1. Explorations in Economics Alan B. Krueger & David A. Anderson

2. Chapter 10: Taxes: The Price of a Functioning Government -Module 28: Why and How are We Taxed -Module 29: Responding to Taxes -Module 30: Evaluating Taxes

3. KEY IDEA: The primary goal of the tax system is to raise enough money for the government to function effectively while doing so as fairly and efficiently as possible. OBJECTIVES: To explain the need for taxes. To identify taxes that discourage undesired behavior and taxes that encourage desired behavior. To describe several important taxes used in the United States. MODULE 28: WHY AND HOW ARE WE TAXED

4. TAXES 6/10/2016Chapter 10-Mods 28-30

5. Taxes are required payments to the government Raising Revenue – paying for essential government services in a fair, efficient way. Discouraging Undesirable Activity – Sin taxes discourage undesired behavior, such as the use of tobacco products. Encouraging Desirable Activity – Example: Making mortgage interest free from tax (deduction). WHY TAX?

6. Why Tax? What are the essential government services? Does the economy function more efficiently when we have these services? Do most American feel taxes are fair value for what they receive? Sin taxes are thought to be the solution to overconsumption of fatty foods and soft drinks. – What do you think? 6/10/2016Chapter 10-Mods 28-30

7. The tax base for a particular type of tax is the value of the activities or assets subject to the tax. WHAT IS TAXED AND WHO DOES THE TAXING? The tax rate is a specific percentage of the tax base that is paid in taxes.

8. The Federal Income Tax A tax return is a form you will complete and submit to the government when you pay your income taxes. It contains the information used to determine the amount of taxes you owe Employers take money out of each pay check (withholding) then submit it to the IRS quarterly. At the end of the year taxpayers file a return to see if what was withheld was the correct amount. If it is more than you were supposed to pay you get a refund. It is less you must pay. WHAT IS TAXED AND WHO DOES THE TAXING?

9. Payroll Taxes A payroll tax is a tax collected from employers on the basis of the wages and salaries paid to workers. WHAT IS TAXED AND WHO DOES THE TAXING?

10. PAYROLL TAX Payroll tax is used to pay social security and Medicare. The Social Security Tax is 6.2% of your gross pay up to a limit of $118,500 in the current year. Federal Individual Contribution Act (FICA) is the official name of the Social Security Payroll Tax. Medicare tax is calculated at 1.45% of gross pay with no limit. Employers match both of these payroll and send the entire amount to the government. 6/10/2016Chapter 10-Mods 28-30

11. Different taxes found on a pay stub. Federal Income Social Security Medicare State Income

12. Corporate Taxes A corporate income tax is a tax on corporate profit that is paid directly by the corporation. WHAT IS TAXED AND WHO DOES THE TAXING?

13. A property tax is a required payment made by the owners of property, such as land, buildings, boats, and cars. Rates are applied to assessed value of the item to be taxed. Assessments and rates will vary across the country. – Property taxes are collected by state and local governments. – In most places, local governments set the property tax rate. – Revenue from tax used to pay for fire and police protection and for elementary and secondary schools. WHAT IS TAXED AND WHO DOES THE TAXING?

14. Sales Taxes A sales tax is collected from consumers by firms when a taxed good or service is purchased. The tax is then passed on to the government. An excise tax applies to specific goods, such as cigarettes or gasoline, and is typically assessed as a certain amount of money per unit, rather than a percentage of the price. WHAT IS TAXED AND WHO DOES THE TAXING?

15. State Taxes per Capita WHAT IS TAXED AND WHO DOES THE TAXING?

16. Tax Revenue as a share of GDP Comparisons with Other Countries WHAT IS TAXED AND WHO DOES THE TAXING?

17. What is…. A. Taxes? B. Sin tax? C. Tax base? D. Tax rate? E. Tax return? F. Payroll tax? G. Corporate income tax? MODULE 28 REVIEW H. Property tax? I. Sales tax? J. Audit? K. Internal Revenue Service? L. Excise tax? M. Federal income tax?

