TAXES: The main source of government revenue

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TAXES The main source of government revenue

• nothing is certain, but death and taxes.
• B. Franklin

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Taxes Fund Public Goods and Services
Health Care for Elderly
National Defense
Social Services
State and Local Police
Public Education
Financial Aid
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The Economics of Taxation

• In addition to creating revenue for the
  government, taxes also impact the economy in the
  following ways
• Resource allocation - if taxes are too high,
  supply will decrease and /or prices will increase
  causing a shift in the allocation of land, labor
  and capital.
• Behavior adjustment - sin taxes, such as those
  placed on cigarettes attempt to change a persons
  behavior
• Productivity and Growth - if taxes are too high,
  there is less incentive for people or businesses
  to continue to grow. Why earn more if most of it
  is taken away in higher taxes?
• Correct negative externalities
• Stabilize the economy through fiscal policy

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To be effective Taxes must meet the following
criteria
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TWO PRINICPLES of TAXATION

• Who pays What is based on two principles
• Benefit Principle - The more you benefit from
  something, the more you should pay. Taxes on
  gasoline
• Ability to Pay - The more you make the more you
  should pay.

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Types of Taxes

• Taxes are classified according to the ay in which
  the tax burden changes as income changes.
• Proportional Tax
• Progressive Tax
• Regressive Tax

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Proportional Taxes

• Regardless of Income, the same tax rate is
  imposed upon everyone. Another term for a
  proportional tax is a flat tax.
• If there is a 20 flat tax, how much do you pay
  in taxes if you earn 10,000? What if you earn
  100,000?
• Note as a persons income increases, the
  percentage of total income paid in taxes remains
  the same.
• Property Tax is a proportional tax.

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Proportional Tax
40
20
Tax Rate
10
10,000 50,000 100,000
Income
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Progressive Tax

• People with higher incomes pay a higher
  percentage in taxes. Federal and State income
  tax are progressive taxes.
• Simple the more you make the more they take

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Progressive Tax
40
20
Tax Rate
10
10,000 50,000 100,000
Income
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Regressive Taxes

• The lower the income the higher percentage paid
  in taxes.
• Sales tax is an example of a regressive tax.
  Assume two families paid 1000 in sales tax by
  the end of the year. Which family spent a higher
  percent of their income on taxes?

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Regressive Tax
40
20
Tax Rate
10
10,000 50,000 100,000
Income
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FEDERAL TAXES
-Amendment 16 gives Congress the power to lay and
collect taxes. Federal Income Taxes are due
April 15. -The Internal Revenue Service (IRS)
enforces/ collects from the tax code.
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Income Tax

• Individual income taxes are paid over time
  through a payroll withholding system (just look
  at your paycheck). By April 15, of every year
  you must file a tax return. Any difference in the
  amount paid compared to the amount owed is
  settled at this time.
• Two forms to know are your W4 and your W2. What
  are they?

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W4

• Your withholding allowance
• Fill out a W4 every time you start a new job
• Increases or Decreases the amount of withholdings
  based on the number of dependents
• 0more withheld 2 less withheld
• Your employer and you are putting away small
  portions of your paycheck, in order for you to
  pay your income tax at the end of the year.

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What does W4 look like?

• http//www.irs.gov/pub/irs-pdf/fw4.pdf

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Sample W-2 Form

• Contains your tax information for one job in one
  year
• Youll receive one for each job you worked at
  during the year
• Must be mailed by January 31 or every year.

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Payroll Taxes
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More Federal Taxes

• Corporate Income Tax - As a separate legal
  entity, corporations are taxed.
• Excise Tax - tax on the manufacture or sale of
  selected items
• Estate Tax - tax (18-50) on the transfer of
  property upon a death. As of 2006, estates worth
  less than 2 million dollars are exempt.
• Gift Tax - Tax on money donations, paid by the
  person donating.
• Customs Duties Tax on imported goods. Exported
  goods may not be taxed.

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State Taxes and Local Taxes

• Intergovernmental Revenues - transfer of money
  from the federal government
• Sales Tax
• Employee Retirement Contributions
• Individual Income Tax

• Intergovernmental Revenues -from state level
• Property Tax
• Public Utility or State owned liquor stores
• Sales Tax - this varies from city to city!

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Where does our tax money come from and then go?
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Where do your Wisconsin tax dollars go?

• http//www.nationalpriorities.org/auxiliary/taxday
  2008/243.pdf