2. Economics – Sources of Government Revenue Chapter 9

3. Economic Impact of Taxes Taxes affect factors of production and, therefore, resource allocation. (pg. 211) A tax placed on a good at a factory raises production costs (Supply curves shifts left). If demand is unchanged, the equilibrium price increases. Taxes impact the economy by encouraging and/or discouraging certain behavior. A sin tax is a high-percentage tax that raises revenue while discouraging consumption of a socially undesirable product (ex: cigarettes)

4. Economic Impact continued…

5. Criteria for Effective Taxes Taxes are effective when they are equitable, simple, and efficient. 1. Fairness and equity; fairness is is subjective, but taxes are considered fairer if they have fewer loopholes – exceptions, deductions, and exemptions. 2. Simplicity; easy to understand 3. Efficiency = easy to administer and successful at generating revenue.

6. Two Principles of Taxation

7. Types of Taxes

8. Individual Income Tax

9. FICA Taxes

10. Corporate Taxes

11. Other Federal Taxes

12. State Government Revenue Sources

13. Local Government Revenue Sources

14. Examining Your Paycheck

15. Tax Reform Under the Reagan administration, the Economic Recovery Act of 1981 reduced taxes for individuals and businesses. Bt the mid-1980’s, Americans believe the tax code favored the rich and powerful. In 1986 Congressional tax reform limited the tax brackets to 15% & 28% The Omnibus Budget Reconciliation Act of 1993 added 2 higher income tax brackets (36 & 39.6%), but its goal was more to assist in balancing the federal budget than in adjusting rates for income levels. By 1997 the government had high tax revenues, so the Taxpayer Relief Act was passed giving tax credits for children and educational expenses, and reduced for people with capital gains from long-term investments in stock and bonds.

16. Tax Reform Continued

17. Valued-Added Tax

18. The Flat Tax

19. The Inevitability of Future Reforms