Sources of Government Revenue: How the government collects money.
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Transcript of Sources of Government Revenue: How the government collects money.
Sources of Government Revenue:
How the government collects money
Criteria (requirements) for Effective Taxes
Effective Taxes
Equal:Must be
fair Simple:Must be
simple for people to
understand
Efficient:Should be
easy to collect so
govt gets the revenue ($)
The Incidence of a Tax
• Government adds tax to producer:
• Example:. Utility company-gas, electric, medicine– Raise rates: consumer pays more (easy if demand is
inelastic)
• $ ____tax on producer• D/S $______• D/S+tax $_____for consumer• D/S+tax $______for supplier• The ____curve shifts to the
______because of ________
Because the demand is ______,
the consumer pays most of the
________and the producer ____.
• Government adds tax to producer:
• Example: more tax on corporation
• Raise rates: consumer pays some and producer pays some (elastic)
• $ ____tax on producer• D/S $______• D/S+tax $_____for consumer• D/S+tax $______for supplier• The ____curve shifts to the
______because of ________.
Because the demand is ______,
the consumer pays _____of the
________and the producer ____ of the tax.
The Incidence of a Tax
Two Principles of Taxation
• Benefit Principle: those who benefit from government and services should pay in proportion to the amount of benefits received
– Gas tax: people who drive more buy more gas and pay more gas tax
– the gas tax pays for roads
• Ability-to-Pay Principle: • People who earn more money should
pay more taxes
Two Principles of Taxation
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
Figure 9.3Figure 9.3
The Federal Tax System
IRS (Internal Revenue
Service)
Treasury Department
Individual Income Taxes
• Fed. Gov’t collects 45% of its revenue (money coming in) from Individual income taxes
• People who work taxes• $ (taxes) are paid each week
and is subtracted from your check– 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
• Proportional tax– As income goes up, % of
income tax paid is same– It doesn’t matter if you
earn a lot of $ or a little $
• Progressive Tax that ranges from 15% -39.6%
Individual Income Taxes
• Progressive tax– Individuals earning higher
incomes pay higher tax rates
Individual Income Taxes
FICA: What is FICA? And why does it take part of my
paycheck?
• FICA:• Federal Insurance Contributions
Act Social Security (6.2% of wages)
+ Medicare (1.45% of wages)
FICA tax ( 7.65% of wages)
• 2nd largest source of Gov’t revenue (money collected)
FICA
• Social Security is a proportional tax up to $65,400 (the capping point) and then it is regressive
• Medicare is not capped; it’s proportional at all levels of income
• Total FICA tax = 7.65%
Corporate Income Taxes
• 3rd largest category of federal taxes
• Corporation is recognized as a separate entity
• Rates vary from 15% -35% (slightly progressive)
Other Federal Taxes
• Excise Tax: tax certain items, such as gasoline and liquor
• Estate Tax: tax the gov’t levies (charges) on the transfer of property when a person dies (parent to child)
• Gift Tax: tax on gift of money/wealth paid by person making gift
State and Local Tax Systems
State Government Revenue($ collected from..)
1.Intergovernmental Revenues - money from
federal gov’t2.Sales tax - general tax on consumer purchases 3.Employee Retirement
Contributions4.Individual Income Taxes (not all states)
• Good way to raise large amount of money
• All consumers pay• Easy to collect: business
collects at point of sale
Advantages of Sales Tax
• Second largest source of revenue for local governments
• Real Property: includes real estate, buildings, & anything permanently attached
Local Property Taxes
• Tangible Personal Property: includes tangible items, not permanently attached.
• Intangible Personal Property: property with invisible value, such as stock, bond, patent, check
Local Property Taxes
Examining Your Paycheck
• Payroll withholding statement: the summary statement attached to a paycheck
• It shows:– income, – tax withholdings (for
fed/state/city govt., and – other deductions
How much $ was deducted from this person’s paycheck?____
• 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?
QUESTION: WHY ARE STATE & LOCAL
GOVERNMENTS LOSING MONEY TO THE INTERNET???