Sources of Government Revenue: How the government collects money

Criteria (requirements) for Effective Taxes Effective Taxes Equal: Must be fair Simple: Must be simple for people to understand Efficient: Should be easy to collect so govt gets the revenue ($)

The Incidence of a Tax Government adds tax to producer: Example:. Utility company-gas, electric, medicine –Raise rates: consumer pays more (easy if demand is inelastic) $ ____tax on producer D/S $______ D/S+tax $_____for consumer D/S+tax $______for supplier The ____curve shifts to the ______because of ________ Because the demand is ______, the consumer pays most of the ________and the producer ____.

Government adds tax to producer: Example: more tax on corporation Raise rates: consumer pays some and producer pays some (elastic) $ ____tax on producer D/S $______ D/S+tax $_____for consumer D/S+tax $______for supplier The ____curve shifts to the ______because of ________. Because the demand is ______, the consumer pays _____of the ________and the producer ____ of the tax. The Incidence of a Tax

Two Principles of Taxation Benefit Principle: those who benefit from government and services should pay in proportion to the amount of benefits received –Gas tax: people who drive more buy more gas and pay more gas tax –the gas tax pays for roads

Ability-to-Pay Principle: People who earn more money should pay more taxes Two Principles of Taxation

Types of Taxes Proportional: imposes same percentage rate of taxation on everyone Progressive: imposes a higher percentage rate of taxation on people with high incomes than on those with low incomes Regressive: imposes a higher percentage rate of taxation on low incomes than on high incomes

Figure 9.3

The Federal Tax System

IRS ( Internal Revenue Service) Treasury Department

Individual Income Taxes Fed. Gov’t collects 45% of its revenue (money coming in) from Individual income taxes People who work taxes $ (taxes) are paid each week and is subtracted from your check –Before April 15th each year, an employee must file a tax return: an annual report to the IRS summarizing total income, deductions, & taxes withheld by employers

Proportional tax –As income goes up, % of income tax paid is same –It doesn’t matter if you earn a lot of $ or a little $ Progressive Tax that ranges from 15% -39.6% Individual Income Taxes

Progressive tax –Individuals earning higher incomes pay higher tax rates Individual Income Taxes

FICA: What is FICA? And why does it take part of my paycheck? FICA: Federal Insurance Contributions Act Social Security (6.2% of wages) + Medicare (1.45% of wages) FICA tax ( 7.65% of wages ) 2 nd largest source of Gov’t revenue (money collected)

FICA Social Security is a proportional tax up to $65,400 (the capping point) and then it is regressive Medicare is not capped; it’s proportional at all levels of income Total FICA tax = 7.65%

Corporate Income Taxes 3rd largest category of federal taxes Corporation is recognized as a separate entity Rates vary from 15% - 35% (slightly progressive)

Other Federal Taxes Excise Tax: tax certain items, such as gasoline and liquor Estate Tax: tax the gov’t levies (charges) on the transfer of property when a person dies (parent to child) Gift Tax: tax on gift of money/wealth paid by person making gift

State and Local Tax Systems

State Government Revenue($ collected from..) 1.Intergovernmental Revenues - money from federal gov’t 2.Sales tax - general tax on consumer purchases 3.Employee Retirement Contributions 4.Individual Income Taxes (not all states)

Good way to raise large amount of money All consumers pay Easy to collect: business collects at point of sale Advantages of Sales Tax

Second largest source of revenue for local governments Real Property: includes real estate, buildings, & anything permanently attached Local Property Taxes

Tangible Personal Property: includes tangible items, not permanently attached. Intangible Personal Property: property with invisible value, such as stock, bond, patent, check Local Property Taxes

Examining Your Paycheck Payroll withholding statement: the summary statement attached to a paycheck It shows: –income, –tax withholdings (for fed/state/city govt., and –other deductions

How much $ was deducted from this person’s paycheck?____

State & local governments rely heavily on sales tax for revenues State & local governments already lose $3.3 billion each year to untaxed interstate sales This figure will increase as more sales are made over the Internet Should there be an Internet sales tax??? How would it work? QUESTION: WHY ARE STATE & LOCAL GOVERNMENTS LOSING MONEY TO THE INTERNET???