1913-1942…Top 10% of workers earning over $500,000 a year or more paid income taxes 1935: Public Salary Tax (Social Security) 1942-2007…Public Revenue Act… 800% tax increase

1942 Public Revenue Act

Individual Income Taxes 1. Payroll withholding system: automatic deduction: Federal Income, Social Security, Medicare, State Income, Local Income IRS—Internal Revenue Tax: Private Business contracted by the Federal Treasury Department to collect income taxes. Why a private company? Example: US Military Rules vs. Blackwater USA

Income or Payroll Tax vs. Stock (Dividend) Tax

FICA 1. Medicare: (1965) free health care for the elderly…President Bush’s “free prescription drug benefit”…largest government program in the history of America.. 2. Social Security: mandated government retirement…1935

Payroll Taxes vs. Article I Section 8 clause 1 (Duties, Customs, Excises)

Corporate Income Taxes Tax a corporation pays on its profits: 15% on income under $50,000 25% on income under $75,000 35% on income over $75,000-$1.8 million

1932 Corporate Taxes

Other Federal Taxes 1. Excise Taxes: tax on a business that is handed down in the form of higher prices to the consumers, “Hidden Tax” “Theft Tax” 2. Death Taxes: Estate and Gift Taxes 18-50% of valued assets.Estate sales Gift Taxes: 40% of valued asset

Death Tax by State

Other Federal Taxes 3. Customs and Duties: prior to 1913 these were the largest forms of federal tax revenues Taxes on Foreign Business. Why? To protect American Business and the Ameican Worker

Other Sources of Revenue User Fees: Ronald Reagan National Parks. Pay only when you use the park Benefit Received Principle of Taxation Protection of citizens civil liberties

State and Local Tax System Intergovernmental Revenues: Education & Welfare State Income Taxes Sales Taxes, Utility Fees Local Intergovernmental Revenues Local Income Property Taxes Sales Taxes, Utility Fees

Current Tax Issues 1981 Tax Reform; Ronald Reagan “the new right” which was the old “new left” of the 1960’s Smaller government and smaller corporations Opposed to the MIC: Military Industrial Complex Trickle Down Economics: Cut Taxes to increase GDP

Tax Reforms 1986 & 1993: Millionaires paid no income taxes from 1983-1986. Taxes lowered with an additional surcharge: additional above the base rate Alternative minimum tax: 20% regardless of exemptions & loopholes in tax code.

The Value-Added Tax VAT—European tax, national sales tax, FAIR Tax. 1. Advantages: Hard to avoid. 2. Disadvantages: Invisible to consumers, would compete with state and local taxes

Value Added Tax Steps

National Sales Tax: Obama-phones

The Flat Tax 1. Advantages: What groups support the flat tax system? 2. Disadvantages: What interest groups oppose the flat tax system and Why?

Flat Tax Closes Loopholes