CHAPTER 9, 10, 14

OK! This is my “lecture” on the vocabulary: 1-5Chapters 9,10, & 14.

ABILITY TO PAY PRINCIPLE OF TAXATION

#1 Keep in mind that this is a “theory” of taxation or a model; make note of that…it is

NOT a tax in itself

Ok, the idea is “the more you make the more they take.” “They” being the government.

Part 1 of the definition: A person pays tax based upon the amount of money earned.

Part 2 of the definitions: …regardless of benefits received.

This sounds good but think about the ramifications.

Tom and JacksonTom hasa 6 figure incomea large house on a good chunk of propertya three-car garage with a large boat parked

near ita double-wide circular drive way (always wanted one) and NO children

JacksonJackson hasa wife and…4 kidsa three-bedroom apartmenta job earning minimum wagea rather large headache…

Who pays??Let’s think about school taxes…

Children receive the benefit of a free public school education through “school” taxes which are based upon property value

Tom Pays through the nose…in other words…he

pays a lot in school taxes because he owns property…he has no children…he does not reap the reward or “benefit” of his school taxes, directly…

JacksonJackson pays no school/property taxes

because he rents; he owns no property. (His landlord may increase the rent for all

tenants in order to pay his bill but no tenant receives a bill from the tax office. )And yet, Jackson has 4 children in school, reaping the benefit of those tax dollars.

How does Tom feel?

Well, he could feel really, really ticked off.He could feel good that he is helping out

his fellow man, a universal good!He might realize that his grandparents paid

taxes when they no longer had anyone in school…what goes around comes around.

What is this called again?It is called the “ability-to-pay principle of taxation.”

You can afford to pay more…so, you do!

Benefit principle of taxation (translation of definition)

Those who receive the benefits should pay for them, the more you receive the more you should pay

Now that makes perfect sense does it not? OK! Let’s think about that in terms of Tom

& Jackson.

has no children and

therefore pays no school taxes.

Jackson has children.If he had one child; he pays for that one

child.If he had two children; he pays for the two

children. has 4 children. Therefore……..Problem? Jackson cannot afford to pay the

school tax for 4 children and they most certainly cannot pay it themselves.

Are we getting this?

If you receive the benefit; you pay for it.The more you receive; the more you pay.

Other benefits are things such as Welfare, SocialSecurity and Unemployment.

How can you expect to pay for those services? If you could, you probably

wouldn’t need them!

TaxesThere are three types of taxes collected

that are based on your earnings; your income.

So, we have now moved away from theories.

Proportional taxesYou have defined this one…let’s see if it makes

sense.Let us say Person A earns $10,000.Person B earns $1,000 dollars.Person C earns $100,000.According to this tax; all would pay the same

percent or proportion of their income in taxes.Let’s make it 2%; regardless of income. Each would

pay $2 for every 100 dollars earned.No example available. We don’t use this one. Some refer to it as a “flat tax.”

NO examp

le

30%

Progressive taxThis one is based on ATP. (Ability-to-pay) I make more than anyone in this room.

Therefore, I pay more in taxes than anyone here.

Tax liability increases as income goes upTax liability decreases as income goes

down (Tax liability means what you pay in

taxes)

How it works

Let’s make up an example:If you earn $61, 000 to $90,000 annually you pay

10% of your incomeIf you earn $31, 000 to $60,000 annually you pay

7% of your incomeIf you earn $11, 000 to $30,000 annually you pay

5% of your income$61, 000 - $90,000 = 10%

$31, 000 - $60,000 = 7% $11, 000 - $30,000 = 5%

INCOME CHANGES; PERCENT CHANGES

Example: Income tax

Regressive taxRegressive, in this case is backwards

Let’s make up an example:If you earn $61, 000 to $90,000; pay 5% of

your incomeIf you earn $31, 000 to $60,000; pay 7% of

your incomeIf you earn $11, 000 to $30,000; pay 10% of

your income$61, 000 - $90,000 = 5%

$31, 000 - $60,000 = 7% $11, 000 - $30,000 = 10%

INCOME CHANGES; PERCENT CHANGES…but in a backward sort of way….

Example: Sales tax

Questions?Comments?

Hostile disagreements?

Let’s see!Number from 1 – 7 in your notebook and let’s have some practice. The

choices of answers are proportional, progressive, and regressive.

Proportional = the same for everyone; 1 % regardless

Progressive= higher income; higher tax bill and vice versa ex: income tax

Regressive = backwards, lower income; the higher the tax bill and vice versa

ex: sales tax

Practice tax quizuse your notes

Proportional = the same for everyone; 1 % regardless

Progressive= higher income; higher tax bill and vice versa ex: income tax.

