Transcript Taxes Slides

News flash – it’s election season! :D
In general, regarding taxation policy, Republicans
advocate lowering taxes as a way to stimulate the
economy.
In general, Democrats advocate raising taxes mostly on
the wealthy as a way to stimulate the economy.
Discuss with the people around you – how can BOTH
policies achieve the goal of economic growth?
Taxes (9/23/16)
I. Basics about taxes
A. 2 principles of tax fairness
1. Benefits principle: those who benefit should pay
a. Examples:
b. Any problems with this?
2. Ability to pay principle: those who are able to pay
more should
a. Examples:
b. Any problems with this?
Assess the following four tax policies in terms of the
benefit principle versus the ability to pay principle.
a. A tax on semi-truck tires that finances maintenance
of state roads
b. An 8% tax on imported goods valued in excess of
$800 per household brought in on passenger flights
c. Airline-flight landing fees that pay for air traffic
control
d. A reduction in the amount of income tax paid based
on the number of dependent children in the household
B. Tax goals: equity vs. efficiency
1. A lump-sum tax where everyone pays the same
amount (ex: everyone pays $500) vs. tax based on
property values (ex: everyone pays 1% of their
home’s value)
a. Which tax is more efficient? (hint: which tax is
more likely to distort people’s behavior? Behavior
distortion  inefficiency)
Which tax is more equitable?
C. Income tax = progressive tax
1. Marginal tax rate: the tax rate on the last $ of
earned income (or what bracket you fall into)
Single Filing Status – Federal Income Tax - Year 2015
10% on taxable income from $0 to $9,225, plus
15% on taxable income over $9,225 to $37,450, plus
25% on taxable income over $37,450 to $90,750, plus
28% on taxable income over $90,750 to $189,300, plus
33% on taxable income over $189,300 to $411,500, plus
35% on taxable income over $411,500 to $464,800, plus
39.6% on taxable income over $464,800.
Taxable income = income after your
deductions
Single Filing Status – Federal Income Tax - Year 2014
10% on taxable income from $0 to $9,075, plus
15% on taxable income over $9,075 to $36,900, plus
25% on taxable income over $36,900 to $89,350, plus
28% on taxable income over $89,350 to $186,350, plus
33% on taxable income over $186,350 to $405,100, plus
35% on taxable income over $405,100 to $406,750, plus
39.6% on taxable income over $406,750.
Single Filing Status – Federal Income Tax - Year 2015
10% on taxable income from $0 to $9,225, plus
15% on taxable income over $9,225 to $37,450, plus
25% on taxable income over $37,450 to $90,750, plus
28% on taxable income over $90,750 to $189,300, plus
33% on taxable income over $189,300 to $411,500, plus
35% on taxable income over $411,500 to $413,200, plus
39.6% on taxable income over $413,200.
Single Filing Status – Federal Income Tax - Year 2015
10% on taxable income from $0 to $9,225, plus
15% on taxable income over $9,225 to $37,450, plus
25% on taxable income over $37,450 to $90,750, plus
28% on taxable income over $90,750 to $189,300, plus
33% on taxable income over $189,300 to $411,500, plus
35% on taxable income over $411,500 to $413,200, plus
39.6% on taxable income over $413,200.
Married Joint Filers– Federal Income Tax - Year 2015
10% on taxable income from $0 to $18,450, plus
15% on taxable income over $18,450 to $74,900, plus
25% on taxable income over $74,900 to $151,200, plus
28% on taxable income over $151,200 to $230,450, plus
33% on taxable income over $230,450 to $411,500, plus
35% on taxable income over $411,500 to $464,850, plus
39.6% on taxable income over $464,850.
