1. [ 8.1 ] Understanding Taxes

2. [ 8.1 ] Understanding Taxes
Learning Objectives
Identify the sources of the government’s authority to tax in the U.S. Constitution.
Describe types of tax bases and tax structures.
Identify who bears the burden of a tax.
Describe the key characteristics of a tax.

3. [ 8.1 ] Understanding Taxes
Key Terms
tax
revenue.
progressive tax
proportional tax
regressive tax
sales tax
tax base
individual income tax
corporate income tax
property tax
incidence of a tax

4. The Importance of National Taxes
You’re looking forward to getting your first paycheck. You figure that at $7 per hour, you should be getting $140 for the 20 hours you worked. When you open the envelope, you find that the check is for much less than $140. Where did the money go? The answer is: taxes! A tax is a required payment to a local, state, or national government. The federal government and most state governments levy taxes on personal income. Is this fair?

5. The Importance of National Taxes
The Impact of Taxation
The Power to Tax
Limits on the Power to Tax

6. Funding Government Programs
Citizens of the United States authorize the government, through the Constitution and elected officials, to raise money through taxes.
Taxation is the primary way that the government collects money.
Without revenue, or income from taxes, government would not be able to provide goods and services.

7. Taxes and the Constitution
The Power to Tax
Article 1, Section 8, Clause 1 of the Constitution grants Congress the power to tax.
The Sixteenth Amendment gives Congress the power to levy an income tax.
Limits on the Power to Tax
The power to tax is also limited through the Constitution:
1. The purpose of the tax must be for “the common defense and general welfare.”
2. Federal taxes must be the same in every state.
3. The government may not tax exports.

8. The Importance of National Taxes
Analyze Political Cartoons What does this cartoon’s caption suggest about the effect of taxes on a million-dollar windfall?

9. Tax Structures and Tax Bases
Despite the constitutional limits on its power, the government actually collects a wide variety of taxes. Economists describe these taxes in different ways. First, they describe how the tax is structured. Economists describe three different tax structures: progressive, proportional, and regressive. Second, they describe a tax according to the object taxed—the tax base.

10. Tax Structures and Tax Bases
Progressive Taxes
Proportional Taxes
Regressive Taxes
Tax Bases

11. Tax Bases and Tax Structures
A tax base is the income, property, good, or service that is subject to a tax.
Proportional Taxes
A proportional tax is a tax for which the percentage of income paid in taxes remains the same for all income levels.
Progressive Taxes
A progressive tax is a tax for which the percent of income paid in taxes increases as income increases.
Regressive Taxes
A regressive tax is a tax for which the percentage of income paid in taxes decreases as income increases.

12. Tax Structures and Tax Bases
The progressive structure shown here is similar—but not identical—to the federal income tax. Analyze Graphs What percentage of total income does each earner shown on this graph pay?

13. Tax Structures and Tax Bases
This graph of a 2013 study shows the share of income paid in state sales and excise taxes at different income levels. Analyze Graphs Explain why this shows the regressive nature of these taxes.

14. Tax Structures and Tax Bases
The tax base for the individual income tax is the money earned by workers like these women.

15. The Tax Burden
Government tax policies have a real impact on millions of individuals and businesses. These impacts can affect the entire economy. Thus, it is important to think about who actually bears the burden of a tax. This is not necessarily the person who sends in the money to pay the tax bill. How can we know who is actually bearing the burden of a tax? The answer lies in supply-and-demand analysis.

16. The Tax Burden
This graph shows the effect of a tax when the demand for the good being taxed is inelastic. Analyze Graphs Do you think consumers or businesses will pay the larger share of the tax? Explain.

17. The Tax Burden
Elasticity of demand for a product affects whether consumers or businesses bear the burden of a tax on it. Apply Concepts Why does the burden shift to businesses if demand is elastic?

18. Key Characteristics of a Tax
Although it is sometimes difficult to decide whether a specific tax is proportional, progressive, or regressive, economists do generally agree on the qualities a tax ought to have. A tax should have four characteristics: simplicity; efficiency; certainty; and equity, or fairness.

19. Key Characteristics of a Tax
Determining Equity
Balancing Tax Revenues and Tax Rates

20. Characteristics of a Good Tax
A good tax has the following characteristics:
Simplicity
Tax laws should be simple and easily understood.
Economy
Government administrators should be able to collect taxes without spending too much time or money.
Certainty
It should be clear to the taxpayer when the tax is due, how much is due, and how it should be paid.
Equity
The tax system should be fair, so that no one bears too much or too little of the tax burden.

21. Key Characteristics of a Tax
The government’s Internal Revenue Service (IRS) has a “long form” and a simpler “short form” for filing taxes. Analyze Political Cartoons What does this cartoon suggest about the tax system?

22. Key Characteristics of a Tax
In addition to the taxes graphed here, governments may also collect sales and other taxes. Analyze Graphs How would you describe U.S. tax policy with regard to taxing income?

23. Quiz: The Importance of National Taxes
According to the Constitution, for what purpose can government collect taxes?
A. to pay the nation’s debts and provide for its defense and welfare
B. to discourage exports and promote imports
C. to ensure religious freedom for all citizens
D. to establish the nation’s gross domestic product

24. Quiz: Tax Structures and Tax Bases
What is the tax structure of the federal individual income tax?
A. regressive
B. proportional
C. flat
D. progressive

25. Quiz: The Tax Burden
Who bears the greater burden of a tax on a good or service when demand is inelastic?
A. manufacturers
B. consumers
C. sellers
D. the government

26. Quiz: Key Characteristics of a Tax
Economists generally agree that taxes ought to be
A. simple, efficient, certain, and fair.
B. universal, progressive, fair, and low.
C. simple, proportional, low, and infrequent.
D. high, regressive, simple, and universal.