1. Economics Chapter 12: Taxes and taxation
Who and What Should be Taxed?

2. Begin with a story… St. Valentine’s Day 1929 Results of the incident?
Anyone know what happened?
Results of the incident?
What eventually brought this person to justice?

3. Taxes! Ben Franklin’s immortal words… What are taxes?
“The price of civilization”—Oliver Wendell Holmes, Jr.
Been around since earliest civilizations
Support services and infrastructure
Promote social and economic goals
What has been our national history towards taxes?

4. What does Adam Smith say?
Four guiding principles:
Equity: Taxes should be fair
“Not unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”
Certainty: Time, manner, and quantity all known up front
Convenience: System should not be complicated
Efficiency: Keep economic cost of taxes to a minimum

5. Tax Equity Debate: Who Pays and Why?
Economists agree that the system should be fair, but they disagree over how to achieve fairness
2 basic approaches
Ability to Pay Principle
Benefits Received Principle
Which one do you think is the proper way to achieve fairness? Turn to a partner and discuss.

6. Who Ends Up Paying?
Economic burden of a tax is known as “Tax Incidence”
May not always fall on the person who pays the tax bill
Think hotel rooms and “occupancy taxes”
Tax Incidence is affected by the elasticity of supply and demand
In general, tax will fall on the side of the market that is less elastic

7. What Taxes Will You Pay?
Important date to know---April 15---filing deadline
Tax Base---the thing that is taxed
Personal income or property tax as examples
Tax Rate---percentage of the value of the good (property or income) that is paid in tax
Example: 20% income tax rate
Look at current tax rates, Federal and Virginia

8. Tax Structures Proportional Tax---same share of income at all levels
Sometimes called a “Flat Tax”
Critics cite fairness as an issue---ability to pay
Advocates say that it is inherently fair
Slovakia has this---19% income tax for all
Tradeoff: Less tax evasion, greater foreign investment/less money for government services

9. Tax Structures
Progressive Tax---takes a larger share of income as income increases
Based on ability to pay principle
Structure for most federal taxes
Critics say it places unequal burden on rich--- fundamentally unfair (punishes rich for being rich)
Creates disincentive to work, save, and invest
Also say it creates a more complicated system

10. Tax Structures
Regressive Tax---tax that takes a smaller share of income as income increases
No government really sets out to do this…but it sometimes happens
Example---Proportional tax called a “sales tax”
Tax on what you spend
20k earned; spends 10k to live; tax rate 5% = $500
Represents 2.5% of low earner’s income
100k earned; spends 30k to live; rate of 5% = $1,500
Represents 1.5% of high earner’s income

11. Taxes You Will Pay Individual Income Tax---Marginal (pg. 239)
Payroll Tax---Tax on wages a company pays its employees (examples---Social Security and Medicare)
Social Security Tax---paid ½ by you, ½ by employer
Social Security tax rate was 12.4%
What type of tax is this?
Property Tax---assessed value
Sales Tax---purchase of a good
Corporate Income Tax---profits
Excise Taxes---Things gov. wants to regulate
Luxury Taxes---private jets, fur coats, etc.
Estate and Inheritance Tax

12. Taxes are Revenue; How does Gov. Spend it?
2007 Tax Revenue for the government
$2,500,000,000, $2.5 Trillion
Four sources---income, payroll, corporate, excise (in order)
Does not take in enough to cover all expenses---- federal deficit
Thus, government borrows money
National debt is the total amount owed as a result of borrowing

13. Federal Spending Mandatory vs. Discretionary Mandatory Discretionary
Spending is fixed by law
Entitlements and interest on national debt
Entitlements include Social Security, Medicare, welfare
Mandatory spending in 2010 approx. 65% of federal rev.
Discretionary
May be raised or lowered as Congress sees fit
National defense