Notes Chapter 9

Taxes

Interesting Facts

• The Gettysburg address is 269 words.

• The declaration of Independence is 1,337 words

• The Holy Bible is only 773,000 words

• However, the tax law has grown from 11,400 words in 1913, to over 7 million words today.

These facts only address the Federal Tax – they do not count state, local, property, sales, or other taxes.

• There are at least 480 different tax forms each with many pages of instructions.

• Even the easiest form the 1040E has 33 pages of instructions, and all in fine print.

• American taxpayers spend $200 billion and 5.4 billion hours working to comply with federal taxes each year. That is more than it takes to produce every car, truck and van in the United States.

• The burden of compliance is the equivalent to a staff of 3 million people working full time for a year, just to comply with the taxes on individuals and businesses.

• Luckily many people have been e-filing because we used to cut down nearly 300,000 trees to produce the paper for all of the IRS forms and instructions

• The IRS employs more than 114,000 people; that’s twice as many as the CIA and five times more than the FBI

• 60% of taxpayers must hire a professional to get through their own return

• Taxes eat up approximately 38% of the average family’s income; that’s more than for food, clothing and shelter combined.

http://www.youtube.com/watch?v=NADcUjszQJY

• PUBLIC GOODS – goods and services provided to the public by the government

• Ex. Police dept., Fire dept., public parks, bridges, roads, public schools, etc

• PRIVATE GOODS – goods owned by individuals and subject to the principle of exclusion

• Ex. My pen, my house, etc

• PRINCIPLES OF EXCLUSION – a claim to sole use of a product

TYPES OF TAXES

• PROGRESSIVE TAX – people with higher incomes, pay a larger percentage of their income in tax

• Ex Income Tax• REGRESSIVE TAX – people with higher

incomes, pay a smaller percentage of their income in tax

• Ex. Sales, tax, gas tax, alcohol tax, toll tax, park fees

http://www.youtube.com/watch?v=nXFZvuaJEgo

• PROPORTIONAL TAX – everyone pays the same percentage of their income in tax

• Ex. Flat tax *property tax – is based on the value of your property, which is a reflection of your income

PRINCIPLES OF TAXATION

• BENEFITS RECEIVED - people who receive the use of the public goods/services should be paying for it

• Ex. Social security, school tax, park fees, license fees

• ABILITY TO PAY – tax individuals who can afford to pay the taxes

• Ex. Income tax, Lottery tax & gambling tax (close to 50%), luxury tax (clothing item over $120 in value, cars over $50,000, jewelry over $10,000

• LEAST LIKELY TO OFFEND – taxes that increase in small amounts so as to go unnoticed by taxpayers.

• Ex. Gas, phone, utilities, cable, etc. • Increasing your cell phone bill by one percent per

month is usually less than $1 but the accumulative effect to tax revenue is in the 100’s of thousands of dollars.

• A couple of years ago, NYS added a 50 cent tax onto your cell phone charges to pay for the enhanced 911 program. It is now more than 3 times that amount.

• PRODUCTION APPROACH – companies are often given tax breaks by a municipality in order to bring new business into an area

• Ex. Bass Pro, Walmart, LOCKPORT – Yahoo will save more than

$45 million under the terms of a state and local package of tax breaks and electricity discounts for the second phase of the company’s data center in Lockport.

• $45 million

• TAX REVENUE – money collected by the government in the form of taxes

• TAX REVENUES COLLECTED #1 Source•• Federal Level – Income Tax• NYS Level - Sales Tax• Local Level- Property Tax

• TAX DOLLARS SPENT - #1 Expenditure• Federal Level - Individuals• NYS Level - Education• Local - Education

• REDISTRIBUTION OF INCOME – Changing the income of households by the way government taxes and spends. Generally it reduces the income of those having higher income and increases the income of those with low income

• TRANSFER PAYMENTS – redistribution of income through cash/check payments

• Ex. Welfare, social security, unemployment

• TRANSFER IN KIND – redistribution of income through non cash payments

• Ex. Food stamps, medical care, low income housing, financial aid for college

• INTERGOVERNMENTAL REVENUE – shifting tax dollars from one level of government to another.

