http://www.stlouisfed.org/education_resources/economic-lowdown-video-companion-series/episode-5-externalities/

Chapter 12 - Taxation

Taxes – money given to government Help to run different institutions and services Necessary to civilized groups; used for

centuries Four general rules to taxation (Adam Smith)

Equity – fairness in who pays Certainty – should know what, when and how

you pay Convenience – should be an easy process for

people Efficiency – should be efficient in collection

and use

What are Taxes?

Federal government allocates tax revenue as follows: Entitlements Interest Payments http://www.youtube.com/watch?v=0efqnvYz4YI National Defense

State and Local governments allocate tax revenues as follows: Public services & public safety Education Social welfare

Where do tax dollars go?

Individual Income tax Payroll Taxes Corporate Income Tax Excise Taxes

Sources of Federal Revenue

Revenue comes from 4 major areas Fiscal year is from Oct 1 – Sept 30, when $ is used Income, Payroll, Corporate Income and Excise

Taxes Federal gov’t doesn’t usually cover all expenses

Leads to deficit – current $17,234,132,052,323

2 types of spending – Mandatory & Discretionary Mandatory – fixed spending by law

Entitlements – Social Security, Medicare, welfare, etc.

Discretionary – can change based on Congressional decisions Largest amount spent on national defense. The

rest is spent on: education, science, health care, foreign aid

How Revenue is Spent

Get most of money from taxes Property tax, state income tax, etc.

Also use tax referenda – vote must pass Cannot raise taxes unless people vote for

it Lotteries – used as a major income source State spending usually focuses on

education, and public safety: law enforcement & fire protection Also focus on public issues – health clinics,

road projects, assistance for low income earners, etc.

State Gov’t Revenue and Spending

Tax equity – asks are taxes equal? Tough to answer due to differing definitions of

equal Should all pay, or only those who use it, etc.

Two principles to answer this Ability-to-Pay Principle

Says those who make more, pay more – b/c they can

Benefits-Received Principle Says only those who receive benefit should

pay Tax Incidence – who actually ends up paying tax

At times burden falls to others

Who should Pay?

Tax base – what is taxed (Income, property, etc.) Tax rate – the percentage of tax paid Types of Taxes – 3 kinds

Proportional Tax – same % for all levels (5% tax) Also called a flat tax – very simple to use

Progressive Tax – increased % with increased income Based on ability-to-pay principle – ex. Income

taxes Regressive Tax – increased % with decreased income

Proportional taxes can act as regressive – ex. Sales tax

People making less money pay higher % of yearly income

Taxation Basics 101

Examples of Each Tax

15000 Salary

Prop 10%

15000 Salary

Prog 10%

40000 Salary Prop

40000 Salary

Prog 20%

75000 Salary Prop

75000 Salary

Prog 30%

100000 Salary Prop

100000 Salary

Prog 40%

0

20000

40000

60000

80000

100000

120000

Takehome Salary

Tax Paid

Actually leaves the poor with less money to spend if given a proportional tax versus a pro-

gressive

Graphing the Differences

Difference in

spendable money

not much

Difference in

spendable money is

huge

Income Tax – once a year, each April 15 Fill out a W-2; tells gov’t how much to

withhold Payroll Taxes – 2 major taxes paid

Social Security Tax – money taken for retirement

Medicare Tax – money to pay for medical needs

Also may pay a disability and unemployment tax

Property Tax – % paid on value of owned land

Sales Tax - % paid on purchased goods

Types of Taxes You Will Pay

Corporate Income Taxes – levied on businesses Excise Taxes – used to regulate goods the gov’t

wants to control Cigarettes, alcohol, etc.

Luxury Taxes – used on major luxury items User Fees and Tolls – tax the user Estate or Inheritance Taxes (progressive) –

Estate tax taken by gov’t on money left after death

Inheritance tax may be levied by the state gov’t on top of the estate tax.

Other Taxes