Chapter 14: First Half

$$$ FEDERAL TAXES $$$

• These needs and functions of Federal Taxing:• -To Pay the Costs of Government- 82% of Federal

Income o 50% of State and local income.

• As costs increase such as the Military, Social Security, Health Care, etc… TAXES INCREASE.

• -To Redistribute Wealth- Like Robin Hood “Takes money from the rich and distributes it to the poor”.o Ex. “Medicaid” healthcare for the poor is not paid for

by the poor’s taxes, but the rich. • Other examples are welfare, food and stamps, however

the people who receive these benefits live distinctively worse lives then the taxpayers who pay the taxes for it.

$$$ FEDERAL TAXES $$$

• These needs and functions of Federal Taxing:

• -To Promote Certain Industries- • A Tariff is a tax on goods entering the country

from a foreign country. • They are made to either raise money for the

government or raise the cost of the imported good, or both.

• A Protective Tariff is when this tax when the major reason is to raise the price of the good.

• Ex US shirt sold for $16 and a foreign T-shirt sold for $15 but has a 10% tariff, therefore the foreign shirt is now $16.50.

$$$ FEDERAL TAXES $$$

• -To Influence Consumer and Business-Spending Patterns - If someone is taxed heavily, they won’t want to spend.

• However if they are not taxed as high, and still spend that money, the government may make more money. (REAGANOMICS)

• For example a person saves $100,000 on taxes: If he or she buys a Ferrari, they paid sales tax, the tariff, the taxes on the gas it, tax the profit Ferrari made, and thus, the consumer may ultimately pay more money they saved. • State and Locals give tax breaks to attract businesses that means more jobs, taxes, etc.

$$$ FEDERAL TAXES $$$

• -To Discourage Certain Behaviors- “Sin Taxes” or Excise taxes are taxes that are designed to discourage bad behaviors such as tobacco, alcohol

• For Example, Current taxes on a pack of Cigarettes in NY ______, NC______.

•  

The Federal Income Tax

• -Individual (or personal) income tax- principle source of revenue for the federal government. It is tax that most people are familiar with.

• -Progressive Tax- The Federal Income Tax is a tax that takes a larger percentage of earnings of high-income individuals than low-income ones.

• -Tax Rates- Because of the progressive tax, rates rise as the amount of income one makes rises.

The Federal Income Tax

• -Tax Rate Schedules. Clearly defines the taxes people have to pay according to the incomes they have made.

• -Internal Revenue Service- The federal agency that collects income taxes.

• Self employed persons (and others with non-wage income like waiters and waitresses) are required to estimate their tax liability for the coming year.

Income Tax in Our Daily Lives

• -Taxable Income Different from overall income for 3 reasons:

1. Some forms of income are exempt from federal taxes

2. Certain exemptions and deductions can be taken against one’s income

3. Some individuals are entitled to tax credits. Many items can be taken away before “taxable income” is figured

Income Tax in Our Daily Lives

• -Income Not Subject to Taxation- Based on 2014 tax rate schedules, an individual earning less than $9,075 and families earning less than $18,150 pay taxes on 10% of money over $0.

• However, these individuals/families would easily have enough tax credits and exemptions to pay no taxes by also having Nontaxable income.

• Other income not taxed is interest on state/municipal bonds and welfare benefits. Inheritances and Social Security benefits may be exempt but not always

Income Tax in Our Daily Lives

• Again, the Federal Income Tax is a progressive tax, not a “Regressive Tax”

• -Regressive Taxes- ones that take a larger fraction of the income of low-income people than of higher income people.

• Examples of these are sales taxes and excise taxes.

• For example, the over $5 cost in taxes for cigarettes in NYS hurt a $15,000 smoker MUCH more than a $150,000 smoker.

Income Tax in Our Daily Lives

• -Exemptions and Deductions- • Exemptions are when the taxpayer can

reduce their taxable income for each of their “dependents” including themselves.

• In 2014, this was $3,950. A family of four was $15,800, thus any family paying under their total exemption DOES NOT PAY TAXES.

• Deductions are when taxpayers have a tax credit for themselves or themselves and a spouse for a variety of reasons.

• Examples: Medical, Dental, Education, and Business Expenses, or Charitable Contributions

Income Tax in Our Daily Lives

• However, when someone wants to list deductions and exemptions, they must ITEMIZE on their taxes.