• Ex. State aid to schools based on attendance

NATIONAL DEBT – the total amount of money the country owes

http://www.usdebtclock.org/

http://securetherepublic.com/main/resources/u-s-national-debt-clock/

• U.S. household consumer debt profile:• Average credit card debt: $15,204 • Average mortgage debt: $148,818 • Average student loan debt: $33,005 • In total, American consumers owe:• $11.28 trillion in debt

– A decrease of 1.4% from last year • $848. billion in credit card debt • $7.93 trillion in mortgages • $1,007.6 billion in student loans

– An increase of 11.9% from last year – Current Data for April 2013

• Prior to 1980’s we borrowed from

US individuals (bonds)

US businesses

US institutions and accounts (we previously borrowed from the Social Security account)

US banks

• After the 1980’s we began borrowing from

Foreign investors and nations

Much of our current debt is being funded by bonds sold to other countries

• Debt can be good, our country has grown to be the largest economy in the world because we were able to borrow. Most people could not own a house if they had to pay cash. However, the following should be considered when going into debt.

What should be considered when going into debt?

• good debt vs. bad debt (college good if you are going to finish and use the degree, vacation bad debt, house business good debt, new outfit – bad debt)

• Size of debt in relation to income• type of debt, long term vs short term, fixed vs.

variable• interest rates (1% difference in a 30 year mortgage of

a $100,000 home is an additional $26,000 in interest!)• Who do you owe? Keeping the debt as close to

home as possible is the best plan. (who every you borrow from receives the interest, if it leaves the country we lose money that would benefit someone is the country).

Nation Debt Explained

http://www.youtube.com/watch?v=oYw3ksQeMD8

• PORK BARREL LEGISLATION – legislation that includes spending for projects that may not be in the best interest of the taxpayers. Known as “Earmarks”

• Ex. Bridge to nowhere

• Gravina Island Bridge was proposed

for Alaska at the cost of

$398 million dollars

$107,000 to study the sex life of the Japanese quail. $1.2 million to study the breeding habits of the woodchuck.

$150,000 to study the Hatfield-McCoy feud. $84,000 to find out why people fall in love. $1 million to study why people don't ride bikes to work. $19 million to examine gas emissions from cow flatulence.

$144,000 to see if pigeons follow human economic laws.

Funds to study the cause of rudeness on tennis courts and examine smiling patterns in bowling alleys.

$219,000 to teach college students how to watch television.

$2 million to construct an ancient Hawaiian canoe. $20 million for a demonstration project to build wooden bridges.

$160,000 to study if you can hex an opponent by drawing an X on his chest.

$800,000 for a restroom on Mt. McKinley. $100,000 to study how to avoid falling spacecraft. $16,000 to study the operation of the komungo, a Korean stringed instrument.

$1 million to preserve a sewer in Trenton, NJ, as a historic monument.

$6,000 for a document on Worcestershire sauce. $10,000 to study the effect of naval communications on a bull's potency.

$100,000 to research soybean-based ink. $1 million for a Seafood Consumer Center. $57,000 spent by the Executive Branch for gold-embossed playing cards on Air Force Two.

Pork Barrel Spending - The Absurd                                                                                                                                                                        Total: $ 45,980,000

http://www.youtube.com/watch?v=ohnnBs9PpoI

• CAPITAL GAINS TAX – tax on investment earnings

• Ex. Tax on stock earnings (buy stock for $100 and sell it for $140, you pay tax on the $40 you earned). If you sell your house or business for more than you paid for it you pay tax on the difference. (However, you are exempt from paying capital gains on your home, once in your lifetime).

• In theory, if you reduce the capital gains tax, people are more likely to invest in the economy

Supply Side economic policy

• SUBSIDIES – government money used to help individuals or businesses in need of assistance

• Ex. School lunches, low income housing, farming products, etc.

ASSETS LIABILITIES

INCOME $962.58 RENT

GAS

ELECTRIC

PHONE

CABLE

SCHOOL LOANS

CAR LOAN

INSURANCE

RETIEMENT FUND

GROCERIES

CLOTHING

ENTERTAINMENT

TRANSPORTATION

HOUSEHOLD

GIFTS

VEHICLE UP-KEEP

CHARITY

SAVINGS

TOTAL ASSETS $962.58 TOTAL LIABILITIES $962.58