Presentation on theme: "Economics Chapter 12: Taxes and taxation"— Presentation transcript:
1 Economics Chapter 12: Taxes and taxation Who and What Should be Taxed?
2 Begin with a story… St. Valentine’s Day 1929 Results of the incident? Anyone know what happened?Results of the incident?What eventually brought this person to justice?
3 Taxes! Ben Franklin’s immortal words… What are taxes? “The price of civilization”—Oliver Wendell Holmes, Jr.Been around since earliest civilizationsSupport services and infrastructurePromote social and economic goalsWhat has been our national history towards taxes?
4 What does Adam Smith say? Four guiding principles:Equity: Taxes should be fair“Not unreasonable that the rich should contribute to the public expense, not only in proportion to their revenue, but something more than in that proportion.”Certainty: Time, manner, and quantity all known up frontConvenience: System should not be complicatedEfficiency: Keep economic cost of taxes to a minimum
5 Tax Equity Debate: Who Pays and Why? Economists agree that the system should be fair, but they disagree over how to achieve fairness2 basic approachesAbility to Pay PrincipleBenefits Received PrincipleWhich one do you think is the proper way to achieve fairness? Turn to a partner and discuss.
6 Who Ends Up Paying?Economic burden of a tax is known as “Tax Incidence”May not always fall on the person who pays the tax billThink hotel rooms and “occupancy taxes”Tax Incidence is affected by the elasticity of supply and demandIn general, tax will fall on the side of the market that is less elastic
7 What Taxes Will You Pay?Important date to know---April 15---filing deadlineTax Base---the thing that is taxedPersonal income or property tax as examplesTax Rate---percentage of the value of the good (property or income) that is paid in taxExample: 20% income tax rateLook at current tax rates, Federal and Virginia
8 Tax Structures Proportional Tax---same share of income at all levels Sometimes called a “Flat Tax”Critics cite fairness as an issue---ability to payAdvocates say that it is inherently fairSlovakia has this---19% income tax for allTradeoff: Less tax evasion, greater foreign investment/less money for government services
9 Tax StructuresProgressive Tax---takes a larger share of income as income increasesBased on ability to pay principleStructure for most federal taxesCritics say it places unequal burden on rich--- fundamentally unfair (punishes rich for being rich)Creates disincentive to work, save, and investAlso say it creates a more complicated system
10 Tax StructuresRegressive Tax---tax that takes a smaller share of income as income increasesNo government really sets out to do this…but it sometimes happensExample---Proportional tax called a “sales tax”Tax on what you spend20k earned; spends 10k to live; tax rate 5% = $500Represents 2.5% of low earner’s income100k earned; spends 30k to live; rate of 5% = $1,500Represents 1.5% of high earner’s income
11 Taxes You Will Pay Individual Income Tax---Marginal (pg. 239) Payroll Tax---Tax on wages a company pays its employees (examples---Social Security and Medicare)Social Security Tax---paid ½ by you, ½ by employerSocial Security tax rate was 12.4%What type of tax is this?Property Tax---assessed valueSales Tax---purchase of a goodCorporate Income Tax---profitsExcise Taxes---Things gov. wants to regulateLuxury Taxes---private jets, fur coats, etc.Estate and Inheritance Tax
12 Taxes are Revenue; How does Gov. Spend it? 2007 Tax Revenue for the government$2,500,000,000, $2.5 TrillionFour sources---income, payroll, corporate, excise (in order)Does not take in enough to cover all expenses---- federal deficitThus, government borrows moneyNational debt is the total amount owed as a result of borrowing
13 Federal Spending Mandatory vs. Discretionary Mandatory Discretionary Spending is fixed by lawEntitlements and interest on national debtEntitlements include Social Security, Medicare, welfareMandatory spending in 2010 approx. 65% of federal rev.DiscretionaryMay be raised or lowered as Congress sees fitNational defense