Chapter Introduction Section 1: Section 2: Section 3: Visual Summary The Economics of Taxation Federal, State, and Local Revenue Systems Current Tax Issues and Reforms
Economic Impact of Taxes (cont.) Taxes and other governmental revenues influence the economy by affecting Resource allocation Behavior adjustment Sin tax
Economic Impact of Taxes (cont.) Productivity and growth Determining incidence of a tax Shifting the Incidence of a Tax
Criteria for Effective Taxes (cont.) Taxes must meet three criteria: Equity impartial and just: Makes sense to avoid tax loopholes Simplicity tax laws written so taxpayers and collectors can understand them Individual income tax complex tax Sales tax simpler
Criteria for Effective Taxes (cont.) Efficiency easy to administer and successful in generating revenue Individuals file a tax return before April 15 th each year.
Two Principles of Taxation (cont.) United States taxes are based on two principles Benefit principle of taxation Limitations to the benefit principle of taxation Those who receive government services are least likely to afford them. Benefits are hard to measure and impact others.
Two Principles of Taxation (cont.) Ability-to-pay principle of taxation We can t always measure benefits derived from government spending. Assumes individuals taxed more suffer less discomfort paying taxes
Three Types of Taxes (cont.) Three general types of taxes exist in the United States today. Proportional tax If the percentage tax rate is constant, the average tax rate is constant. Medicare tax fund Three Types of Taxes
Three Types of Taxes (cont.) Progressive tax Marginal tax rate Regressive tax Profiles in Economics: Monica Garcia Pleiman
Federal, State, and Local Revenue Systems The Internal Revenue Service (IRS) is the branch of the U.S. Treasury Department in charge of collecting taxes today.
Federal Government Revenue Sources (cont.) Four largest sources of government revenue are Individual income taxes Tax is mostly collected through a payroll withholding system. Tax code takes into account indexing. Federal Government Revenue Sources
Federal Government Revenue Sources (cont.) FICA or Federal Insurance Contributions Act tax Social Security and Medicare are part of payroll taxes. Borrowing by selling bonds to investors Corporate income tax Excise tax The Global Economy & YOU Total Tax Revenue as a Percentage of GDP
Federal Government Revenue Sources (cont.) Estate tax and gift tax Customs duty Miscellaneous fees like a user fee
State Government Revenue Sources (cont.) Largest sources of state governments revenue Intergovernmental revenue Sales tax implemented by most states Individual income taxes by most states Other revenue sources State and Local Government Revenue Sources
Local Government Revenue Sources (cont.) Largest sources of local governments revenue Intergovernmental transfers from state and federal governments Property tax Tax assessor determines valuations of property State and Local Taxes as a Percentage of State Income
Local Government Revenue Sources (cont.) Utility revenues from natural monopolies Sales tax Other revenue sources
Examining Your Paycheck (cont.) The payroll withholding statement attached to your paycheck lists deductions taken. Biweekly Paycheck and Withholding Statement
Tax Reform (cont.) The Economic Recovery Tax Act, signed by Ronald Reagan in 1981, included large tax reductions for individuals and businesses. Businesses also got tax relief from accelerated depreciation and investment tax credit. Tax Table for Single Individuals, 2006
Tax Reform (cont.) In 1983 the alternative minimum tax was passed. In 1993 government added tax brackets in order to balance the budget. The Taxpayer Relief Act of 1997 was both economical and political. Capital gains tax was reduced. Total Government Receipts per Capita, Adjusted for Inflation
Tax Reform (cont.) Temporary tax reform in 2001 based on the federal government collecting more taxes than it was spending Temporary tax reform in 2003 due to slow economic growth, accelerated many of 2001 reforms If the present trend of government spending more than it collects in taxes continues, it will be difficult to preserve tax cuts due to expire in 2011.
Alternative Tax Approaches (cont.) Two alternative forms of taxation Flat tax Value-added tax (VAT) The Value-Added Tax
Alternative Tax Approaches (cont.) Advantages to the flat tax Simplicity to taxpayer Closes most loopholes Reduces need for many workers in IRS and tax preparers
Alternative Tax Approaches (cont.) Disadvantages to the flat tax Removes many incentives built into current tax code Don t know what rate is needed to replace revenues collected today Unsure if flat tax would stimulate economic growth
Alternative Tax Approaches (cont.) Advantages to the VAT Tax is hard to avoid Tax incidence is widespread Easy to collect Encourages saving
Alternative Tax Approaches (cont.) Disadvantage to the VAT Virtually invisible other factors can change the product s price. Desires to simplify the tax code, unexpected expenditures on war and natural disasters, and political change all result in tax reform.