Transcript Taxes - Princeton High School

Explorations in Economics
Alan B. Krueger & David A. Anderson
Chapter 10: Taxes: The Price of a Functioning Government
- Module 28: Why and How are We Taxed
- Module 29: Responding to Taxes
- Module 30: Evaluating Taxes
MODULE 28:
WHY AND HOW ARE WE TAXED
KEY IDEA:
The primary goal of the tax system is to raise enough money
for the government to function effectively while doing so as
fairly and efficiently as possible.
OBJECTIVES:
• To explain the need for taxes.
• To identify taxes that discourage undesired behavior and
taxes that encourage desired behavior.
• To describe several important taxes used in the United
States.
TAXES
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WHY TAX?
Taxes are required payments to the government
• Raising Revenue
– paying for essential government services in a fair, efficient
way.
• Discouraging Undesirable Activity
– Sin taxes discourage undesired behavior, such as the use
of tobacco products.
• Encouraging Desirable Activity
– Example: Making mortgage interest free from tax
(deduction).
Why Tax?
• What are the essential government services? Does
the economy function more efficiently when we have
these services? Do most American feel taxes are fair
value for what they receive?
• Sin taxes are thought to be the solution to
overconsumption of fatty foods and soft drinks.
– What do you think?
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WHAT IS TAXED AND
WHO DOES THE TAXING?
The tax base for a particular type of tax is the
value of the activities or assets subject to the tax.
The tax rate is a
specific percentage of
the tax base that is
paid in taxes.
WHAT IS TAXED AND
WHO DOES THE TAXING?
The Federal Income Tax
•A tax return is a form you will complete and submit to the
government when you pay your income taxes. It contains the
information used to determine the amount of taxes you owe
•Employers take money out of each pay check (withholding)
then submit it to the IRS quarterly. At the end of the year
taxpayers file a return to see if what was withheld was the
correct amount. If it is more than you were supposed to pay
you get a refund. It is less you must pay.
WHAT IS TAXED AND
WHO DOES THE TAXING?
Payroll Taxes
A payroll tax is a tax collected from employers on the basis of
the wages and salaries paid to workers.
PAYROLL TAX
• Payroll tax is used to pay social security and
Medicare.
• The Social Security Tax is 6.2% of your gross pay up to
a limit of $118,500 in the current year. Federal
Individual Contribution Act (FICA) is the official name
of the Social Security Payroll Tax.
• Medicare tax is calculated at 1.45% of gross pay with
no limit.
• Employers match both of these payroll and send the
entire amount to the government.
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Different taxes
found on a pay
stub.
•
•
•
•
Federal Income
Social Security
Medicare
State Income
WHAT IS TAXED AND
WHO DOES THE TAXING?
Corporate Taxes
A corporate income tax is a tax on corporate profit that is
paid directly by the corporation.
WHAT IS TAXED AND
WHO DOES THE TAXING?
A property tax is a required payment made by the
owners of property, such as land, buildings, boats,
and cars. Rates are applied to assessed value of
the item to be taxed. Assessments and rates will
vary across the country.
– Property taxes are collected by state and local
governments.
– In most places, local governments set the property
tax rate.
– Revenue from tax used to pay for fire and police
protection and for elementary and secondary
schools.
WHAT IS TAXED AND
WHO DOES THE TAXING?
Sales Taxes
A sales tax is collected from consumers by firms when a taxed good or
service is purchased. The tax is then passed on to the government.
An excise tax applies to specific goods, such as cigarettes or gasoline,
and is typically assessed as a certain amount of money per unit, rather
than a percentage of the price.
WHAT IS TAXED AND
WHO DOES THE TAXING?
State Taxes per Capita
WHAT IS TAXED AND
WHO DOES THE TAXING?
Tax Revenue as a share
of GDP Comparisons
with Other Countries
MODULE 28 REVIEW
What is….
A. Taxes?
B. Sin tax?
C. Tax base?
D. Tax rate?
E. Tax return?
F. Payroll tax?
G. Corporate income tax?
H. Property tax?
I. Sales tax?
J. Audit?
K. Internal Revenue Service?
L. Excise tax?
M. Federal income tax?
MODULE 29:
RESPONDING TO TAXES
KEY IDEA:
People respond to taxes because a tax changes the cost of
a particular activity.
OBJECTIVES
● To explain how buyers and sellers respond to taxes.