18. KEY IDEA: People respond to taxes because a tax changes the cost of a particular activity. OBJECTIVES ● To explain how buyers and sellers respond to taxes. ● To show how the burden of paying a tax can shift from one party to another. ● To explain the difference between the average tax rate and the marginal tax rate. MODULE 29: RESPONDING TO TAXES

19. A Tax on Buyers HOW BUYERS AND SELLERS RESPOND TO A TAX Consumers respond to the tax by being willing to pay less to firm for any given quantity.

20. Buyers Respond to Tax 6/10/2016Chapter 10-Mods 28-30 Per unit tax on burgers will decrease the demand for the burgers. Because of the $.50 tax, the quantity of burgers demanded at a price of $2.50 is the same as the quantity that would have been demanded at $3.00.

21. A Tax on Sellers HOW BUYERS AND SELLERS RESPOND TO A TAX The shift in the supply curve means that firms are willing to supply fewer hamburgers at any given price.

22. HOW BUYERS AND SELLERS RESPOND TO TAX 6/10/2016Chapter 10-Mods 28-30 Per unit tax on sellers will reduce the supply of the product. At a price of $3.50, the amount a firm actually gets to keep is $3.00—the $3.50 price minus the $0.50 tax. So with the tax in place firms supply the same quantity of hamburgers at a price of $3.50 as they did without the tax at a price of $3.00.

23. A Tax on Buyers is Partially Shifted to Sellers YOU REALLY PAYS THE TAX? Here, most of the burden is shifted to the seller. Demand curve shifted downward with new equilibrium at $2.60. Consumers pay $.10 more but sellers collect $.40 less than before tax. A tax on buyers is not entirely paid by the buyers. Some of it is lost revenue to the seller.

24. A Tax on Sellers is Partially Shifted to Buyers HOW BUYERS AND SELLERS RESPOND TO A TAX Here, most of the burden is shifted to the seller. Supply curve shifted to the left with new equilibrium at $3.10. Sellers still need to pay tax of $.50. Consumers pay $.10 more but sellers collect $.40 less than before tax.

25. RESPONDING TO THE INCOME TAX Average and Marginal Tax Rates The marginal tax rate is the portion of an additional dollar of income that is paid in taxes. The average tax rate is the proportion of a taxpayer’s total taxable income that is paid in taxes.

26. What is… A. Marginal tax rate? B. Average tax rate? RESPONDING TO THE INCOME TAX

27. KEY IDEA: Taxes are evaluated along two lines: whether they are fair and whether the same amount of money could be raised with less harm to the economy. OBJECTIVES: ● To explain the concepts of efficiency as it relates to taxes. ● To define two measures of tax fairness: vertical equity and horizontal equity. ● To evaluate proposals for tax reform. MODULE 30: EVALUATING TAXES

28. Improving Tax Efficiency All similar goods should be taxed at the same rate. A low marginal tax rate changes people’s behavior less than a high marginal tax rate. Simple can be better. EFFICIENCY

29. Vertical equity means that those who have a greater ability to pay taxes make a larger tax payment. A tax is progressive if people with a higher income pay a higher share of their income in taxes. A tax is regressive if people with a higher income pay a lower share of their income in taxes. A tax is proportional or flat if everyone pays the same share of their income in taxes, regardless of their level of income. TAX FAIRNESS

30. The federal government’s income taxes are a ___________ tax. Many states use a sales tax to raise revenue. Sales taxes would be a _______ tax? The federal payroll tax on individuals tends to be a ______ tax? 6/10/2016Chapter 10-Mods 28-30

31. TAX FAIRNESS Vertical equity means that those who have a greater ability to pay taxes make a larger tax payment. A tax is progressive if people with a higher income pay a higher share of their income in taxes.

32. Horizontal equity means that those with the same ability to pay taxes make the same tax payment. The U.S. tax system is sufficiently complicated that people with the same income often do, in fact, pay different amounts in taxes. Horizontal inequity affects where people choose to live. TAX FAIRNESS

33. Tax Fairness in Practice TAX FAIRNESS

34. Broadening the Tax Base Taxing more benefits earned Limiting deductible income A Nationwide Sales Tax Currently, sales tax is a state and local tax A Flat Tax Flat tax requires all tax payers to pay a constant percentage of their income THE FUTURE DIRECTION OF TAXES

35. What is… A. Vertical equity? B. Horizontal equity? C. Progressive tax? D. Regressive tax? E. Proportional tax? MODULE 30 REVIEW