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Economics 9

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  • 1. Chapter 9: Sources of Government Revenue
  • 2. 9-1: The Economics of Taxation
    • Economic Impact of Taxes
      • Resource allocation – when taxes are raised on a product, consumers buy less, manufacturers produce less, and resources will have to go to other industries to be employed
      • Behavior adjustment - taxes can be used to encourage or discourage certain types of activities
      • By changing incentives to save, invest and work, taxes affect productivity and growth
  • 3.
    • Criteria for Effective Taxes
      • Equity - fair
      • Simplicity – easy to understand
      • Efficiency – benefits outweigh costs
    • Two Principles of Taxation:
      • Benefit Principle – belief that taxes should be paid based on benefits received, regardless of income
      • Ability to Pay Principle – belief that taxes should be paid according to the level of income, regardless of benefits received
  • 4.
    • Three Types of Taxes
      • 1. Proportional Tax – as income goes up, the percentage of income paid in taxes stays the same
      • 2, Progressive Tax – as income goes up, the percentage of income paid in taxes goes up
      • 3. Regressive Tax - as income goes up, the percentage of income paid in taxes goes down
  • 5. 9-2: Federal, State, and Local Revenue Systems
    • Federal Government Revenue Sources (in order of size)
    • 1. Individual Income Taxes
    • – collected with a payroll withholding system that automatically deducts income taxes from paychecks
    • 2. FICA Taxes - Federal Insurance Contributions Act
    • - tax levied on employers and employees to support Social Security and Medicare
    • - also automatically deducted from paycheck
    • 3. Borrowing
    • 4. Corporate Income Taxes
    • 5. Excise Taxes – tax on manufacture or sell of selected items such as gasoline and liquor
  • 6. 6. Estate and Gift Taxes 7. Customs Duties 8. Miscellaneous Fees
  • 7.  
  • 8.
    • State Government Revenue Sources (in order of size)
    • 1. Intergovernmental Revenues
    • – funds collected by one level of government that is distributed to another level of government for expenditures
    • 2. Sales Taxes
    • - general tax levied on consumer goods
    • - 5 states do not have a general sales tax
    • 3. Individual Income Taxes
    • - only 7 states do not rely on individual income taxes for revenue
    • - varies widely from state to state
    • 4. Other Revenues
    • - interest earnings
    • - tuition and fees
    • - corporate income taxes
  • 9.
    • Local Government Revenue Sources (in order of size)
    • 1. Intergovernmental Revenues
    • 2. Property Taxes
    • - tax on tangible and intangible possessions such as real estate, buildings, furniture, stocks, bonds and bank accounts
    • 3. Utility Revenues
    • - public utility companies that supply water, electricity, sewer, and sometimes telecommunications are often owned by local governments
    • 4. Sales Taxes
    • 5. Other Revenue Sources
    • - interest earnings
    • - fees
    • - borrowing
  • 10.  
  • 11.  
  • 12. 9-3: Current Tax Issues and Reforms
    • Current Tax Code is incredibly complex
    • Tax Reform: 1981
      • Economic Recovery Tax Act included large tax deductions for individuals and businesses, accelerated depreciation, and investment tax credits
    • Tax Reform: 1986
    • Tax Reform: 1993
    • Tax Reform: 1997
    • Tax Reform: 2001
    • Tax Reform: 2003
    • Permanent tax cuts by 2011?
  • 13.
    • Alternative Tax Approaches
    • Flat Tax – a proportional tax on individual income
      • Simple
      • Closes “loopholes”
      • Save $$ and time preparing tax returns
      • Removes incentives in current tax code
    • Value-Added Tax – Tax consumption, not income
      • Equivalent to a national sales tax
      • Tax on the value added at every stage of the production process