(There are only 2 certainties in life:

Death and taxes!)

• sin tax individual income tax• sales tax benefit principle• ability-to-pay principle proportional tax• progressive tax regressive tax• payroll withholding IRS• tax return FICA• Medicare corporate income

tax• excise tax estate tax• gift tax property tax• customs duty intergovernmental

revenue• property tax

•An enormous amount of $ is required to run the federal, State, and local governments of the U.S.

•Taxes & other governmental revenues influence the economy by affecting 3 things:

1) Resource allocation The factors of production are affected

whenever a tax is levied (a tax on a good/ service raises the cost of production)

2) Behavior adjustment Taxes are often used to encourage or

discourage certain types of activities (Ex. home ownership, credit card use & tobacco, alcohol – sin taxes)

3) Productivity & growth Taxes can change the incentives to save,

invest & work

• To be effective, taxes must meet 3 criteria:

1. Equity/fairnesso Most people view taxes as being

fairer if they have fewer exceptions, deductions & exemptions (problems?)

2. Simplicityo Tax laws should be written so

taxpayer & tax collector understand them

3. Efficiencyo Taxes should be relatively easy to

administer & reasonably successful at generating revenue

•Taxes in the United States are based on 2 principles that have evolved over the years:

1)The Benefit principle Those who benefit from

governmental goods/services should pay in proportion to the amount of benefits they receive

There are 2 limitations:1.Many government services

provide the greatest benefit to those who can least afford to pay them

2.Benefits often are hard to measure

2)The Ability-to-Pay principle People should be taxed

according to their ability to pay regardless of the benefits they receive

Based on 2 factors:1)Societies cannot always measure

the benefits derived from government spending

2)Assumes people with higher incomes suffer less discomfort paying taxes than people with lower incomes

•Three general types of taxes exist in the United States today

•Each type is classified according to the way in which the tax burden changes as income changes

•They are:

1)Proportional tax Imposes same percentage

rate of taxation on everyone, regardless of income

Example: tax rate is 20%1)Person with $10,000 in

income pays $20002)Person with $100,000 in

income pays $20,000

2) Progressive tax Imposes a higher

percentage rate of taxation on persons with higher incomes

Claims a larger dollar amount & a larger percentage of income as income increases

Example: individual income tax

3) Regressive taxImposes a higher percentage rate

of taxation on low incomes than on high incomes

Example: Social Security TaxTax on income up to $80,400. If you make more than this, you don’t have to pay tax on the amount above $80,400

If you make $80,400 or less, you would pay about 7.5 cents per dollar in SS tax

If you make $300,000, you would pay about 1.7 cents per dollar in SS tax

• Income tax–Collected through payroll withholding system (automatically deducted)

– IRS, the agency in charge of collecting taxes

–File a tax return in April (an annual report)

•FICA (Fed Insurance Contributions Act)–Tax levied on SS and Medicare, a federal health-care program available for all senior citizens

•Corporate income tax –Tax paid on corporate profits

•Excise tax–Paid when purchases are made on specific goods & activities, such as gasoline, liquor, phone services, tires, legal gambling & coal

•Estate tax–Tax on transfer of property when one dies

•Gift tax–Tax on donations of $ or wealth paid by the giver–Done so the wealthy do not try to avoid taxes by giving away their estates before their deaths

•Customs duty–Tax paid on goods imported from other countries

•Largest source of State revenue comes from intergovernmental revenue in the form of funds collected by the federal govt then distributed to the State

•2nd largest source of State revenue is the sales tax

Average Sales Tax Rates

•Largest source of local revenue comes in the intergovernmental revenue collected by the State; smaller amount from the federal govt

•2nd largest source of local revenue is the property tax – tax on tangible & intangible possessions– Examples: real estate, buildings,

furniture, automobiles, farm animals, stocks, bonds & bank accounts