Transcript TAXES: The main source of government revenue

TAXES: The main source of
government revenue
…nothing is certain, but death and
taxes.
B. Franklin
Taxes Fund Public Goods and
Services
Health Care for Elderly
National Defense
Social Services
State and
Local Police
Public Education
Financial Aid
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 person’s 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
To be effective Taxes must
meet the following criteria:
CRITERIA FOR TAXES
EQUITY
Is this tax fair?
SIMPLICITY
Is this tax easy to understand?
EFFICIENCY
Is this tax easy to administer?
Does this tax generate enough money?
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.
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
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 person’s income increases, the
percentage of total income paid in taxes
remains the same.
 Property Tax is a proportional tax.
Proportional Tax
40%
20%
Tax Rate
10%
10,000
50,000
Income
100,000
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”
INCOME
$10,000
Amount Paid Amount Paid
in Taxes
as a
percentage
of Income
$1,000
10%
$50,000
$ 10,000
20%
$100,000
$ 30,000
30%
Progressive Tax
40%
20%
Tax Rate
10%
10,000
50,000
Income
100,000
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?
Income
Amount paid Amount paid in
taxes as a
in taxes
percentage of
their income.
$10,000
$1000.00
10%
$50,000
$1000.00
5%
Regressive Tax
40%
20%
Tax Rate
10%
10,000
50,000
Income
100,000
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.
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?
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
 0=more 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.
What does W4 look like?
 http://www.irs.gov/pub/irs-pdf/fw4.pdf
Sample W-2 Form



Contains your tax information for one job in one year
You’ll receive one for each job you worked at during the year
Must be mailed by January 31 or every year.
12-2222222
Real World Business
16,680.24
1,728.00
16,680.24
1034.16
16,680.24
241.92
Chicago, IL 60640
000-00-000
D
Irma Money
2301 South Jackson
Chicago, IL 60640
IL
12-2222222
16,680.24
440.40
2000.00
Payroll Taxes
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
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!
Where does our tax money
come from and then go?
Where do your Wisconsin tax
dollars go?
 http://www.nationalpriorities.org/auxilia
ry/taxday2008/243.pdf