• -Itemization- When tax payers itemize, or list what their expenses were, they list deductions such:o state/local taxeso real estate taxeso mortgage interesto charitable giftso and medical expenses can be deducted.

Income Tax in Our Daily Lives

• -Income Tax Credits- these are offered for 2 purposes:

1. Promote certain activities 2. To help specific groups of individuals

• Education Credit- entitles taxpayers to deduction tuition costs of up to $4000 for the first two years of post-secondary school for themselves or their dependents.

Income Tax in Our Daily Lives

• -Earned Income Tax Credit- For low-income taxpayers, this reduces the amount of income taxes owed and could result in a refund check.

• These taxpayers may also result in free tax preparation services and electronic filing by participating tax professionals and volunteers

• -Elderly and Disabled Tax Credit- Taxpayers 65 years of age or older and persons retired on permanent and total disability may be entitled to a reduction in their taxes

Income Tax in Our Daily Lives

• -Different Opinions on the Income Tax-

• People who favor the personal income tax stress its progressive character b/c of income distribution, people that are taxed still can spend into the economy, thus the economy can still get influxes of consumer cash

• However here are common criticisms of the Federal Income Tax:

Income Tax in Our Daily Lives

• -Different Opinions on the Income Tax-

• Too many people do not end up paying the Federal Income Tax…

And• -“Favors the Rich at The Expense of

The Poor”- Along with the argument that too many people do not pay the tax, the argument of the rich being able to hire lawyers, accountants, and others to lower their taxes is easily apparent.

Income Tax in Our Daily Lives

• -Different Opinions on the Income Tax-

1. Too many people do not end up paying the Federal Income Tax… And2. “Favors the Rich at The Expense of The Poor”- Along with the argument that too many people do not pay the tax, the argument of the rich being able to hire lawyers, accountants, and others to lower their taxes is easily apparent.

Income Tax in Our Daily Lives

• -Different Opinions on the Income Tax- 3. “The Federal Income Tax Discourages Investments”- While deductions do exist for other reasons, people argue it should have credits, deductions, and exemptions for individual investors in private enterprises. These exist in things such as municipal bonds but others could be useful such as remove capital gains taxes on stock trades, bonds, or property. Investors could invest more money if these taxes were abolished.

“OTHER WAYS TO GET YOUR

MONEY!!!”Corporate Income Tax• Taxes on net profits that increase

proportionately with the size of profits

Criticisms of the CIT1. Stockholders are “Double Taxed” with income

tax and by revenue2. Discourages economic growth because instead

of increasing size of the company, companies pay taxes

3. Some or all of these taxes are passed onto consumers through higher prices

“OTHER WAYS TO GET YOUR

MONEY!!!”Excise Taxes

• Taxes levied on the manufacture or sale of particular goods and services

• Examples include alcohol, gas, tobacco

• Popular with politicians because people are unaware they are paying

“OTHER WAYS TO GET YOUR

MONEY!!!”Estate Tax -levied on a person’s property at the time of death

Criticisms include: -Depletion of savings- “Why save then government is going to take away when its passed on”?-Complexity- “Tax experts can be brought in to minimize estate taxes)-Break up of family businesses and farms- “The people who inherit these businesses and farms may not be able to afford the estate tax placed by the Federal Government”

“OTHER WAYS TO GET YOUR

MONEY!!!”Estate Tax -levied on a person’s property at the time of death Those who approve argue: only 2% of the population pays the estate tax (For this group the taxes are affordable and fair)

Prevention of an upper class (a tax prevents a group whose power and wealth is inherited)

Uses the rich’s money for the common good (Government as “Robin Hood”).

“OTHER WAYS TO GET YOUR

MONEY!!!”• Gift Tax- created to prevent wealthy persons

from giving away their property to get around the estate tax. This tax is now at $14,000.

• Social Security and Medicare Taxes- “33 cents” out of every dollar” from payroll taxes, SS tax is only up to $118,500-Medicare tax is unlimited.

“OTHER WAYS TO GET YOUR

MONEY!!!”But what if I don’t like the Progressive US Federal Income Tax?The chief alternative that critics bring up is a flat tax

• Flat Tax ArgumentAn argument to simplify the US tax codes, but the ultimate criticism is that the rich will have an easier tax rate then they currently have

For Example: A 25% tax rate for everyone, now someone making $20k pays $5k a year, and $200k pays $50k, where currently they would pay