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The Economics of Taxation: Revenue Systems and Current Issues

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  1. Splash Screen

  2. Chapter Introduction Section 1: The Economics of Taxation Section 2: Federal, State, and Local Revenue Systems Section 3: Current Tax Issues and Reforms Visual Summary Chapter Menu

  3. You have just received your first paycheck and are looking forward to being paid $8 per hour for the 20 hours you worked. You look at your check and . . . “What? This check isn’t for $160! Where’s the rest of my money?” Make a list of the deductions that might be subtracted from your earnings. Read Chapter 9 to learn more about how governments raise revenue. Chapter Intro 1

  4. All levels of government use tax revenue to provide essential goods and services. Chapter Intro 2

  5. Chapter Intro-End

  6. Section Preview In this section, you will learn that taxes are the most important way of raising revenue for the government. Section 1-Preview

  7. Content Vocabulary • sin tax • incidence ofa tax • tax loophole • individual income tax • sales tax • tax return • benefit principle of taxation • ability-to-pay principle of taxation • proportional tax • average tax rate • Medicare • progressive tax • marginal tax rate • regressive tax Section 1-Key Terms

  8. Academic Vocabulary • validity • evolved Section 1-Key Terms

  9. A B C What is the most important way for governments to raise revenue? A. Sell bonds B. Sell services C.Taxes Section 1

  10. Economic Impact of Taxes Taxes affect the decisions we make in a variety of ways. Section 1

  11. Economic Impact of Taxes (cont.) • Taxes and other governmental revenues influence the economy by affecting • Resource allocation • Behavior adjustment • Sin tax Section 1

  12. Economic Impact of Taxes (cont.) • Productivity and growth • Determining incidence of a tax Shifting the Incidence of a Tax Section 1

  13. A B C D Which example demonstrates a tax encouraging an activity? A.Sin tax B.Interest paid on mortgages C.Luxury goods tax D. None of the above Section 1

  14. Criteria for Effective Taxes To be effective, taxes must be equitable, easy to understand, and efficient. Section 1

  15. Criteria for Effective Taxes (cont.) • Taxes must meet three criteria: • Equity—impartial and just: Makes sense to avoid tax loopholes • Simplicity—tax laws written so taxpayers and collectors can understand them • Individual income tax—complex tax • Sales tax—simpler Section 1

  16. Criteria for Effective Taxes (cont.) • Efficiency—easy to administer and successful in generating revenue • Individuals file a tax returnbefore April 15th each year. Section 1

  17. A B C D Which of the taxes below was not worthwhile? A.Toll booth taxes B.Sales tax C.Luxury tax on small private aircraft D. Gasoline tax Section 1

  18. Two Principles of Taxation Taxes can be levied on the basis of benefits received or the ability to pay. Section 1

  19. Two Principles of Taxation (cont.) • United States taxes are based on two principles • Benefit principle of taxation • Limitations to the benefit principle of taxation • Those who receive government services are least likely to afford them. • Benefits are hard to measure and impact others. Section 1

  20. Two Principles of Taxation (cont.) • Ability-to-pay principle of taxation • We can’t always measure benefits derived from government spending. • Assumes individuals taxed more suffer less discomfort paying taxes Section 1

  21. A B Which method of taxes better suits you or your family? A.Benefit principle of taxation B.Ability-to-pay principle of taxation Section 1

  22. Three Types of Taxes All taxes can be broken down into three categories—proportional, progressive, and regressive. Section 1

  23. Three Types of Taxes (cont.) • Three general types of taxes exist in the United States today. • Proportional tax • If the percentage tax rate is constant, the average tax rate is constant. • Medicaretax fund Three Types of Taxes Section 1

  24. Three Types of Taxes (cont.) • Progressive tax • Marginal tax rate • Regressive tax Profiles in Economics:Monica Garcia Pleiman Section 1

  25. A B C D In which category of taxes does a homeowner’s property tax fall? A.Proportional tax B.Progressive tax C.Regressive tax D. None of the above Section 1

