Sources of Government Revenue

ChevalierSpring 2015

Spending in Washington

Some Quick notes on Government Revenues

1. Government revenues have increased 800% since 1940 (adjusted for inflation)

2. Spending by all levels of government has increased by 2.5% annually

Amount of revenue depends economic performance

I. Sources of Gov’t Revenue (3)

1. Borrowing (Bonds) 3 different types▪ T-bonds▪ T-notes▪ T-bills

Sources of Gov’t Revenue

2. Selling Services and goods

For example: military products For example: national parks, auctions,

museums, real estate, property, furniture, vehicles

Sources of Gov’t Revenue

3. Taxes affect: 1. Resource allocation 2. Consumer behavior 3. Nation’s productivity and growth

Resource Allocation

Resource allocation Taxes levied on certain things can raise cost

of production, which shifts S curve to left If demand remains unchanged, price goes

up People then buy less, causing cut-backs on

production

▪ For example: 1991-luxury tax implemented on expensive cars, planes, yachts (demand for these products is elastic)

Consumer Behavior

Sin Tax Alcohol and tobacco▪ Demand is inelastic, government can raise

billions Mortgage Interest Children

Nation’s Productivity and Growth

Incentive to work and produce Democrats vs. Republicans Europe’s high UER; why does this exist?

Who Ultimately Pays The Tax?

AKA the ‘Incidence of a tax’ How taxes on products gets passed

along▪ Inelastic v. elastic▪ By definition: the final burden of a tax▪ Examine two demand curves

II. Characteristics of a Good Tax

1. Equity- a tax has to be fair

Loopholes Different types of taxes: Benefit principle of taxation▪ Toll Roads, gas tax, tire tax▪ Welfare/hard to measure

‘ ability to pay’ principle▪ Progressive income tax

Characteristics of a Good Tax

2. Simplicity- a tax has to be easy to understand

Indiv. Income tax (complicated) ▪ This is why people don’t like the IRS

Sales tax ▪ Much easier to understand

Characteristics of a Good Tax

3. Efficiency- Ease of administration and successful at generating revenue

Indiv. Income tax▪ How is it collected

▪ What is an inefficient tax?

III. Classification of Taxes 1. Progressive tax

2. Regressive tax

Proportional tax (flat) Estonia (26%) Lithuania (33%) Latvia (25%) Russia (13%) Serbia (14%)

2015 IRS Tax Brackets

IV. American Tax System and Sources of Government Revenue

Federal Sources 1. IIT’s▪ payroll deductions IRS (progressive)

2.FICA- Payroll taxes (SS and Medicare)▪ 12.4% up to $118,500 (SS) and 2.9% (MC) = 15.3%

(7.65 %) 3. Corporate income taxes▪ 34% on income at 75K▪ 35% on incomes in excess of 18.3 million (progressive)

4. Excise taxes – phones, gas, liquor, tires, legal betting

4. Estate and gift Taxes (5.43M) (40%) (14K)

State and local sources

State: 1. sales tax-Alaska, Delaware, Montana,

NH, Ore.

Local Taxes (counties) 1. property taxes