Regressive = backwards, lower income; the higher the tax bill and vice versa ex: sales tax

• 1. a tax of $500 on all persons

1. a tax of $500 on all persons

Proportional = the same for everyone; 1 % regardless

Progressive= higher income; higher tax bill and vice versa ex: income tax.

Regressive = backwards, lower income; the higher the tax bill and vice versa ex: sales tax

• 2. a tax of $8 on every $10 earned

Proportional = the same for everyone; 1 % regardless

Progressive= higher income; higher tax bill and vice versa ex: income tax.

Regressive = backwards, lower income; the higher the tax bill and vice versa ex: sales tax

3. sales tax on food

Proportional = the same for everyone; 1 % regardless

Progressive= higher income; higher tax bill and vice versa ex: income tax.

Regressive = backwards, lower income; the higher the tax bill and vice versa ex: sales tax

4. Income tax of 10% on incomes less than $15,000 dollars

20% on income between $15,000 + $30,000 and

30% on incomes over $30,000

Proportional = the same for everyone; 1 % regardless

Progressive= higher income; higher tax bill and vice versa ex: income tax.

Regressive = backwards, lower income; the higher the tax bill and vice versa ex: sales tax

5. 12% tax on all income

Proportional = the same for everyone; 1 % regardless

Progressive= higher income; higher tax bill and vice versa ex: income tax.

Regressive = backwards, lower income; the higher the tax bill and vice versa ex: sales tax

6. income tax in which higher incomes are taxed at a higher rate than lower incomes

Proportional = the same for everyone; 1 % regardless

Progressive= higher income; higher tax bill and vice versa ex: income tax.

Regressive = backwards, lower income; the higher the tax bill and vice versa ex: sales tax

7. tax in which the same percentage of income is collected from all individuals

7. tax in which the same percentage of income is collected from all individuals = same % for all; PROPORTIONAL

6. income tax in which higher incomes are taxed at a higher rate than lower incomes =

% varies according to your income; ATP…PROGRESSIVE

5. 12% tax on all income = every one pays the same percent of INCOME….PROPORTIONAL

4. Income tax of 10% on incomes less than $15,000 dollars, 20% on income between %15,000 + $30,000; and 30% on incomes over $30,000 = %s vary; ATP; PROGRESSIVE

3. sales tax on food = all sales tax are…REGRESSIVE. WHAT IS A SALES TAX? A TAX ON PURCHASES

2. a tax of $8 on every $10 earned = everyone is paying the same percent of income no matter what PROPORTIONAL

1. a tax of $500 on all persons = the percentage would vary depending upon income…it would take a larger percent of a poor’s man’s income; therefore REGRESSIVE check next 2 slides

Answers to practice quiz

HINTS:All sales tax are regressive. Let’s go back to and for a minute.Let us say that and both bought clothing because they want to work on the car.They both spend the same amount on clothing and the same amount in taxes.

Let’s say that ? paid $8 in tax. He had 56 dollars in his pocket.We will pretend the $56 is his income. He just spent 1/7 of his income in taxes. 8/56. Does that make sense? Let’s say that ? paid the same $8 in tax. He had 16 dollars in his pocket.We will pretend the $16 is his income. (8/16) He just spent 1/2 of his income in taxes. So, what the example is trying to show you is that the percent of income paid in tax was NOT the same for both people…the eight dollars in tax must be related to income. When that occurs, we can plainly see that the percentage paid is NOT the same. Regressive taxes take a larger percent of a poor man’s income. Again, that is why it is “regressive.” It is back wards.

Think about gasoline taxes: You and I both pay them. I can afford to pay them more easily than you can. HOWEVER, the percent of my income paid is smaller than yours…% is different and you pay a larger percent…just like .

Relate tax to

income

And furthermore…If I paid 20 % of my income in taxes; that would be proportional.If I paid $20 in taxes that would be regressive.Think about it:

You pay a “poll” tax of 100 dollars.You only make a 100 dollars. You just paid 100 % of your income in taxes.

I have to pay the $100 poll tax also.I made $500. I paid only 1/5 or 20% of my income in taxes…

The percent is not the same. So, it is NOT proportional.And, “it takes a larger percent/proportion of a poor man’s income.”So, regressive it is!!!

DONE!Time for the real, graded quiz. Need ½ sheet with heading,

number from 1-5.