  26. Section 1-End

  27. Section Preview In this section, you will learn that federal, state, and local governments rely on different revenue sources. Section 2-Preview

  28. Content Vocabulary • Internal Revenue Service (IRS) • payroll withholding system • indexing • FICA • payroll tax • corporateincome tax • excise tax • estate tax • gift tax • customs duty • user fee • intergovernmental revenue • property tax • tax assessor • natural monopoly Section 2-Key Terms

  29. Academic Vocabulary • implemented • considerably Section 2-Key Terms

  30. A B The second most important federal revenue source is the individual income tax. A. True B. False Section 2

  31. Federal, State, and Local Revenue Systems • The Internal Revenue Service (IRS) is the branch of the U.S. Treasury Department in charge of collecting taxes today. Section 2

  32. Federal Government Revenue Sources Individual income taxes, FICA, and borrowing constitute the main sources of government revenue. Section 2

  33. Federal Government Revenue Sources(cont.) • Four largest sources of government revenue are • Individual income taxes • Tax is mostly collected through a payroll withholding system. • Tax code takes into account indexing. Federal Government Revenue Sources Section 2

  34. Federal Government Revenue Sources(cont.) • FICA or Federal Insurance Contributions Act tax • Social Security and Medicare are part of payroll taxes. • Borrowing by selling bonds to investors • Corporate income tax • Excise tax The Global Economy & YOUTotal Tax Revenue as a Percentage of GDP Section 2

  35. Federal Government Revenue Sources(cont.) • Estate taxandgift tax • Customs duty • Miscellaneous fees like a user fee Section 2

  36. A B C Why is indexing so important to the tax code? A.Lowers the tax on those who pay a gift tax B.Helps defray costs related to Medicare and Social Security C.Keeps workers from paying more in taxes because of inflation Section 2

  37. State Government Revenue Sources States rely on funds from the federal government in addition to income taxes and sales taxes. Section 2

  38. State Government Revenue Sources(cont.) • Largest sources of state governments revenue • Intergovernmental revenue • Sales tax implemented by most states • Individual income taxes by most states • Other revenue sources State and Local Government Revenue Sources Section 2

  39. A B C D Which of the following states does not charge a general sales tax or individual state income tax? A.New Hampshire B.Alaska C.Washington D. Delaware Section 2

  40. Local Government Revenue Sources Local governments rely mostly on intergovernmental revenue and property taxes. Section 2

  41. Local Government Revenue Sources(cont.) • Largest sources of local governments revenue • Intergovernmental transfers from state and federal governments • Property tax • Tax assessor determines valuations of property State and Local Taxes as a Percentage of State Income Section 2

  42. Local Government Revenue Sources(cont.) • Utility revenues from natural monopolies • Sales tax • Other revenue sources Section 2

  43. A B C D Which of the following property does not fall under the property tax laws? A.Real estate B.Farm animals C.Automobile D. Jewelry Section 2

  44. Section 2-End

  45. Section Preview In this section, you will learn that one consequence of tax reform was to make the individual tax code more complex than ever. Section 3-Preview

  46. Content Vocabulary • payroll withholding statement • accelerated depreciation • investment tax credit • alternative minimum tax • capital gains • flat tax • value-added tax (VAT) Academic Vocabulary • concept • controversial Section 3-Key Terms

  47. A B C Do Americans pay more in taxes than do people in other developed countries? A. Yes B. No C.About the same Section 3

  48. Examining Your Paycheck The income taxes you pay are summarized on the stub that is attached to your paycheck. Section 3

  49. Examining Your Paycheck (cont.) • The payroll withholding statement attached to your paycheck lists deductions taken. Biweekly Paycheck and Withholding Statement Section 3

  50. A B C D What is the FICA tax percentage deducted from your paycheck? A.6.20% B.5.5% C.7.65% D. Varies by individual Section 3

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