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Taxation

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Decide fairest taxation method: a. same percent for all b. greater percent for the individuals with high

incomes c. greater percent for the individuals with low

incomes

Why??

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1. Why do governments tax? 2. What are the purposes of taxes? 3. Give as many examples of types of taxes

as you can (e.g., sales tax). 4. Pick three of the taxes listed above and

judge whether each tax puts more of a burden on individuals with higher income, lower income or impacts both groups equally.

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Funding Government Programs Citizens of the United States authorize the

government, through the Constitution and elected officials, to raise money through taxes.

Taxation is the primary way that the government collects money.

Without revenue, or income from taxes, government would not be able to provide goods and services.

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Taxes and the ConstitutionThe Power to Tax Article 1, Section 8,

Clause 1 of the Constitution grants Congress the power to tax.

The Sixteenth Amendment gives Congress the power to levy an income tax.

Limits on the Power to Tax

The power to tax is also limited through the Constitution:1. The purpose of the tax must be

for “the common defense and general welfare.”

2. Federal taxes must be the same in every state.

3. The government may not tax exports.

Who Bears the Burden of a Tax? To fully evaluate the fairness of a tax, it is important to think

about who bears the burden of the tax. The incidence of a tax is the final burden of the tax.

If demand is inelastic, a tax will increase the price of a good and consumers will bear a large burden of the tax. If demand is elastic, the opposite is true.

Elasticities of Demand and Tax Effects

Quantity

Pri

ce

$1.40

$1.00

Lower quantity

Inelastic Demand

Higher quantity

New supply with $.50 tax

Original supply

f

i

Demand

Elastic Demand

Lower quantity

Higher quantity

Quantity

Pri

ce

$1.10$1.00

New supply with $.50 tax

Original supply

ig

Demand

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Individual Income Taxes “Pay-as-You-Earn” Taxation

Federal income taxes are collected throughout the course of the year as individuals earn income.

Tax Withholding Withholding is the process by which employers take tax

payments out of an employee’s pay before he or she receives it.

Tax Brackets The federal income tax is a progressive tax. In 1998, there

were five rates, each of which applied to a different range of income.

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Individual Income Taxes Personal income tax

individual who earns the income must pay tax on that income

Social security tax Provides disability and retirement benefits for

most working people

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Other Types of Taxes Sales tax

amount of sales and taxes based on purchase of certain goods and services

Property tax tax on real estate such as property, home, or

some other building - important source of revenue for the local

government.

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Other Types of Taxes Excise Taxes

applies only to specific goods such as tires, gasoline, cigarettes, liquor, and fur

Estate and gift taxes tax on wealth passed on from one person to

another Estate taxes - the death of the wealth holder Gift taxes - from one living person to another.

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Types of Taxes Proportional Taxes

A proportional tax is a tax for which the percentage of income paid in taxes remains the same for all income levels. (i.e. 10% for all income levels)

Progressive Taxes A progressive tax is a tax for which the percent of income paid in taxes

increases as income increases. (i.e. someone with an income of $50,000 may pay 15%, but someone with an income of $500,000 may pay 25%)

Regressive Taxes A regressive tax is a tax for which the percentage of income paid in

taxes decreases as income increases. (e.g. a sales tax would take a higher percentage of a lower income person’s money)

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*Data covers calendar year 2003, not fiscal year 2003- and includes all income, not just wages, excluding Social Security

The top 1% pay more than a third: 34.27%

The top 50% were those individuals or couples filing jointly who earned $29,019 and up in 2003. (The top 1% earned $295,495-plus.) 

The top 1% earns 16.77% of all income (2002: 16.12%). The top 5% earns 31.18% of all the income (2002: 30.55%). The top 10% earns 42.36% of all the income (2002: 41.77%); the top 25% earns 64.86% of all the income (2002: 64.37%) , and the top 50% earns 86.01% (2002: 85.77%) of all the income.

Who Pays the Taxes in the US?

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