1. Sources of Government Revenue Ch. 9
Economics
Mr. Bennett

2. Economic Impact of Taxes
Resource Allocation
The Factors of Production are affected whenever a tax is levied.
Taxes raise the cost of production and shifts the supply curve left.
As a business, they want to make their profit…so they raise the price of their product due to an increase in the cost of production.
Then we, as consumers, buy less…which forces business to produce less. If they sell & produce less…they have to cut back on resources (labor, land, etc)

3. Economic Impact of Taxes (cont.)
Behavior Adjustment
Taxes are sometimes used to encourage or discourage certain types of activities.
A so-called Sin Tax (a relatively high tax designed to raise revenue while reducing consumption of a socially undesirable product, such as liquor or tobacco) is an example of how a tax can change behavior.
Interest payments on mortgages used as a tax deduction to encourage home ownership – Encourage behavior.
California is trying to pass a Sin Tax on soda this year…?

4. Economic Impact of Taxes (cont.)
Productivity & Growth
Taxes can affect productivity and economic growth by changing the incentives to save, invest, and work.
Basically, some people argue that taxes are already high, & the more money you make, the more taxes you pay…so what is the incentive to earn more if you just have to pay a higher tax rate (aka more $ in taxes)?
Is there a point where the gov’t takes so much money in taxes that it isn’t worth it to make more money? $1 million? $10 million? $1 billion?

5. Economic Impact of Taxes (cont.)
Incidence of a Tax
The final burden of the tax
Who pays the tax?
Indirect vs. Direct taxation:
An example of Indirect taxation would be if the government wanted to tax cell phone companies, so then the cell phone companies raised their rates to help pay for the extra taxes they had to pay
An example of direct taxation would be personal income tax & a driver’s license fee.

6. Criteria for Effective Taxes
Fair (Equitable)
Avoid tax loopholes – exceptions or oversights in tax law that allow a taxpayer to avoid paying certain taxes.
Simple
The tax must be easy to understand, ha…
Sales tax (a basic rate across the board) vs. federal income tax (which is overly complicated)
Efficient
Easy to administer & collect

7. Principles of Taxation
The benefit principle of taxation is the concept that those who benefit from the spending of tax dollars should pay the taxes to provide the benefits.
The ability-to-pay principle of taxation is the concept that those who can best afford to pay taxes should pay most of the taxes.

8. 3 Types of Taxes
A progressive tax is a tax that takes a larger percentage of higher incomes and a smaller percentage of lower incomes.
Federal Income Tax
A regressive tax is a tax that takes a larger percentage from lower incomes and a smaller percentage of higher incomes.
Sin Tax
A proportional tax is a tax that takes the same percentage of income from all taxpayers.
Medicare

9. Federal Revenue
The federal government gets its revenue from a number of sources. Taxes are the primary source of revenues, but borrowing also plays a big part. The four largest sources of revenues are:
1. Individual Income Taxes
2. Social Security Taxes
3. Borrowing
4. Corporate Income Taxes

10. Individual Income Tax The main source of revenue for the federal gov’t
The government taxes peoples earnings to finance its operations.
Progressive Tax, ranging from 10% to 35%
Gov’t uses indexing – adjusting the tax brackets to offset inflation
These taxes are collected through the payroll withholding system (employer collected)

11. FICA Taxes FICA – Federal Insurance Contributions Act
Is a Payroll Tax – deducted from paychecks
Social Security & Medicare taxes are collected on every dollar you earn up to $106,
Social Security (to pay pension for 67 & over)
6.2% plus your employer matches your tax for another 6.2% or12.4% total.
Medicare (to pay medical expenses for 65 & over)
1.45% plus your employer matches your tax for another 1.45% or 2.9% total.

12. Income Tax Rate for 2015

13. Federal Revenue - Borrowing
Borrowing is the third-largest source of federal revenue.
B/c tax revenues fluctuate, the government never knows exactly how much it will need to borrow. Therefore, it continues with its spending as allocated in the budget.
If government does not collect enough money in taxes, it simply borrows the rest by selling bonds to investors.
The increased borrowing has been mainly due to the increased levels of gov’t spending that have outpaced federal revenue collection.

14. Corporate & Excise Taxes
Corporate Income Tax, the tax a corporation pays on its profits, is the fourth-largest source of federal revenue. Tax bracket: 15% to 35%
Excise Tax, a tax on the manufacture or sale of selected items such as gas, tires, cigarettes, & liquor, is the 5th largest source of gov’t revenue.

15. Estate & Gift Tax
Estate tax is the tax on the transfer of property when a person dies. Taxes range from 18% to 55%.
Gift tax is a tax on the transfer of money or property & is paid by the person who gives the gift.
Gift tax is used to make sure wealthy people do not try to avoid taxes by giving away their estates before they die.
The tax is levied on all gifts $13,000 or greater.

16. State Government Revenue
The largest source of state revenue consists of Intergovernmental revenue – funds collected by one level of government that are distributed to another level of government for expenditures.
States receive the majority of this $ from the federal gov’t to fund expenditures like welfare, education, health, highways, & hospitals.
The 2nd largest source of state revenue comes from Sales tax – a general tax levied on most consumer purchases at the time of sale.
Florida’s sales tax rate is 6% with some local gov’ts adding more.

17. Local Government Revenue
Local Governments like state receive funds from both the federal & state levels of government, Intergovernmental revenue.
The largest non-transfer comes from property taxes.
Can include real estate, furniture, farm animals, stocks, bonds, automobiles, & bank accounts.