Examples of personal tax deductions
•
•
•
•
•
•
•
•
Mortgage interest
Educational expenses
Charitable donations
Dependents
Child care
Moving expenses because of job
Student loan interest
Home office expenses (or other work-related
expenses)
• Certain medical expenses
Again– marginal tax rate: the tax rate on the last dollar of income
earned (or what bracket you fall into)
Practice problem:
An income tax taxes 1% of the first $10,000 of income, 2% on all
income from above $10,000 to $30,000, and 4% on all income over
$30,000.
a. What is the marginal tax rate for someone with an income of
$5000? How much total tax does this person pay? How much is this
as a percentage of his income?
b. What is the marginal tax rate for someone with an income of
$20,000? How much total tax does this person pay? How much is
this as a percentage of her income?
c. What is the marginal tax rate for someone with an income of
$50,000? How much total tax does this person pay? How much is
this as a percentage of his income?
Warm-up: September 27, 2016
All states impose excise taxes on gasoline. According to
data from the Federal Highway Administration, the state of
California imposes an excise tax of $0.18 per gallon of
gasoline. In 2005, gasoline sales in California totaled 15.6
billion gallons.
a. What was California’s tax revenue from the gasoline
excise tax?
b. If California doubled the excise tax, would tax revenue
double? Why or why not?
D. State income tax
(9/26/16)
1. States w/o: AK, FL, NV, SD, TX, WA, WY
2. States differ (some use brackets, some flat %, etc)
Single Filing Status - 2015
E. Other taxes
1. Payroll tax: FICA (Social Security and Medicare)
a. Proportional tax: same % regardless of income
b. Soc Sec: 6.2% up to $118,500 (up from $117,000
in 2014) - 12.4% total
i. Becomes a regressive tax:
2. Medicare: 1.45% (2.9% total)
3. Taxes on corporate profits (progressive)
4. Estate and gift taxes:
a. Estate tax: the “death” tax
Calendar year
Exemption
Rate (highest percentage)
2006
$2 million
46
2007
$2 million
45
2008
$2 million
45
2009
$3.5 million
45
2010
repealed
0
2011
$5 million
35
2012
$5.12 million
35
2013
$5.25 million
40
2014
$5.34 million
40
2015
$5.43 million
40
2016
$5.45 million
40
b. Gift tax: 40% on value over $14,000.
Example 1: I give you (not my kid) a car valued at
$20,000. I owe taxes on $6,000 of it.
Example 2: I give my kid a car valued at $20,000. I have
to claim it (but as long as lifetime gifts don’t exceed
$5.43m, I won’t pay taxes on it)
Exclusions:
Gifts that are not more than the annual exclusion for
the calendar year. ($14000 since 2013)
Tuition or medical expenses you pay for someone
Gifts to your spouse.
Gifts to a political organization for its use.
5. Sales tax
a. Varies by state, county (CA: 6.25%; Alameda Co: 9.5%)
b. Tends to be regressive:
6. Property tax
a. Depends on value of property – flat percentage
b. Helps fund schools
c. Proposition 13 (1978):
Impact of Prop 13
Average home price in CA, 1975: $41,600
Property taxes paid (1.02%) = $424.32
Value of home cannot increase by more than 2% per year
Prop taxes 39 years later (2014) = 41,600 x (1.02^39) = $901
Value of home for taxation = $90,100
Average value in 2014 in CA = $424,900
2014 property tax for new home = $4333.98
If you keep your 1975 home…
Home value increased by 10x, but property tax bill only
increased by 2x!
Another example:
If there was no Prop 13 in California…
In the town where I live, median home values have increased 24% from
September 2013 to now
Let’s say I bought my home for $1m in 2013
Tax of 1.02% = $10,200
In 2016, my home is re-assessed (increased in value 24%) – now valued
at $1.24m
Tax of 1.02% = $12,648
If trend continues in 2017? $1,339,200 at 1.02% tax rate = $13,659.84
(Compare that to $10,824 in 2016 under Prop 13)
New Jersey? 2.19% (highest in nation)
2013 – 2016
$1m x 2.19% = $21,900
$1.24m x 2.19% = $27,156
7. Excise taxes
a. Tax charged on each unit of a good or service sold
b. Famous example: the luxury tax of 1991
c. Other examples:
Luxury Tax 1991 – 10% on all:
•Cars sold for more than $30,000
•Boats sold for more than
$100,000
•Jewelry and furs above $10,000
•Aircraft above $250,000
Guess what happened?
So, if you impose a tax on either the producer or a
consumer of a product….
