1. Ewww….Taxes
Chapter 9

2. Economic Impact of Taxes
Influence the economy by affecting resource allocation, consumer behavior, and nation’s productivity and growth.
If taxes on goods are too high, consumers tend to cut back on buying
This in turn affects the company who may have to lay off workers who then in turn cannot buy goods

3. Taxes can change a person’s motivation to work
Sometimes taxes are used to discourage or encourage certain types of behavior
Sin tax = relatively high tax designed to raise money and reduce consumption of socially undesirable products
Example: cigarettes and alcohol
Taxes can change a person’s motivation to work
If you work more, you are just going to have to pay more taxes

4. Sometimes the person/business being taxes isn’t the one who bears the burden of the tax
Example: city decides to tax the local electric company to raise money
So the electric company raises rates on consumers…YOU!

5. Types of Taxes Three general types exist in US:
Proportional tax = imposes the same percentage rate on everyone, regardless of income
Example: income tax rate of 20% for a person making $20,000 would be the same 20% for a person making $200,000
If your income goes up, your percentage of taxes does NOT increase

6. Progressive tax = tax that imposes a higher rate of tax on people with higher incomes
The more you make, the larger percentage of tax you pay
Example: You may pay 10% if your income is $10,000 or you may pay 30% if your income is $100,000
Regressive tax = tax that imposes a higher percentage rate on lower incomes
Example: if you make $10,000 a year and spend $5,000 on clothing, and your friend makes $100,000 a year and spends $20,000 a year on food and clothing, if the state sales tax if 4%, you are paying a higher % of your total income in taxes
You = 2.5% of your income paid in sales tax
Friend = 1.0% of their income paid in sales tax

7. Federal Taxes Individual income tax = tax paid on your income
Payroll withholding system = your employer automatically deducts if from your check
Internal Revenue Service = they collect your taxes from employer
Tax return = annual report by you to the IRS summarizing your total income, deductions, and taxes withheld by employers
You may owe, you may get a refund
This is a progressive tax

8. FICA (Federal Insurance Contributions Act) = tax levied on employers and employees to pay for Social Security and Medicare
They are payroll taxes because they are taken out of your paycheck
Social Security (aka Old Age Insurance)
4.2% for you – 6.2% for your employer
Up to $110,000 income
Medicare = federal health care insurance for senior citizens regardless of income
1.45% for you and your employer
No limit on income

9. Corporate Income Tax = tax corporation pays on its profits
It is progressive
Excise tax = tax on the manufacture and sale of selected items
Example: gas, alcohol, tires, telephone services
It is a regressive tax
Estate Tax = tax on transfer of property when a person dies
If the property is worth over $2,000,000
Gift tax = tax on donations of money or wealth paid by person who makes the gift
Customs duties = charge levied on goods brought in from other countries
Basically a tariff on imports
Relatively low today

10. State Tax Systems
Intergovernmental revenue = money collected by one level of government and given to another for expenditures.
States get this money to help fund education, welfare, hospitals, roads, etc.
About 20% of state government money comes from the federal government.

11. Sales tax = general tax placed on consumer goods
Paid to the merchant who then pays the state government
The sales tax is the 2nd largest source of money for the states. (AK, DE, MT, NH and OR – no sales tax)
Employee retirement contributions are the 3rd largest source

12. State income taxes are the 4th largest source
The remaining money states get is from :
Tuition and other fees from state-owned universities
Corporate income taxes
Interest on their surplus money

13. Local Taxes Local gov’ts get most of their money from state gov’ts
Usually for education and public welfare
2nd largest source is the property tax = tax on tangible and intangible possession
Land, buildings, cars, farm animals, stocks, etc
3rd largest source is earnings from public utilities and state-owned liquor stores

14. Tax Reform
Economic Recovery Tax Act of 1981 = greatly reduced taxes for people and businesses.
By mid 1983 over 3,000 millionaires did NOT pay taxes
Many corporations like Boeing and Greyhound were able to legally avoid paying taxes
1986 – tax reform law that brought the highest incomes up to 31% tax
People had to pay a minimum of 20% regardless of income
Corporate income tax went back up

15. Taxpayer Relief Act of 1997 = reduced capital gains taxes, inheritance taxes, allowed a $500 per child deduction
But tax percentages remained mostly the same
This actually benefitted the wealthy but not the poor
Tax Bill of 2001 = cut the four top tax brackets, single people got $300 check, married got $600 check
This helped get rid of a gov’t surplus of money