1. Taxes As Incentives Unit Objectives: Recognize that governments impose taxes in order to collect revenues Identify reasons why people dislike paying taxes Identify and apply criteria for judging whether a tax is fair Recognize that taxes are incentives Predict how people will respond when taxes are changed

2. Categories of Federal Taxes Individual Income Taxes Social Insurance Taxes (FICA) Corporate Income Taxes Excise Taxes –Alcohol, Cigarettes, Gas Estate & Gift Taxes Custom Duties

3. Categories of Federal Spending Social Security Medicare National Defense Interest on the $11,000,000,000,000 Debt Health & Human Services TransportationAgriculture Education & Training

4. Categories of State Taxes & Spending State & Local Taxes Sales Taxes Property Taxes Individual Income Taxes Corporate Income Taxes State & Local Spending Education Health & Welfare Programs Transportation Civilian Safety

5. Why Do People Dislike Paying Taxes? Government Coercion –Most transactions are voluntary –Taxes are not –Government can force payment Costs Are Obvious, Benefits Are Not –Direct benefit of taxes difficult to see –Benefit can be delayed, indirect or spread thinly

6. Criteria for a Fair Tax Ability to Pay –Proportional (Flat Taxes) –Progressive Taxes –Regressive Taxes EfficientSimple Benefits Received

7. Ability To Pay - 3 Types Proportional Taxes –Also called a flat tax. All income levels pay the same percentage. Progressive Taxes –Higher incomes pay a higher percentage. Regressive Taxes –Lower incomes pay a higher percentage. A fair tax should tax individuals with equal ability to pay. Said another way - people with different incomes should pay different taxes.

8. Efficiency A new tax should not provide incentive for people or businesses to behave in a dangerous or unlawful manner. –Example: A tax is placed on the safe disposal of a hazardous by- product. This may result in the company dumping the by-product illegally to avoid the tax. –An expensive toll is added to a major highway. As a result, drivers avoid the highway and cut through busy residential sections of town, resulting in traffic jam and increased accidents. With each new tax, you must predict how people will respond to it and ensure the response is not negative.

9. Simplicity A new tax should not be so complicated that it costs citizens too much time and/or money to determine and pay. There is an overwhelming belief that our tax code is way too complicated with too many loop holes.

10. Benefits Received A citizen paying the tax should receive the benefit of however the taxes are then spent. Two examples: –Bridge Tolls – If you do not drive over the bridge, you do not pay! –School Taxes – Every property owner pays them, regardless if they have kids in school.