• Will more or fewer products be sold?
• Will the price consumers pay be more or less
than before?
The Supply and Demand for Hotel Rooms
in Potterville
Price of hotel
room
$140
120
S
100
Equilibrium
price
E
80
B
60
D
40
20
0
5,000
10,000
Equilibrium
quantity
15,000
Quantity of hotel
rooms
An Excise Tax Imposed on Hotel Owners
Price
$140
120
S
2
Supply curve shifts
upward by the
amount of the tax
A
S
1
100
E
Excise tax = $40
per room
80
60
D
B
40
Tax creates
DEADWEIGHT
LOSS
20
0
5,000
Tax of $40
imposed. Supply
curve shifts
upwards by the
amount of the
tax. New
equilibrium =
5000 rooms
supplied at $100
per room.
10,000
15,000
Quantity of
hotel rooms
Burden of tax
shared by hotel
and customers
(hotel loses $20
per room,
customers pay
$20 more per
room)
An Excise Tax Imposed on Hotel Guests
Price
Tax of $40 imposed on
consumers. Demand curve
shifts downward by amount
of tax.
5000 rooms supplied at $60
per room. Consumers then
pay $40 tax on top of room
charge.
$140
120
A
100
Excise tax =
$40 per room
Demand curve
shifts downward
by the amount
of the tax
E
80
60
Burden of the tax again
shared by hotels and
consumers.
S
D
1
B
40
20
0
D
2
5,000
10,000
15,000
Quantity of
hotel rooms
The Revenue from an Excise Tax
Price of hotel
room
$140
The tax revenue collected is:
Tax revenue = $40 per room × 5,000 rooms =
$200,000
120
A
S
100
Excise tax = $40
per room
80
60
D
B
The area of the shaded rectangle is:
Area = Height × Width = $40 per room ×
5,000 rooms = $200,000
40
20
0
E
Area = tax
revenue
6
5,000
10,000
15,000
Quantity of hotel rooms
An Excise Tax Paid Mainly By Consumers
Price of gas (per pound)
$2.95
Excise tax =
$1 per
gallon
Tax burden falls
mainly on
consumers
When the price
elasticity of demand is
low and the price
elasticity of supply is
high, the burden of an
excise tax falls mainly
on consumers.
S
2.00
1.95
D
0
Quantity of gasoline (pounds)
An Excise Tax Paid Mainly by Producers
Price of parking space
S
$6.50
6.00
D
Excise tax = $5
per parking
space
When the price
elasticity of
demand is high
and the price
elasticity of supply
is low, the burden
of an excise tax
falls mainly on
producers.
Tax burden falls
mainly on
producers
1.50
0
Quantity of parking spaces
A Tax Reduces Consumer and Producer Surplus
Pr i c e
Fall in consumer surplus
due to tax
P
C
A
Excise tax
=T
P
B
E
E
F
C
P
S
P
Fall in producer surplus
due to tax
Q
T
Q
E
D
Quantity
Deadweight Loss and Elasticities
(a) Elastic Demand
Price
(b)Inelastic Demand
Price
S
Deadweight loss
is larger when
demand is elastic
S
P
C
Excise
tax = T
P
C
P
E
E
Excise
tax = T
P
E
P
P
E
D
Deadweight loss
is smaller when
demand is
inelastic
P
P
D
Q
T
Q
E
Quantity
Q Q
T E
Quantity
Deadweight Loss and Elasticities
(c) Elastic Supply
(d)Inelastic Supply
Price
Price
S
Deadweight
loss is larger
when supply is
elastic
P
C
S
P
C
Excise
tax = T
P
E
P
P
E
Excise
tax = T
P
E
E
Deadweight
loss is smaller
when supply
is inelastic
P
P
D
Q
T
Q
E
D
Quantity
Q Q
T E
Quantity
Deadweight Loss and Elasticities
• To minimize the efficiency costs of taxation, one
should choose to tax only those goods for which
demand or supply, or both, is relatively
inelastic.
• For such goods, a tax has little effect on behavior
because behavior is relatively unresponsive to
changes in the price.