1. Processing: Complete W-9 and W-4 handouts for homework.
Preview: You have just received your first paycheck and are looking forward to being paid $8 per hour for the 20 hours you worked. You look at your check and “What? This check isn’t for $160! Where’s the rest of my money?” Make a list of the deductions that might be subtracted from your earnings.
Processing: Complete W-9 and W-4 handouts for homework.
Chapter Intro 1

2. All levels of government use tax revenue to provide essential goods and services.
Chapter Intro 2

3. What is the most important way for governments to raise revenue?
A. Sell bonds
B. Sell services
C. Taxes A B C
Section 1

4. Economic Impact of Taxes
Taxes affect the decisions we make in a variety of ways.
Section 1

5. Economic Impact of Taxes (cont.)
Taxes and other governmental revenues influence the economy by affecting
Resource allocation
Behavior adjustment
Sin tax
Productivity and growth
Determining incidence of a tax
Section 1

6. Economic Impact of Taxes (cont.)
Shifting the Incidence of a Tax
Section 1

7. Criteria for Effective Taxes
To be effective, taxes must be equitable, easy to understand, and efficient.
Section 1

8. Criteria for Effective Taxes (cont.)
Taxes must meet three criteria:
Equity—impartial and just: Makes sense to avoid tax loopholes
Simplicity—tax laws written so taxpayers and collectors can understand them
Individual income tax—complex tax
Sales tax—simpler
Section 1

9. Criteria for Effective Taxes (cont.)
Efficiency—easy to administer and successful in generating revenue
Individuals file a tax return before April 15th each year.
Section 1

10. Two Principles of Taxation
Taxes can be levied on the basis of benefits received or the ability to pay.
Section 1

11. Two Principles of Taxation (cont.)
United States taxes are based on two principles
Benefit principle of taxation
Limitations to the benefit principle of taxation
Those who receive government services are least likely to afford them.
Benefits are hard to measure and impact others.
Section 1

12. Two Principles of Taxation (cont.)
Ability-to-pay principle of taxation
We can’t always measure benefits derived from government spending.
Assumes individuals taxed more suffer less discomfort paying taxes
Section 1

13. Three Types of Taxes
All taxes can be broken down into three categories– proportional, progressive, and regressive.
Section 1

14. Three Types of Taxes (cont.)
Three general types of taxes exist in the United States today.
Proportional tax
If the percentage tax rate is constant, the average tax rate is constant.
Medicare tax fund
Progressive tax
Marginal tax rate
Regressive tax
Section 1

15. Federal, State, and Local Revenue Systems
The Internal Revenue Service (IRS) is the branch of the United States Treasury Department in charge of collecting taxes today.
Section 2

16. Federal Government Revenue Sources
Individual income taxes, FICA, and borrowing constitute the main sources of government revenue.
Section 2

17. Federal Government Revenue Sources (cont.)
Four largest sources of government revenue are
Individual income taxes
Tax is mostly collected through a payroll withholding system.
Tax code takes into account indexing.
Federal Government
Revenue Sources
Section 2

18. Federal Government Revenue Sources (cont.)
FICA or Federal Insurance Contributions Act tax
Social Security and Medicare are part of payroll taxes.
Borrowing by selling bonds to investors
Corporate income tax
Excise tax
The Global Economy & YOU Total Tax Revenue as a Percentage of GDP
Section 2

19. Federal Government Revenue Sources (cont.)
Estate tax and gift tax
Customs duty
Miscellaneous fees like a user fee
Section 2

20. State Government Revenue Sources
States rely on funds from the federal government in addition to income taxes and sales taxes.
Section 2

21. State Government Revenue Sources (cont.)
Largest sources of state governments revenue
Intergovernmental revenue
Sales tax implemented by most states
Individual income taxes by most states
Other revenue sources
State and Local Government Revenue Sources
Section 2

22. Local Government Revenue Sources
Local governments rely mostly on intergovernmental revenue and property taxes.
Section 2

23. Local Government Revenue Sources (cont.)
Largest sources of local governments revenue
Intergovernmental transfers from state and federal governments
Property tax
Tax assessor determines valuations of property
State and Local Taxes as a Percentage of State Income
Section 2

24. Local Government Revenue Sources (cont.)
Utility revenues from natural monopolies
Sales tax
Other revenue sources
Section 2

25. Examining Your Paycheck
The income taxes you pay are summarized on the stub that is attached to your paycheck.
Section 3

26. Examining Your Paycheck (cont.)
The payroll withholding statement attached to your paycheck lists deductions taken.
Biweekly Paycheck and Withholding Statement
Section 3

27. Tax Reform
Numerous changes have been made to the federal income tax code since 1981.
Section 3

28. Tax Reform (cont.)
The Economic Recovery Tax Act, signed by Ronald Reagan in 1981, included large tax reductions for individuals and businesses.
Businesses also got tax relief from accelerated depreciation and investment tax credit.
Tax Table for
Single Individuals, 2006
Section 3

29. Tax Reform (cont.) In 1983 the alternative minimum tax was passed.
In 1993 government added tax brackets in order to balance the budget.
The Taxpayer Relief Act of 1997 was both economical and political.
Capital gains tax was reduced.
Total Government Receipts per Capita, Adjusted for Inflation
Section 3

30. Tax Reform (cont.)
Temporary tax reform in 2001—based on the federal government collecting more taxes than it was spending
Temporary tax reform in 2003—due to slow economic growth, accelerated many of 2001 reforms
If the present trend of government spending more than it collects in taxes continues, it will be difficult to preserve tax cuts due to expire in 2011.
Section 3

