1. Chapter 9 Sources of Government Revenue Section 1
Sin tax
a relatively high tax
Raise revenue
Used to fund treatment and prevention
Discourage an undesirable product
Liquor
Tobacco

2. Incidence of a tax
the final burden of the tax

3. Tax loopholes
exceptions or oversights in the tax law that allow select individuals and businesses to avoid paying taxes.
Raise a question of fairness.

4. Individual income tax
tax on a person annual earnings (salary, wages, tips, etc.)
A complex tax
Many rules apply to
how much is taxable
How much is deductible

5. Marginal and Average Taxes Worksheet
Marginal tax rate- the rate at which the last dollar of income is taxed. (Not a flat rate across entire income.)
Average Tax- average tax burden across entire income.
Personal Exemption- a dollar amount provided by the Federal Government that is deducted from income for yourself and each dependent. Government provides deductions to help the economy.
Examples
Yourself
Child (each)
Mortgage

6. Sales tax levied on most consumer products Simple tax
Paid on time of purchase
Uniform for all products
CA = 7.5%
Exemptions include:
Basic foods (not processed)
Child care
medicine

7. Benefit principles of taxation
those who benefit from government goods and services should pay in proportion to the amount of benefits they receive
A guiding principle of taxation.
Ex: Gas tax paid only by users at gas stations
Pays for interests of users of gasoline
Highways

8. Ability-to-pay principle of taxation
the belief that people should be taxed according to their ability to pay.
Recognizes
That society cannot measure the benefits derived from government spending.
The assumption is that people with higher incomes suffer less discomfort paying taxes than people with lower incomes.

9. Proportional tax
imposes the same percentage of taxation on everyone, regardless of income.
A 20% tax would mean
$10,000 income, tax would be $2000.
$100,000 income, tax would be $20,000
Examples
Some states have a proportional income tax.
Tithe- a payment of 10% of your income to a religious organization.

10. Average tax rate total taxable income divided by the total income
Constant, regardless of income
If income increases, the percentage stays the same.

11. Progressive tax
imposes a tax with a higher rate of taxation on person with higher income.
Marginal tax rate
Applies a levy to the next dollar of taxable income
The rate increases as the amount of taxable income increases
$10,000 income, tax is $1000
$20,000 income, tax is $2000
$100,000 income, tax is $20,000
Points of percentage increase are called “brackets”

12. Regressive tax
A tax that imposes a higher percentage rate of taxation on low incomes than on high incomes.
Sales tax is harder on lower income people than higher income people.
Examples:
Sin Taxes
Sales Tax
Social Security (caps out at higher levels of income)

13. Section 2: Payroll withholding system
requires the employer to automatically deduct income taxes from an employee’s paycheck.
W-2 form starts the process
W-2 statement informs employee
total annual gross income,
net income,
taxes withheld.

14. Internal Revenue Service (IRS)
Branch of the US government that collects taxes.
Part of the Department of the Treasury

15. Tax return an annual report filed by the employee to the IRS
Total income
Deductions
Taxes withheld by employers
Must be submitted by April 15th if employee owes any more taxes.
If employer paid more taxes, the employee will receive a payment from the government.

16. Indexing
an upward revision of the tax brackets to keep workers from paying more in taxes just because of inflation.

17. FICA Federal Insurance Contributions Act Medicare
Tax levied on both employers and employees to pay for Social Security and
Medicare
A federal health-care program available to all senior citizens
Regardless of paying the tax for Social Security and Medicare
Payroll tax
Revenue deducted from a person’s paycheck by the government.
FICA

18. Corporate tax
a corporation pays an income tax as if it were an individual.
Based on profits
Brackets as of printing were:
15% up to $50,000
25% $50,001 to $75,000
34% $75,001 to $18.3 million
35% $18.3 million and over.

19. Excise tax A tax on the manufacture or sale of selected items
Gasoline
Liquor
Telephone service
Tires
Legal betting
Coal
Luxury goods
A regressive tax as lower-income people pay more of their income than higher income people.

20. Luxury good
good or service where demand for the good rises faster than income, when income grows.
Vehicles over $40,000
Large pleasure boats
Private planes
Jewelry
Furs
Phased out by Congress in 2002

21. Estate tax tax levied on the transfer of property when a person dies.
Usually on property OVER $2 million.
Aka, “death tax”

22. Gift tax
tax on large amount of money or wealth “donated” by a person to others to avoid paying larger income taxes.

23. Customs duty
tax on imported goods or goods brought in by travelers from other countries.
Automobiles
Jewelry
Metals
Until 1913, the main source of revenue of the United States
Replaced by income tax that year.

24. User fees Charges for the use of a good or service.
Ex: National park fees

25. Assessments: Checking for Understanding
1 List the ways that taxes influence the economy.
Resource allocation
Behavior adjustment
Productivity and growth
Incidence of a tax

26. 3 Describe the economic impact of taxes They affect
resource allocation
Consumer behavior
The nation’s productivity and growth

27. 4 List three criteria to evaluate taxes.
Equity
Simplicity
Efficiency

28. 5 The two main principles of taxation. (just list them)
Benefit principle
Ability-to-pay principle

29. 6 Explain the characteristics of proportional, progressive, and regressive taxes.
Same percentage rate of taxation on everyone
Progressive:
Imposes higher percentage rate on person with higher incomes
Regressive:
Imposes a higher percentage rate on lower incomes as compared to high incomes.

30. Assessments: Checking for Understanding
1 List the federal government’s most important revenue sources.
Individual income taxes
FICA taxes
Corporate income taxes

31. 3 Describe the progressive nature of the individual income tax.
It imposes a higher percentage rate of taxation on persons with higher income.

32. 4 Identify the main marginal tax brackets in the corporate income tax structure .
15%
25%
34%
35%

33. 5 Describe the other sources of government revenue.
Excise taxes
Estate taxes
Gift taxes
Customs duties
User fees for the use of a good or service.

34. image, p. 224
What information does the graph show for the period 1980 to 2000?
Total government receipts grew from 500% of the 1940 level to over 700%

35. Image, p. 225
Who is likely to bear the greater burden- the producer or consumer- if a tax is placed on medicine?
The demand for medicine is generally inelastic
The consumer will bear the greater burden of a tax on medicine.

36. images, p. 227
According to the ability-to-pay principle, how is the amount each person has to pay determined?
The amount each pays depends on how much income each earns

37. images, p. 228
Under which type of tax do individuals with lower incomes pay a smaller percentage than do those with higher incomes?
Progressive tax

38. image, p. 232
How did these occurrences change the composition of government revenues between 1990 and 2004?
Borrowing decreased and taxes increased

39. Image, p. 233
How much in taxes would an individual with $40,000 of taxable income pay?
$6,810.00
Solution:
$3, ($40,000 – $28,400) =
$3,910 + $2,900 = $6,810

40. image, p. 234
Is the FICA tax a progressive or regressive tax? Explain your reasoning.
A regressive tax
Because the Social Security portion of FICA is capped at a certain income level
The higher the income, the lower the FICA tax.

41. image, p. 235 What are luxury Goods?
Goods or services for which the demand rises faster than income when income grows.