SOURCES OF GOVERNMENT REVENUE

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SOURCES OF GOVERNMENT REVENUE

• Chapter 9

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• TAXES ARE THE SINGLE MOST IMPORTANT WAY OF
  RAISING REVENUE FOR THE GOVERNMENT

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I. Economic Impact of Taxes
A. Producer Paid Taxes

• Increased Production Costs
• It now costs more to produce an item
• This will decrease supply and increase price
• Elastic Demand Producer absorbs tax
• Inelastic Demand Consumer absorbs tax

The person being taxed does not always bear the
burden
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Consumer Paid Taxes
I. Economic Impact of Taxes

• Changes incentives to save, invest and work
• Mortgage rates, auto financing
• Affects resource allocation
• Sin Tax manipulating taxes to discourage
  behavior
• Tax on socially undesirable goods
• Alcohol, tobacco, gasoline

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II. Criteria for Effective Taxes
EQUITY
EFFICIENCY
SIMPLICITY
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Equity

• Fairness Perceived
• What is fair?
• If Everyone Pays the same?
• If you make more you pay more?
• If you use more you pay more?
• Loopholes

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Simplicity

• Easily understood
• Individual Income Taxes
• Tax on earnings
• Sales tax
• General tax placed on items sold
• Food, Child Care, Rx

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Efficiency

• Easily Administered
• Payroll, Sales, Income, Road Toll
• Serves its purpose
• Raises enough
• Example 1991 Luxury tax on private aircraft
• Raised 53,000 in tax revenue
• Caused job cuts and cost over 53,000 in
  unemployment benefits.
• Congress repealed it

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III. Principles of Taxation

• Benefit Principle
• Those who benefit should pay an amt.
  proportionate to their benefit
• Road toll, gas tax, sales tax
• Limitations
• Benefits are hard to measure
• Do only those who own cars benefit from toll
  roads?
• Government Services
• Those who benefit the most can least afford the
  taxes (low-income housing)
• Ability-To-Pay Principle
• Those who make more money pay more in taxes

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IV. Types of Taxes

• Proportional
• Directly related to value of item taxes
• Such as Property Tax
• Progressive
• Income goes uptaxes go up
• Federal Income Tax
• Regressive
• Income goes up of total goes down
• Sales Tax, FICA

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V. Categories of Taxes

• Individual Income Tax
• FICA
• Corporate Income Tax
• Other Federal Taxes
• Excise
• Estate
• Gift
• Customs duty
• User fees

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Individual Income Tax

• 1913 16th Amendment
• Allows Congress to impose an income tax
• Tax on individual, personal earnings
• 48 of Federal Revenue

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Individual Income Tax

• Via payroll deductions
• Automatically deducted
• Paid directly to the
• government by employers
• Tax Returns
• Between Dec 31st April 15th
• Summarizes annual activity (/-) (paid v. owed)
• THIS IS YOUR MONEY

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FICA Federal Insurance Contributions Act

• Also known as payroll tax
• Pays for Social Security (6.2)
• 6.2 of gross income (84,900. cap)
• Pays for Medicare
• Medicare Federal health-care program available
  to senior citizen, regardless of income
• 1.45 of gross income (no cap)
• Employer/Employee share in this equally
• TOTAL tax is 15.3

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Corporate Income Tax

• Corporations are separate, legal entities
• They pay taxes on their income as if they were an
  individual
• 15 income over 5,000.
• 25 income over 50,000.
• 34 income over 75,000.
• 35 income over 18.3 million.

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Other Federal Taxes

• Excise
• Taxes on the production, transportation, sale, or
  purchase of certain goods
• gas, liquor, telephone, coal, luxury goods
• Estate Death Tax
• Transfer of property when a person dies (18-50)
• Gift Gifts of cash or items in excess of a
  certain amt.
• Customs duty Imports
• Tax on certain items brought into the country
• User fees Fee paid when fed government items
  are used (national parks, animal grazing on Fed.
  land, etc.)

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Some Criticisms of our Current Tax System

• Too complex the Federal Tax Code is 18,500
  pages!
• Too many loopholes do the wealthiest Americans
  pay their fair share?
• Too bureaucratic the IRS costs too much!

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FLAT TAX (A proposed reform)

• ADVANTAGES
• A single percentage rate is paid on individual
  income after a certain amount has been earned.
• Simplifies the process
• Reduces opportunities for loopholes
• Reduces need for tax accountant, preparers, and a
  large portion of the IRS
• DISADVANTAGES
• Removes behavior incentives
• Many millionaires would actually pay less than
  they do now.
• Homeowners (middle income earners) would lose the
  mortgage interest deduction

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Extra Credit OpportunityThe FairTax Proposal

• Read The FairTax Fundamentals and facts
• http//www.fairtax.org/PDF/FairTax-Fundamentals_an
  d_facts-070122.pdf
• Read Unspinning the FairTax
• http//www.factcheck.org/taxes/print_unspinning_th
  e_fairtax.html
• Write a one page essay summarizing the FairTax
  proposal and the arguments against it. Give your
  opininon as to who you believe makes the better
  argument.
• (Due by the last day of the six weeks.)

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Think about this!

• If you were an elected official who wanted to
  increase tax revenues, which of the following
  taxes would you prefer to use individual income,
  sales, property, corporate income, user fees, or
  flat?
• Provide reasons for your decision.