1. The Economics of Taxation
Chap 9, sec 1&2 & chap 10 notes

2. Taxes
The Internal Revenue Service (IRS)- branch of the Treasury Department in charge of collecting taxes
1. The benefit principle: those who benefit from government goods & services should pay for those goods & services in proportion to the amount of benefits they receive
a. gas tax-those who drive more should pay more
b. senior citizens should not pay for taxes that go to education
c. limitations- those who receive the benefits are usually the ones who are least able to pay
d. benefits are hard to measure-senior citizens benefit from an educated society; everyone benefits from police & fire protection

3. Taxes continued
2. Ability to pay principle: people should be taxed according to their ability to pay, regardless to benefits they receive
a. people with higher wages pay more taxes
b. can’t measure the benefits we get from government spending (military, fire police)
c. people with high incomes suffer less discomfort from paying taxes then people of lower incomes

4. Three Types of tax:
proportional tax- same percent (%) on everyone (Example – 1.45 % medicare tax taken out in paychecks)
2. progressive tax- the more you earn, the more you pay (Example – Individual income tax code in the U.S.)
3. regressive tax- higher percentage rate on lower incomes than higher ones (they use less govt. programs)

5. What makes taxes effective?
1. EQUITY- fairness/impartial/just
need to decide what’s fair
try to avoid loopholes (allows some people
to avoid paying taxes)
Warren Buffet, 2nd wealthiest man in the U.S. pays less taxes than his secretary
2. SIMPLICITY- taxpayers & collectors should be able to understand them
-individual income tax- federal tax on earnings
-largest source of earnings for the federal government
-very complicated to understand
-sales tax- much easier- 6% on purchased goods in MI.
3. EFFICIENCY-easy to administer & generating
Revenue (example individual income tax – W2 forms)

6. Government spending- expenditures- how the govt spends the money we give to them in the form of taxes
Fiscal policy- the federal government’s attempt to influence or stabilize the economy through taxing & government spending
-when govt. spends in excess (more) of taxes &
other revenues= deficit spending
-National debt= the total amount borrowed from investors to finance the government’s deficit
spending