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Chapter 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