Sources of Government Revenue Taxes The Good the Bad and the Ugly
1. Resource Allocation Factors of Production are affected when a tax is levied. Taxes raise cost of production and shifts the supply curve left. When Prices go up we shift resources from other areas to cover the increased price.
Taxes encourage or discourage activities Sin Tax: High tax designed to raise price and decrease consumption Ex. Liquor, Tobacco, SUV tax Note! Usually show up as an excise tax paid by the producer charged to the consumer,
Taxes can affect productivity and economic growth by changing the incentives to save, invest, and work.
On whom does the Final Burden of the tax fall? Placing tax burdens on share holders, employees, and consumers Ex. Smaller dividends, postpone pay raise, increase in prices
Equitable The tax must be fair Simple The tax must be easy to understand Efficient Must be easy and efficient to collect
The benefit principle of taxation is the concept that those who benefit from the spending of tax dollars should pay the taxes to provide the benefits. The ability-to-pay principle of taxation is the concept that those who can best afford to pay taxes should pay most of the taxes.
A progressive tax is a tax that takes a larger percentage of higher incomes and a smaller percentage of lower incomes. Example: Federal Income Tax A regressive tax is a tax that takes a larger percentage from lower incomes and a smaller percentage of higher incomes. Example: Sales Tax A proportional tax is a tax that takes the same percentage of income from all taxpayers. Example: Flat Tax or Value added tax
Individual Income Tax 38% Social Security 33% Corporate Income Tax 8% Excise & Other Taxes 8% Borrowing 13% 100%
Individual Income Taxes The government taxes peoples earnings to finance its operations. Taxes range from 10% to 35% Income tax is a progressive tax Note! Federal Income Tax is a progressive tax. This type of tax that takes a larger percentage of higher incomes and a smaller percentage of lower incomes.
For Tax Year 2004 Percentiles Ranked by AGI AGI Threshold on Percentiles Percentage of Federal Personal Income Tax Paid Top 1% $328,049 36.89 Top 5% $137,056 57.13 Top 10% $99,112 68.19 Top 25% $60,041 84.86 Top 50% $30,122 96.7 Bottom 50% <$30,122 3.3 Note: AGI is Adjusted Gross Income Source: Internal Revenue Service
Income But not over-- The tax is: $0 $7,550 10% of the amount over $0 $7,550 $30,650 $755 plus 15% of the amount over 7,550 $30,650 $74,200 $4,220.00 plus 25% of the amount over 30,650 $74,200 $154,800 $15,107.50 plus 28% of the amount over 74,200 $154,800 $336,550 $37,675.50 plus 33% of the amount over 154,800 $336,550 no limit $97,653.00 plus 35% of the amount over 336,550
Tax Rate Single Married filed jointly 10% 0-8,000 0-16,000 15% 8,001-32,000 16,001-64,000 20% 32,001-77,000 64,001-130,000 28% 77,001-160,000 130,001-195,000 33% 160,001-350,000 195,001-350,000 35% More than 350,000 More than 350,000
Employers are required to withhold taxes from your paycheck. FICA - Social Security & Medicare taxes are collected on every dollar you earn up to $106,800.00. Social Security - tax is 6.2% plus your employer matches you tax for another 6.2% or12.4% total. Medicare tax is 1.45% plus your employer matches you tax for another 1.45% or 2.9% total. Total FICA taxes are over 15% of paid wages with no exemptions.
Social Security The purpose is to make available a small pension at the age of 67(?). Medicare The purpose is to cover most medical expenses at age 67. Note! Both Social Security and Medicare will be insolvent in the next twenty years, and possibly sooner.
Corporate Income Tax is the third largest revenue source for the federal government. Tax rates run from 15% to 35%. Excise Taxes is the fourth largest source of revenues. This is a tax placed on the manufacturer or sale of selected items. Examples are the gasoline, liquor, telephone, tires, cigarettes and many more products.
Gift Tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not. The tax will be levied on all gifts $13,000 or greater. (2011) Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The rate is 45% on everything over $1,000,000. (2011) 55% on estates valued over $10,000,000.00
U.S. Federal Revenues
printer-friendly chart
Luxembourg $29,323.19 Norway $29,174.83 Denmark $25,055.22 Sweden $22,361.69 Finland $18,462.56 Switzerland $17,559.08 Austria $17,409.89 Belgium $16,759.93 France $16,568.84 Monaco $15,983.21 Netherlands $15,657.95 Ireland $15,565.23 Kuwait $15,333.90 Germany $14,557.63 Iceland $13,998.92 San Marino $13,850.41 U. K. $13,813.47 Italy $13,233.39 Brunei $13,159.27 Liechtenstein $12,581.19 Qatar $11,783.77 Greenland $11,458.98 Australia $11,085.11 Gibraltar $11,009.89 Japan $10,995.39
State Government s revenues come from many sources. Intergovernmental transfers, from the Federal Government is the # 1 source followed by sales tax. Local Governments like state receive funds from both the federal & state levels of government. The largest non-transfer comes from property taxes.
Intergovernmental Transfers Sales Tax Corporate Taxes Fees for Services
Intergovernmental Revenues Property Taxes
Shifting the tax base from income driven to consumption driven is the purpose of the VAT or Value Added Tax. It is hard to avoid because the tax collector levies it on the total amount of sales less the cost of inputs. The Flat Tax This tax would close or remove loopholes along with deductions. You would simply pay tax on all your income. Simple tax but would remove behavior incentives already in the code.