31. Alternative Tax Approaches
The need for new federal revenues will influence future tax reform.
Section 3

32. Alternative Tax Approaches (cont.)
Two alternative forms of taxation
Flat tax
Value-added tax (VAT)
The Value-Added Tax
Section 3

33. Alternative Tax Approaches (cont.)
Advantages to the flat tax
Simplicity to taxpayer
Closes most loopholes
Reduces need for many workers in IRS and tax preparers
Section 3

34. Alternative Tax Approaches (cont.)
Disadvantages to the flat tax
Removes many incentives built into current tax code
Don’t know what rate is needed to replace revenues collected today
Unsure if flat tax would stimulate economic growth
Section 3

35. Alternative Tax Approaches (cont.)
Advantages to the VAT
Tax is hard to avoid
Tax incidence is widespread
Easy to collect
Encourages saving
Section 3

36. Alternative Tax Approaches (cont.)
Disadvantage to the VAT
Virtually invisible—other factors can change the product’s price.
Desires to simplify the tax code, unexpected expenditures on war and natural disasters, and political change all result in tax reform.
Section 3

37. Types of Taxes All taxes in the United States can be broken down into three categories: proportional, progressive, and regressive
VS 1

38. Government Revenue Sources Federal, state, and local revenue sources differ. Much of the federal revenue is sent on to state and local governments.
VS 2

39. Alternative Tax Approaches Because the federal tax code has become so large and cumbersome, people have discussed the flat tax and the value-added tax as two alternatives.
VS 3

40. Figure 1

41. Figure 2

42. Figure 3

43. Figure 4

44. Figure 5

45. Figure 6

46. Figure 7

47. Figure 8

48. Figure 9

49. Figure 10

50. Monica Garcia Pleiman (1964– )
president and CEO of OMS, a technology consulting firm
publisher of Hispanic lifestyles magazine Latino SUAVE
cofounder of the Latina Chamber of Commerce
Profile

51. DFS Trans 1

52. DFS Trans 2

53. DFS Trans 3

54. sin tax
relatively high tax designed to raise revenue and discourage consumption of a socially undesirable product
Vocab1

55. incidence of a tax
final burden of a tax
Vocab2

56. tax loophole
exception or oversight in the tax law allowing taxpayer to avoid paying certain taxes
Vocab3

57. individual income tax
federal tax levied on the wages, salaries, and other income of individuals
Vocab4

58. sales tax
general state or city tax levied on a product at the time of sale
Vocab5

59. tax return
annual report by a taxpayer filed with local, state, or federal government detailing income earned and taxes owed
Vocab6

60. benefit principle of taxation
belief that taxes should be paid according to benefits received regardless of income
Vocab7

61. ability-to-pay principle of taxation
belief that taxes should be paid according to level of income, regardless of benefits received
Vocab8

62. proportional tax
tax in which percentage of income paid in tax is the same regardless of the level of income
Vocab9

63. average tax rate total taxes paid divided by the total taxable income
Vocab10

64. Medicare
federal health-care program for senior citizens
Vocab11

65. progressive tax
tax in which the percentage of income paid in tax rises as the level of income rises
Vocab12

66. marginal tax rate
tax rate that applies to the next dollar of taxable income
Vocab13

67. regressive tax
tax in which the percentage of income paid in tax goes down as income rises
Vocab14

68. validity
justification
Vocab15

69. evolved
developed gradually
Vocab16

70. Internal Revenue Service (IRS)
branch of the U.S. Treasury Department that collects taxes
Vocab17

71. payroll withholding system
system that automatically deducts income taxes from paychecks on a regular basis
Vocab18

72. indexing adjustment of tax brackets to offset the effects of inflation
Vocab19

73. FICA
Federal Insurance Contributions Act; tax levied on employers and employees to support Social Security and Medicare
Vocab20

74. payroll tax
tax on wages and salaries deducted from paychecks to finance Social Security and Medicare
Vocab21

75. corporate income tax
tax on corporate profits
Vocab22

76. excise tax
general revenue tax levied on the manufacture or sale of selected items
Vocab23

77. estate tax
tax on the transfer of property when a person dies
Vocab24

78. gift tax
tax paid by the donor on transfer of money or wealth
Vocab25

79. customs duty
tax on imported products
Vocab26

80. user fee
fee paid for the use of good or service
Vocab27

81. intergovernmental revenue
funds that one level of government receives from another level of government
Vocab28

82. property tax
tax on tangible and intangible possessions such as real estate, buildings, furniture, stocks, bonds, and bank accounts
Vocab29

83. tax assessor
person who examines and assesses property values for tax purposes
Vocab30

84. natural monopoly
market structure in which average costs of production are lowest when a single firm exists
Vocab31

85. implemented
put into effect
Vocab32

86. considerably
to a noticeable or significant extent
Vocab33

87. payroll withholding statement
document attached to a paycheck summarizing pay and deductions
Vocab34

88. accelerated depreciation
schedule that spreads depreciation over fewer years to generate larger tax reductions
Vocab35

89. investment tax credit tax credit given for purchase of equipment
Vocab36

90. alternative minimum tax
personal income tax rate that applies to cases in which taxes would otherwise fall below a certain level
Vocab37

91. capital gains
profits from the sale of an asset held for 12 months or longer
Vocab38

92. flat tax
proportional tax on individual income after a specified threshold has been reached
Vocab39

93. value-added tax (VAT)
tax on the value added at every stage of the production process
Vocab40

94. concept
general idea
Vocab41

95. controversial
disputed
Vocab42

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