Transcript Taxes PowerPoint

Economics Unit 5
Fiscal Policy and Taxes
Answer the first question on your
guided notes sheet on your own!
Tax Principles
Principles of American Democracy
demand that each taxpayer should
be created equally under the law
 This does not mean that all
taxpayers should pay the same
amount of tax. Principles of taxation
suggest that some should pay more
than others.

Answer the 4 questions regarding
the pie chart shown in your notes.
Sources of Federal Gov't Income for 2000
Excise, customs,
estate, gift, and
miscellaneous
8%
Corporate and
Income Taxes
10%
Social Security,
Medicare and
Unemployment
Taxes
32%
Personal Income
taxes
50%
2 Basic Types of Tax Principles

Benefits received principle
• Definition – Those who receive more
benefits from government program
funded by a tax should pay more of that
tax
• Example: toll roads and bridges – those
who use them pay the toll, those who
don’t have to pay
Tax principle con’t

Ability to pay principle
• Definition – Those with a greater ability
to pay, such as those with a higher
income, should pay more of a tax
• Example – Federal income taxes, the
rate varies from 10% to 38.6%
depending on your level of income.
Question?

Why isn’t it logical for the
government to try to pay for
a welfare program with a
benefits received principle?
Types of funding for each level of
government
Federal – rely primarily on Federal
Income Tax
 State –rely primarily on State
Income Tax and sales taxes
 Local – Reply on property taxes
 Other Revenue Sources – Aid from
higher levels of government, user
fees like tolls, fines like speeding
tickets, monopoly profits such as
lottery tickets

Look at the picture below and
answer the question in your notes
3 Tax Classifications

Progressive Taxation
• Definition – tax as a percentage of income,
increases as income increases
• Example – Federal Income Taxes

Proportional taxation
• Definition – Tax as a percentage of
income, remains constant as income
increases, also called a flat tax
• Example – No perfect example exists but if
everyone paid 10% of income to tax that
would be an example
Tax Classifications

Regressive taxation
• Tax as a percentage of income
decreases as income increases
• Example – State sales tax
Tax Collection
Direct taxes are paid directly to the
government like property taxes
 Indirect taxes are included in the
cost of a good or service like rent
payments
 Pay as you earn – taxes are paid as
you receive each paycheck and the
government takes a cut

Types of Taxes
Income Taxes – Includes FICA,
State, Local and Federal taxes
withheld from your paycheck
 Sales Taxes – includes taxes added
to the price of goods and services at
the time of purchases
 Property Taxes – Taxes assessed on
the value of real estate property
 Excise Taxes – Taxes collected on
sales of specific goods, such as
firearms, air travel and gasoline

Types of Taxes con’t





Estate Taxes – Taxes on property that was
received by those legally entitled to the
estate
Gift Taxes – Taxes gift givers may pay
Business or License Taxes – taxes paid to
receive certification or permit like a license
to practice medicine
Custom Duties or tariffs – taxes imposed
on imports
“Sin” Taxes – taxes used to discourage
sales of certain products like alcohol
Work with a neighbor

George has 2 job offers, basing his
decision only on financial benefits to
George which job should he take?
Why?
The Birth of Fiscal Policy

Fiscal policy
• Definition- Government decisions on
taxing and spending
• 2 Main thoughts
Classical Economists – believe that free
markets work best without any government
intervention
 Keynesian Economists – Believe that the
government needs to use fiscal policy to
control free markets when they are failing to
perform. Developed during the Great
Depression

Fiscal Policy Tools

2 categories
• Discretionary Fiscal Policy

Definition – Congressional changes in
spending and taxing to promote Economic
Goals
• Automatic Stabilizers

Definition – Government spending and
taxing programs that year after year
automatically reduce fluctuations in the
business cycle
Fiscal Policy Video

Fiscal Policy explained with
Aggregated Supply and Demand
How Fiscal Policy Works
Economy Declines
Government reduces taxes to
stimulate growth and encourage
spending
Economy Declines
Government increases spending
which creates government jobs
and buys from businesses
Economy Expands
Government increases taxes to
stimulate contraction and
discourage spending
Economy Expands
Government decreases spending
which shrinks the overall market