3. 9.1 I. Economic Impact of Taxes A. Taxes affect the factors of production and, therefore, resource allocation A tax placed on a good at the factory raises production B. A tax placed on a good at the factory raises production costs costs (supply curve shifts to the left); if demand stays the same, the equilibrium price goes up.

5. C. Taxes affect the economy by encouraging or discouraging certain activities 1. A % of interest payments on mortgages is tax deductible = encourages homeownership 2. Interest payments on credit card debt is not tax deductible = discourages credit card use Tax deductable Not tax deductable

6. D. A sin tax is a high-percentage tax that raises revenue while reducing consumption a socially undesirable product of a socially undesirable product * Alcohol and tobacco * Tanning beds E. Taxes affect productivity and economic growth by changing the incentive to save, invest, and work

7. F. The incidence of a tax is the final burden of the F. The incidence of a tax is the final burden of the tax: tax: 1. it is easier for a producer to shift the incidence of a tax to the consumer if the incidence of a tax to the consumer if the demand is inelastic; demand is inelastic; 2. the more elastic the demand, the more likely 2. the more elastic the demand, the more likely the producer will absorb a greater portion of the producer will absorb a greater portion of the tax. the tax. 1. it is easier for a producer to shift the incidence of a tax to the consumer if the incidence of a tax to the consumer if the demand is inelastic; demand is inelastic; 2. the more elastic the demand, the more likely the producer will absorb a greater portion of the producer will absorb a greater portion of the tax. the tax.

9. II.Criteria for Effective Taxes- Taxes are effective when they are: * equitable, * simple, and * efficient

10. A. Criterion 1: equity or fairness fairness is subjective, but taxes are considered fairer if they have fewer loopholes—exceptions, deductions, and exemptions = loopholes

11. B. Criterion 2: simplicity * tax laws should be easy to understand * Individual Income Tax is EXTREMELY complex * Sales Tax is fairly straight forward = everyone who buys products pays the same tax

12. C. Criterion 3: efficiency * easy to administer and is successful at generating revenue

13. III. Two Principles of Taxation A. BENEFITS RECEIVED = states that those who benefit from government goods and services should pay in proportion to the amount of benefits they receive 1. Those who do not use the service do not pay taxes for the benefit (gas tax) 2. The limitations of this principle are that many government services provide the greatest benefit to those who can least afford them and that benefits are hard to measure

14. B.ABILITY TO PAY = those with higher incomes pay more taxes than those with lower incomes, regardless of the number of services used more taxes than those with lower incomes, regardless of the number of services used (property taxes to support schools) (property taxes to support schools) 1. Based on two ideas: a. that societies cannot always measure the benefits derived from government spending, b. and that people with higher incomes suffer less discomfort in paying taxes than people with lower incomes

15. IV. Types of Taxes A. Proportional Tax is one that imposes the same percentage on everyone, regardless of income B.A Progressive Tax a tax that takes a larger % of higher incomes than lower incomes; ability to pay principle – current income tax higher incomes than lower incomes; ability to pay principle – current income tax C. A Regressive Tax is one that takes a larger % of lower incomes than higher incomes; hardest for lower incomes than higher incomes; hardest for those with the least – sales tax those with the least – sales tax

17. I.Individual Income Taxes (Personal Income Tax) = #1 source of income for government A. The federal government collects about 45 A. The federal government collects about 45 percent of its revenue from the individual percent of its revenue from the individual income tax income tax B. Taxes are typically withheld from individual’s B. Taxes are typically withheld from individual’s paychecks, with employers sending the paychecks, with employers sending the taxes directly to the IRS taxes directly to the IRS

18. C.Individuals file a tax return on or before April 15 each year 1. If taxes withheld are more than the taxes owed, the individual receives a refund 2. If not, the individual makes a payment of the tax balance to the IRS

19. individual income tax progressive tax D.The individual income tax is a progressive tax because individuals earning higher incomes pay higher tax rates

20. II. FICA = Federal Insurance Contributions Act A. #2 source of income for government A. #2 source of income for government B. FICA pays for Social Security and Medicare B. FICA pays for Social Security and Medicare C CC C. Partly proportional and regressive; proportional up to an income of $87,000, and regressive after D. Medicare added in 1965 to assist senior citizens with health care

21. Corporate Taxes III. Corporate Taxes #3 source of income A. #3 source of income for government for government Progressive up B. Progressive up to then $18.3 million, then proportional proportional; some states also levy, so DOUBLE taxation

22. IV. Other Taxes A. Excise Tax = on manufacture or sale of certain products like alcohol, gas, tobacco; some states also levy, so DOUBLE taxation (Regressive tax) B. Sales Tax = tax on purchases; regressive C. Estate Tax = tax on inherited property

23. D.GIFT Tax = tax on large donations (gifts) of money or wealth and is paid by the donator E. Customs Duties = Tariffs; tax paid by the importer on imported goods to the USA

24. F.Property Tax = tax on the value of property (state and local tax) G. User Fees = charges on the use of goods or services; based on benefit principle

26. 9.3 State Government Revenue Sources

27. 9.3 I. State Government Revenue Sources A. Intergovernmental revenues are funds collected by one level of government that are distributed to another level. (welfare, education, highways) Intergovernmental revenues are the largest 1. Intergovernmental revenues are the largest source of revenues for state and local source of revenues for state and local governments governments—about one-fourth of all state revenues

29. Sales Tax 2 nd largest B. Sales Tax = tax on consumer purchases = 2 nd largest source of revenue for most states source of revenue for most states C.Employee retirement 3 rd largest C.Employee retirement contributions = 3 rd largest source of income E.Other taxes = interest earnings on surplus funds, state colleges, universities, schools, corporate taxes, hospital fees, lotteries D. S tate Income Tax = 4 44 4th largest source of income

30. II. Local Government Revenue Sources Intergovernmental revenues A. Intergovernmental revenues are generally earmarked for education and public welfare – largest source of income B. Property taxes are levied on items like real estate, buildings, furniture, automobiles, farm animals, bonds, bank accounts

31. C.Local governments receive revenues from owned public utilities and state owned liquor stores – 3 rd largest source government-owned public utilities and state owned liquor stores – 3 rd largest source D.Some towns and cities have a local sales tax (Special Local Option Sales Tax – SPLOST), which is collected along with the state’s sales tax – 4 th largest source E. Other sources of local income = hospital fees, personal taxes, public lotteries

33. 9.4 Tax Reform I.Two Proposals; one in effect A. Alternative Minimum Tax passed in 1986 1. Required people to pay a minimum of 20% - designed to prevent people from using loopholes to pay little to no tax B. Flat Tax; not used in USA, but many support it as a way to simplify taxes and encourage economic growth 1. Proportional tax on individual income above a certain amount 2. Easy to work with 3. Closes tax loopholes 4. Reduces the need for people who work with taxes (IRS and tax preparers); could save the nation as much as $100 billion per year! 5. Does not go along with the ability-to-pay principle of taxations 6. Not sure how the flat tax would affect the economy & do not know what rate would be needed to fund the government