The Design of the Tax System

1
Chapter 12

• The Design of the Tax System
• (pp. 243-250)

2
In this world nothing is certain but death and
taxes. (Benjamin Franklin)
Taxes paid in 1789 accounted for 5 of personal
income
100
80
60
40
20
0
1789
3
In this world nothing is certain but death and
taxes. (Benjamin Franklin)
100
Today, taxes account for about 35 of personal
income!
80
60
40
20
0
1789
Today
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The Tax System

• When the government addresses the problem of
  externalities, provides public goods, or
  regulates the use of common resources, it can
  raise economic well-being.
• For the government to perform these and its other
  many functions, it needs to raise revenue.

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A Financial Overview of the U.S. Government

• Where does the government get its income from?
• Who contributes the most to the U.S. Government
  in the form of taxes?
• What does the government spend its income on?

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The U.S. Economy may be divided into two major
sectors

• The Private Sector
• About two-thirds of all economic activity in the
  U.S. takes place within the private sector.
• The Public Sector
• About one-third of all economic activity in the
  U.S. involves the government sector.

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The Government Sector Federal, State and Local

• The Federal Government collects about two-thirds
  of the taxes in our economy. (Figure 12-1)
• Individual Income Taxes
• Social Insurance Taxes
• Corporate Income Taxes
• Excise Taxes
• Other

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Table 12-2 1999 Fed. Receipts
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Individual Income Taxes... The largest source of
government revenue

• Tax Liability is how much taxes a family owes and
  is based upon total income.
• Marginal Tax Rate is the tax rate applied to each
  dollar of income. (Table 12-3)
• Higher-income families pay a larger percentage of
  their income in taxes.

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Tax Relief Act of 2001

• Passed in May 2001
• Tax rebate checks of between 300-600 were
  issued in Summer 2001
• Marginal Tax rates in 2006 will be lower (15 to
  10, 28 to 25, 31 to 28, 36 to 33 and 39.6
  to 35)
• Rate changes will be phased in

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Social Insurance Taxes

• Established in 1935 (part of New Deal) .
• Based on wages only (payroll tax).
• Employee (and employer) each pay 7.65 of wages.
• Social Security tax (6.2) applies to first
  80,400 in earnings (2001 limits).
• Medicare rate (1.45) applies to all earnings.

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Federal Government Spending

• Spending of government revenues (taxes) includes
  transfer payments and the purchase of public
  goods and services. (Table 12-4)
• Transfer Payments is a government payment not
  made in exchange for a good or a service.
• Transfer payments accounts for the largest
  expenses of the government.

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Spending of the Federal Government

• Expense Category
• Social Security
• National Defense
• Income Security
• Net Interest
• Medicare
• Health
• Other

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Financial Conditions of the Federal Budget

• Budget Deficit
• Situation where the expenses of the budget are
  greater than the revenues.
• Government finances the deficit by borrowing from
  the public
• Budget Surplus
• Situation where the revenues are greater than the
  expenses. Used to pay outstanding debts.

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State and Local Governments Collect about
one-third of taxes paid

• Receipts
• Sales Taxes
• Property Taxes
• Individual Income Taxes
• Corporate Income Taxes
• Federal Government
• Other

• Expenses
• Education
• Public Welfare
• Highways
• Other

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Table 12-5 1996 SL Receipts
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Tax Revenue by Source in Georgia

• Individual Income Tax (47.1)
• General Sales Tax (34.3)
• Corporate Tax (5.3)
• Motor Fuel (4.7)
• Georgia State Government Tax (2000)

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Spending in Georgia (1999) by Function ( of
total)

• Education (42.7)
• Public Welfare (20.8)
• Highways (6.8)
• Corrections (4.1)

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Local Government in Georgia

• Main Tax Sources Property Tax (71) and Sales
  Tax (17)
• Main Spending Categories Education (35), Health
  (18) and Public Safety (8)