1. Unit 4: Lesson 3 Taxes, Fees and Fines

2. Three Essential Questions About Taxes
What is being taxed?
What is the rate of the tax?
How does it affect taxpayers?

3. WHAT DOES EVERY TAX HAVE?
Tax base: What is being taxed?
Income
Property
Consumption
Tax rate: How is the amount determined?
Flat
Percentage

4. How does the tax rate effect taxpayers?
Proportional
Regressive
Progressive

5. Proportional Taxes
Takes the same percentage or amount from both high and low income tax payers
Examples:
Michigan income tax - all are taxed on their income at the same percentage (4.35%)
Social Security Taxes (up to the limit): Everyone (employer and employee each) pays 6.2% up to $106,800

6. Regressive Taxes
Takes a larger share of income from low income taxpayers than from high income taxpayers
Examples (consumption taxes):
Sales tax- if an individual buys a new appliance and pays $40 in sales tax, this $40 tax affect someone with a lower income more than one with a higher income (6.00%)
Gasoline tax – everyone pays the same percentage but it ends up taking a greater percentage of one’s income from the lower income earners than higher income earners

7. Progressive Taxes
Takes a larger share of the income of high-income taxpayers than of low-income taxpayers.
Higher income levels are taxed at higher rates
Examples:
Federal individual income tax - the higher the income, the higher the tax rate
Brackets include 10% up to $8,375; 15% up to $34,000; 25% up to $82,400; 28% up to $171,850; 33% up to $373,650, 35% beyond $373,650 (single rates)
Corporate income tax rates

8. Effect on $20,000 income Effect on $50,000 income
Type of Tax
Effect on $20,000 income
Effect on $50,000 income
Effect on $100,000 income
Proportional Tax:
4.35% Michigan Income Tax
$ paid in taxes
$2, paid in taxes
$4, paid in taxes
Regressive Tax:
6% Michigan
Sales Tax
You buy new furniture and have to pay $500 in tax. This takes 2.5% of your total income
You buy new furniture and have to pay $500 in tax. This takes 1% of your total income
You buy new furniture and have to pay $500 in tax. This takes 0.5% of your total income
Progressive Tax:
Federal Income Tax
Taxed 15%
$3,000 paid in taxes
Taxed 25%
$12,500 paid in taxes
Taxed 28%
$28,000 paid in taxes

9. Types of Government Taxes
Federal
State
Local
Individual federal income tax
Sales tax
Property tax
FICA (Federal Insurance Corporations Act)
Social Security
Medicare
Individual state income tax
Utility tax (taxes on cable, phone, etc.)
Corporate income tax
State fees
State park fees
School taxes
Estate tax, gift tax
“Sin” taxes
Local sales taxes
Teacher Note: This chart is subject to change as government entities attempt to find ways to raise revenue for them to operate. Previously few municipalities charged a tax, but that is beginning to shift.
Federal Taxes
Individual Income Tax: tax on the income an individual makes from wages and investments.
This is a progressive tax and households pay a % dependent on the tax bracket
FICA (Federal Insurance Corporations Act):a payroll tax taken out one’s paycheck for the Social Security and Medicare systems, which provide an income and medical care to retired and disabled Americans.
Social Security:6% of income up to $98,000
Medicare- 14% for all
Corporate Income Tax: Corporations are taxed off of their profits.
Estate Tax: deals with the transfer of property when a person dies.
Gift Tax: placed on large donations of money- paid by the donor.
State Taxes
Sales Tax– also known as an excise tax. It is a tax that depends on the value of goods/services sold and states have different levels. Therefore this is a regressive tax
Michigan 6%
Individual Income Taxes: tax on the income an individual makes from wages and investments.
This is a proportional tax
“Sin” taxes: tax on activities deemed socially undesirable (cigarettes, alcohol, lottery)
$2.00 on a pack of cigarettes since 2004
Beer= 20 cents/gallon, wine= 51 cents/gallon, liquor= 4%
State fees: Fees charged to individuals for certain activities (hunting and drivers licenses, tuition, hospitals, state park fees)
Local Taxes
Property Tax- assessed each year to indicate home value
It is a proportional tax based on value of home
Also based partly on community vote for mileage (police, education, infrastructure, ect)
Utility Payments- taxes on cable, phone, etc.

10. What does this tell you?
Ask students what they notice about this chart. What information does this chart provide? What does this tell you about the deficit? What does it tell you about individual and corporate income taxes?

11. State Taxes
Explain how the chart shows that the sales and excise tax is regressive?
What questions does this graph raise for you?
Teacher Note: Because this is an average of all states, it makes generalizations. Students would have to look at a particular state to see where it fits in this scheme.

12. Michigan Taxes

13. Local Taxes Property Tax- assessed each year to indicate home value
It is a proportional tax based on value of home
Also based partly on community vote for mileage (police, education, infrastructure, etc.)
Utility Payments

14. Criteria for Evaluating Taxes
Ability to Pay: People should be able to afford to pay the tax.
Equity: A tax should have vertical and horizontal equity.
Vertical - People with different amounts of income should pay different amounts of taxes.
Horizontal – People with the same amount of income should pay the same amount of taxes.
Benefits Received: Those who received more benefits should pay more than those who receive less.
Efficiency: The tax should not inhibit productive activities; nor should it discourage people from working or investing in new capital or businesses. It also should not encourage individuals to be wasteful in buying goods.
Simplicity: The tax should be simple to administer and follow. The rationale for the tax should be generally agreeable and justifiable. Loopholes and exemptions should be minimized.
Criteria: A fair tax should meet at least 3 of the 5 criteria.