AGENDA Thurs 1/7/16 QOD #2: Fiscalville Taxes HW Review (CH16 Q #1-6) Ch 16: Government Finance Partner Practice (Handout/P #3) Spring Syllabus

Transcription

1 AGENDA Thurs 1/7/16 QOD #2: Fiscalville Taxes HW Review (CH16 Q #1-6) Ch 16: Government Finance artner ractice (Handout/ #3) Spring Syllabus notification/google Form HW: Read pp Q#1-3 & 8-10

2 QOD #2: Fiscalville Taxes Suppose in Fiscalville there is no tax on the first $10,000 of income, but a 20 percent tax on earnings between $10,000 and $20,000 and a 30 percent tax on income between $20,000 and $30,000. Any income above $30,000 is taxed at 40 percent. 1. If your income is $50,000, how much will you pay in taxes? 2. Determine your marginal and average tax rates. 3. Is this a progressive tax?

3 QOD #2: Solution 1. Total tax = $13,000 (= $ $ $8000). 2. Marginal tax rate = 40% and average tax rate = 26% (= $13,000 / $50,000). 3. This is a progressive tax, because the average tax rate rises as income goes up.

4 Apportioning the Tax Burden Size, distribution, and impact of the costs that taxes impose on society Benefits-received principle-examle? Ability-to-pay principle-examle? LO2 16-4

5 Apportioning the Tax Burden rogressive tax average tax rates increase as income increases Regressive tax average tax rate declines as income increases roportional tax average rate stays the same as income increases Income? Sales? Corp. income? ayroll? roperty? LO2 16-5

6 Tax Incidence and Efficiency Loss Tax incidence Who really pays the tax? Excise tax Tax burden depends on elasticity Inelastic vs. elastic Efficiency loss Deadweight loss Transfer of surplus to government LO3 16-6

7 rice (er Bottle) Elasticity and Tax Incidence 14 S t 12 S 10 8 Tax $ D LO Q Quantity (Millions of Bottles er Month) 16-7

8 Elasticity and Tax Incidence e 1 a Tax b S t S 1 b a Tax c b S t S a c D e Di Q 2 Q 1 Elastic Demand 0 Q 2 Q 1 Inelastic Demand Smaller efficiency loss with inelastic demand LO3 16-8

9 Elasticity and Tax Incidence a e S b i 1 1 a 0 c Tax Q 1 D S t b Tax Q 2 Q 0 Q 1 Q a Q 2 S t c b S D Elastic Supply Inelastic Supply Smaller efficiency loss with inelastic supply LO3 16-9

10 rice (er Bottle) Efficiency Loss of a Tax Tax paid by consumers S t Tax $2 S Tax paid by producers Efficiency loss (or D deadweight loss) Q Quantity (Millions of Bottles er Month) LO

11 For tax purposes, gross income is all the money a person receives in a given year from any source. But income taxes are levied on taxable income rather than gross income. The difference between the two is the result of many exemptions and deductions. To see how they work, suppose you made $50,000 last year in wages, $10,000 from investments, and were given $5000 as a gift by your grandmother. Also assume that you are a single parent with one small child living with you. a. What is your gross income? CH 16 #3 b. Gifts of up to $13,000 per year from any person are not counted as taxable income. Also, the personal exemption allows you to reduce your taxable income by $3650 for each member of your household. Given these exemptions, what is your taxable income? c. Next, assume you paid $700 in interest on your student loans last year, put $2000 into a health savings account (HSA), and deposited $4000 into an individual retirement account (IRA). These expenditures are all tax exempt, meaning that any money spent on them reduces taxable income dollar-for-dollar. Knowing that fact, what is now your taxable income?

12 CH 16 #3 (cont.) d. Next, you can either take the so-called standard deduction or apply for itemized deductions (which involve a lot of tedious paperwork). You opt for the standard deduction that allows you as head of your household to exempt another $8500 from your taxable income. Taking that into account, what is your taxable income? e. Apply the tax rates shown in Table 16.1 to your taxable income. How much Federal tax will you owe? What is the marginal tax rate that applies to your last dollar of taxable income? f. As the parent of a dependent child, you qualify for the government s $1000 per-child tax credit. Like all tax credits, this $1000 credit pays for $1000 of whatever amount of tax you owe. Given this credit, how much money will you actually have to pay in taxes? Using that actual amount, what is your average tax rate relative to your taxable income? What about your average tax rate relative to your gross income?

13 CH 16 #3 Solution (a) Gross income = $65,000 (= $50,000 + $10,000 + $5000) (b) Taxable income = $52,700 (= $65,000 $5000 $7300) (c) Taxable income = $46,000 (= $52,700 $700 $2000 $4000) (d) Taxable income = $37,500 (= $46,000 $8500) (e) Tax = $ (= $ $ ). The marginal tax rate is 15%. (f) Actual tax = $ , for an average tax rate on taxable income of 10.1%, and an average tax rate on gross income of 5.8%.