● To show how the burden of paying a tax can shift from
one party to another.
● To explain the difference between the average tax rate
and the marginal tax rate.
HOW BUYERS AND SELLERS
RESPOND TO A TAX
A Tax on Buyers
Consumers respond
to the tax by being
willing to pay less
to firm for any
given quantity.
Buyers Respond to Tax
Per unit tax on burgers will decrease the demand for the burgers.
Because of the $.50 tax, the quantity of burgers demanded at a
price of $2.50 is the same as the quantity that would have been
demanded at $3.00.
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HOW BUYERS AND SELLERS
RESPOND TO A TAX
A Tax on Sellers
The shift in the
supply curve
means that firms
are willing to
supply fewer
hamburgers at
any given price.
HOW BUYERS AND SELLERS
RESPOND TO TAX
Per unit tax on sellers will reduce the supply of the product.
At a price of $3.50, the amount a firm actually gets to keep is
$3.00—the $3.50 price minus the $0.50 tax.
So with the tax in place firms supply the same quantity of
hamburgers at a price of $3.50
as they did without the tax at a price of $3.00.
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YOU REALLY PAYS THE TAX?
A Tax on Buyers is Partially Shifted to Sellers
Here, most of the
burden is shifted to
the seller. Demand
curve shifted
downward with new
equilibrium at $2.60.
Consumers pay $.10
more but sellers collect
$.40 less than before
tax. A tax on buyers is
not entirely paid by
the buyers. Some of it
is lost revenue to the
seller.
HOW BUYERS AND SELLERS
RESPOND TO A TAX
A Tax on Sellers is Partially Shifted to Buyers
Here, most of the burden is
shifted to the seller. Supply
curve shifted to the left with
new equilibrium at $3.10.
Sellers still need to pay tax of
$.50. Consumers pay $.10 more
but sellers collect $.40 less than
before tax.
RESPONDING TO
THE INCOME TAX
Average and Marginal Tax Rates
The marginal tax rate is the
portion of an additional dollar of
income that is paid in taxes.
The average tax rate is the
proportion of a taxpayer’s total
taxable income that is paid in
taxes.
RESPONDING TO
THE INCOME TAX
What is…
A. Marginal tax rate?
B. Average tax rate?
MODULE 30:
EVALUATING TAXES
KEY IDEA:
Taxes are evaluated along two lines: whether they are fair
and whether the same amount of money could be raised
with less harm to the economy.
OBJECTIVES:
● To explain the concepts of efficiency as it relates to taxes.
● To define two measures of tax fairness: vertical equity
and horizontal equity.
● To evaluate proposals for tax reform.
EFFICIENCY
Improving Tax Efficiency
• All similar goods should be taxed at
the same rate.
• A low marginal tax rate changes
people’s behavior less than a high
marginal tax rate.
• Simple can be better.
TAX FAIRNESS
Vertical equity means that those who have a greater ability to
pay taxes make a larger tax payment.
A tax is progressive if people with a higher income pay a higher
share of their income in taxes.
A tax is regressive if people with a higher income pay a lower
share of their income in taxes.
A tax is proportional or flat if everyone pays the same share of
their income in taxes, regardless of their level of income.
• The federal government’s income taxes are a
___________ tax.
• Many states use a sales tax to raise revenue. Sales
taxes would be a _______ tax?
• The federal payroll tax on individuals tends to be a
______ tax?
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TAX FAIRNESS
Vertical equity means
that those who have a
greater ability to pay
taxes make a larger tax
payment.
A tax is progressive if
people with a higher
income pay a higher
share of their income in
taxes.
TAX FAIRNESS
Horizontal equity means that those with the same ability to pay
taxes make the same tax payment.
The U.S. tax system is sufficiently complicated that people with
the same income often do, in fact, pay different amounts in
taxes.
Horizontal inequity affects where people choose to live.
TAX FAIRNESS
Tax Fairness in Practice
THE FUTURE DIRECTION
OF TAXES
Broadening the Tax Base
Taxing more benefits earned
Limiting deductible income
A Nationwide Sales Tax
Currently, sales tax is a state and local tax
A Flat Tax
Flat tax requires all tax payers to pay a
constant percentage of their income
MODULE 30 REVIEW
What is…
A. Vertical equity?
B. Horizontal equity?
C. Progressive tax?
D. Regressive tax?
E. Proportional tax?