Sources of Government Revenue

1. Sources of Government Revenue Chapter 9

2. Chapter 9 Essential Questions 9.1 EQ: What is the single most important way of raising money for the government? 9.2 EQ: What are 3 ways that the government raises money thorough taxes? 9.3 EQ: What is Value Added Tax/Flat Rate Tax?

3. 9.1 The Economics of Taxation

4. I. Economic Impact of Taxes • An enormous amount of money is needed to run the government. • In 2003 the government collected $3 trillion ($10,300 per person) • Taxes affect the factors of production and, therefore, resource allocation.

5. A. Resource Allocation • Tax placed on a good or service • Raises the cost of production • Example: • Congress placed a luxury tax on expensive cars, yachts, or private jets to help raise revenue. • Drove customers away to other industries.

6. B. Behavior Adjustment 1. Taxes encourage or discourage certain behaviors. i. Sin tax: high tax designed to raise revenue and reduce consumption of a socially undesirable or harmful product. Ex: Liquor or tobacco.

7. C. Productivity and Growth 1. Taxes can change the incentive to save, invest, or work. Ex: Why try to earn an additional $10 million if you are going to be taxed on half of it? i. There must be a point where taxes cannot get so high that it affects productivity and growth.

8. D. The Incidence of a Tax 1. Taxes do not only fall on the individual, but can affect others as well. Ex: A local company gets taxed by government to raise revenue. Company raises prices which affects consumer. i. Elastic leads to less tax. ii. Inelastic leads to more tax.

9. II. Criteria for Effective Taxes A. Taxes must meet a certain criteria. i. Equity (fairness) • Everybody must be taxed • How much? Wealthier more? • Fairness seen as problem from time to time. ii. Simplicity • Tax payer and collector should understand them. If people understand why then more likely they will tolerate them. iii. Efficiency • Tax should be easy to administer and raise revenue. • Ex: Luxury tax in 91’ on planes, yachts, etc. only raised $53,000 in one year. Turned out to be worse. People lost jobs. Congress got rid of tax the next year.

10. III. Two Principles of Taxation A. Taxes in the United States are based on two principles. 1. Benefit Principle i. Those who benefit from government goods and services should pay in proportion to the amount of benefits and services. Ex: Police, School, etc. 2. Ability-to-Pay-Principle ii. People should be taxed according to their ability to pay. Ex: Higher Income = Higher Taxes. A percentage is taken rather than a fixed-amount.

11. IV. Types of Taxes 3 general types of taxes exist in the United States today: A. Proportional Tax: Percentage rate of taxes. 1. Ex: If income tax rate is 20%, individual making $10,000 only pays $2,000 2. $100,000 = $20,000 B. Progressive Tax: As income goes up, the percent of income paid in taxes goes up. 1. Ex: Pay $1,000 on $10,000 / Pay $4,000 on $20,000 / Pay $30,000 on $100,000. C. Regressive Tax: As income goes up, the percent of income paid in taxes goes down. 1. Ex: Sales Tax. Wealthy person buys $20,000 of food and clothing and Poor person buys $20,000 of food and clothing. 2. Person with lower income is paying a higher percentage because they make less.

12. 9.1 EQ Q: What is the single most important way of raising money for the government? A: taxes!!!

13. 9.2 The Federal Tax System

14. Tax Activity You may work with a partner or by yourself. -Make a chart, poster, brochure, etc on the following term. You will present first thing tomorrow (2-3 minutes): • Payroll Deductions • Progressive Income Tax • Indexing • Social Security Taxes • Medicare Taxes • Corporate Income Taxes • Excise Taxes • Estate and Gift Taxes • Custom Duties • Miscellaneous Fees State the purpose of the tax and how it is fair, simple, and efficient. Include a title, picture and color

15. I. Individual Income Taxes • The federal govt. collects about 45% of its revenue from the individual income tax. • Taxes are typically withheld from individual’s paychecks, with employer’s sending the taxes directly to the IRS. • If the taxes withheld are more than the taxes owed, the indv. receives a refund. If not, they must pay the IRS. • The individual income tax is a progressive tax because people earning higher incomes pay higher tax rates.

16. II. FICA taxes A. The Federal Insurance Contributions Act (FICA) tax pays for Social Security and Medicare B. FICA is the 2nd largest source of a govt. revenue C. The FICA is a regressive tax. Social Security is partially a proportional tax and partly a regressive tax.

17. Individual Question • What are the characteristics of a corporation?

18. III. Corporate Income Taxes • Corporations pay a high tax on their profits because they are considered legal entities. • Corporate tax is the 3rd largest source of govt. revenue

19. 9.2 EQ What are 3 ways that the government raises money thorough taxes?

20. 9.3 State and Local Tax System

21. I. State Government Revenue Sources State and Local Governments must collect taxes as well to raise revenue: A. Intergovernmental Revenues: State receives funds from federal government to help with expenditures on welfare, education, health, highways, etc. B. Sales Tax (paid on nearly all products) C. Income tax

22. II. Local Govt. Revenue Sources A. Intergovernmental Revenues • Funds from state government • Used for education and public welfare B. Property Taxes 1. Tax on tangible and intangible possessions such as real estate, buildings, furniture, automobiles, etc. i. Real Estate property tax raises most revenue.

23. III. Examining Your Pay Check • Looking at your payroll withholding statement will help you identify many of your state and local government’s revenue sources. • Additional deductions can be added to payroll for retirement contributions, purchasing savings bonds, or credit unions.

24. Current Tax Issues • Tax Reform: • Tax Reform in 1981. • Ronald Reagan believed high taxes were the main stumbling block to economic growth. • Reagan introduced the Economic Recovery Tax Act of 1981 which reduced taxes for businesses and individuals. • Stimulated economic growth. People had more money to spend now.

25. Tax Reform of 1986 and 1993 • 3,000 Millionaires paid no income taxes. • Found a loophole in tax laws. • 1986 tax reform law closed tax loopholes and simplified tax brackets for income. • The Budget Deficit Reduction Act of 1993 helped raise revenue for government because they were spending more than they had.

26. Tax Reform in 97’ • Taxpayer Relief Act of 1997 provided the wealthy with long-term tax breaks and provided modest tax relief for individuals with child and educational expenses.

27. Tax Reform in 2001 • President Bush implemented plan to cut taxes $1.35 billion over ten years.

28. 9.3 EQ Value Added Tax/Flat Rate Tax 1. Define Value Added Tax and Flat Rate Tax 2. Give Advantages and Disadvantages for each 3. Describe the features of the VAT and Flat Rate Tax.