T for Taxes

Chapter 9 sections 1 & 2Teacher’s edition

GPS Standard

SSEMA3: The student will explain how the government uses fiscal policy to promote price stability, full employment and economic growth.

a.  Define fiscal policy.b.  Explain the government's taxing and spending decisions.

EUs and EQs

EU: Incentives: The student will understand that parties respond predictably to positive and negative incentives.

EU: Interdependency: The student will understand that, because of the interdependency, a decision made by one party has intended and unintended consequences on other parties.

EQ: How can government policies affect consumer behavior, and how can consumer behavior affect government policies?

EQ: How do fiscal policy decisions affect the nation’s economy?

We SEE that a good tax is Simple, Equitable, and Efficient.

SimpleSimple

EquitableEquitable

EfficientEfficient

PRINCIPLES OF TAXATION

Benefit Principle: those who benefit from gov’t services should be the ones who pay for them and in proportion to what they receive.

Ability-to-Pay Principle: people should be taxed according to their ability to pay, regardless of the benefits they receive.

Types of Taxes Proportional: imposes same

percentage rate of taxation on everyone

Progressive: imposes a higher percentage rate of taxation on people with high incomes than on those with low incomes

Regressive: imposes a higher percentage rate of taxation on low incomes than on high incomes

FEDERAL TAX SYSTEM

IRS (Internal Revenue Service) is part of the Treasury Department

3 largest sources of 3 largest sources of government revenuegovernment revenue

Individual income tax FICA Corporate income tax

INDIVIDUAL INCOME TAX Paid over time through payroll

withholding system Self-employed workers must pay > 20%

alternative minimum tax quarterly. Before April 15th each year, an

employee must file a tax return: an annual report to the IRS summarizing total income, deductions, & taxes withheld by employers

Progressive Tax that ranges from 15% -39.6%

What is FICA? And why does it take part of my paycheck?

FICA stands for Federal Insurance Contributions Act

FICA tax includes Social Security (6.2% of wages) & Medicare (1.45% of wages)

Total FICA tax = 7.65%

92.35

7.65

Paycheck FICA

Their married name is FICA

social social security security

++

medicaremedicare

Always together on your paycheck!Always together on your paycheck!

What type of Tax is FICA?

Social Security is a proportional tax up to $102,000 (the capping point) and then it is regressive. (the capping

point increases annually)

Medicare is not capped; it’s proportional at all levels of income

CORPORATE INCOME TAX 3rd largest

category of federal taxes

Corporation is recognized as a separate entity

Rates vary from 15% -35% (slightly progressive)

OTHER FEDERAL TAXES Excise Tax: tax on the

manufacture or sale of certain items, such as gasoline and liquor

Estate Tax: tax the gov’t levies on the transfer of property when a person dies

Gift Tax: tax on gift of money/wealth paid by person making gift

Major State Gov’t Revenue Sources Intergovernmental

Revenues - money from federal gov’t

Sales tax - general tax on consumer purchases

Employee Retirement Contributions

Individual Income Taxes (not all states)

24.3

22.1

16.913.9

47.1

Fed money Sales TaxRetirement Income TaxOther

Local government revenue sources

Intergovernmental transfers Property taxes Sales tax (SPLOST)

STATE SALES TAX

States with the Highest Sales Tax:

Mississippi Rhode Island Washington Texas Illinois

States Without a State Sales Tax

Alaska Delaware Montana New Hampshire Oregon

Advantages of Sales Tax Effective way to raise

large sums of money Difficult to avoid

because it affects large numbers of consumers

Relatively easy to administer - merchant collects at point of sale

QUESTION: SHOULD A FEDERAL SALES TAX REPLACE THE FEDERAL INCOME TAX?

What would be the advantages?

What would be the disadvantages?

Would you like to see this happen?

Local Property Taxes Second largest source of revenue for

local governments Real Property: includes real estate,

buildings, & anything permanently attached

Tangible Personal Property: includes tangible items, not permanently attached.

Intangible Personal Property: property with invisible value, such as stock, bond, patent, check

QUESTION: WHY ARE STATE & LOCAL GOVERNMENTS LOSING MONEY TO THE INTERNET???

State & local governments rely heavily on sales tax for revenues

State & local governments already lose $3.3 billion each year to untaxed interstate sales

This figure will increase as more sales are made over the Internet

Should there be an Internet sales tax??? How would it work?

Parting words. .. . .

The incidence of a tax identifies whom the final burden of paying a tax falls upon.

Proposals for a flat tax would result in a federal income tax for which all would pay the same percentage of their income. This opposes the principle of ability to pay, it would make calculating taxes much simpler, & would probably cause structural unemployment among tax lawyers & tax accountants

The elasticity of demand determines the incidence of a tax.