1. Splash Screen

2. Section 1: The Economics of Taxation
Chapter Introduction
Section 1: The Economics of Taxation
Section 2: Federal, State, and Local Revenue Systems
Section 3: Current Tax Issues and Reforms
Visual Summary
Chapter Menu

3. 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. Read Chapter 9 to learn more about how governments raise revenue.
Chapter Intro 1

4. Section Preview Section Objectives:
In this section, you will learn that taxes are the most important way of raising revenue for the government.
Section Objectives:
Students will be able to:
Describe the impact taxes have on the economy.
Identify the incidence of a tax.
Identify and describe the criteria for effective taxes.
Describe and give examples of the principles of taxation and the 3 types of taxes.
Section 1-Preview

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

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

7. Economic Impact of Taxes (cont.)
Taxes and other governmental revenues influence the economy by affecting
Resource allocation
Behavior adjustment
Sin tax
Section 1

8. Economic Impact of Taxes (cont.)
Productivity and growth
Determining incidence of a tax
Shifting the Incidence of a Tax
Section 1

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

10. 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

11. 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

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

13. 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

14. 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

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

16. Three Types of Taxes (cont.)
Three general types of taxes exist in the United States today.
Proportional tax
Imposes the same percentage rate on everyone, regardless of income.
The percentage tax rate is constant.
Medicare tax fund
Tends to hurt the poor and help the rich.
Section 1

17. Three Types of Taxes (cont.)
Progressive tax
The rate of tax increases as the income earned increases.
This type of tax hurts the rich and helps the poor.
Federal Income Tax
Marginal tax rate
Section 1

18. Three Types of Taxes (cont.)
Regressive tax
A tax rate that is higher on lower incomes and decreases as income rises.
This type of tax favors the rich and hurts the poor.
Sales tax and Michigan state income tax
Three Types of Taxes
Section 1

19. Section Objectives: Students will be able to:
Describe the impact taxes have on the economy.
Identify the incidence of a tax.
Identify and describe the criteria for effective taxes.
Describe and give examples of the principles of taxation and the 3 types of taxes.
Section 1-Preview 19

20. Section 1-End

21. Section Preview Section Objectives
In this section, you will learn that federal, state, and local governments rely on different revenue sources.
Section Objectives
Students will be able to:
Describe why paying taxes is important to the economy.
Identify and describe the 3 main sources of Federal governmental revenue.
Section 2-Preview

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

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

24. 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

25. 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

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

28. Section Objectives Students will be able to:
Describe the steps necessary to make tax law.
Identify and describe the 3 main sources of Federal governmental revenue.
Section 2-Preview 28

29. Section 2-End

30. Section Preview Section Objectives:
In this section, you will learn that one consequence of tax reform was to make the individual tax code more complex than ever.
Section Objectives:
Students will be able to:
Identify and describe a withholding statement.
Describe the purpose of tax reforms.
Identify and describe alternative approaches to taxation.
Section 3-Preview

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

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

33. Federal W – 4 Form

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

35. 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

36. 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

37. 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

38. What do you think Congress should do now regarding taxes?
A. Keep everything the same
B. Reduce government spending
C. Increase taxes
D. Change the tax structure all together A B C D
Section 3

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

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

41. 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

42. 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

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

44. 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

45. Why is it difficult for politicians to change the tax code completely?
A. Hard to give up power of modifying behavior and influencing allocation of resources
B. They support their own pet projects.
C. They find it hard to grant concessions to special interest groups.
D. All of the above A B C D
Section 3

46. Section Objectives: Students will be able to:
Identify and describe a withholding statement.
Describe the purpose of tax reforms.
Identify and describe alternative approaches to taxation.
Section 3-Preview 46

47. Section 3-End

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

49. 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

50. 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

51. VS-End

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62. 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

63. xxx – insert new DFS trans 1

64. DFS Trans 2

65. DFS Trans 3

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

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

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

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

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

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

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

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

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

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

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

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

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

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

80. validity
justification
Vocab15

81. evolved
developed gradually
Vocab16

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

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

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

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

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

87. corporate income tax
tax on corporate profits
Vocab22

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

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

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

91. customs duty
tax on imported products
Vocab26

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

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

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

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

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

97. implemented
put into effect
Vocab32

98. considerably
to a noticeable or significant extent
Vocab33

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

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

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

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

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

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

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

106. concept
general idea
Vocab41

107. controversial
disputed
Vocab42

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