Economics 9


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Economics 9

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