The Economics of Taxation. Warm Up 1. Do you think the government utlizes our tax dollars effectively? Why or Why not? 2. Explain the difference gross.

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Presentation transcript:

The Economics of Taxation

Warm Up 1. Do you think the government utlizes our tax dollars effectively? Why or Why not? 2. Explain the difference gross pay and net pay.

Agenda 1. Warm Up 2. Discuss “Economics of Taxation” 3. Principal of Taxation Practice. 4. How to Tax Paragraph. 5. Tax Article?

Economic Impact of Taxation A tax raises the price of a good affecting demand 1991 tax enacted on luxury goods caused unemployment to rise in these industries Tax used as a way to encourage or discourage behaviors Taxes can change incentives to save, invest and work

Incidence of Tax Final burden of tax Can be transferred from intended target to unintended Utility tax? Tariffs? 1991 luxury tax final burden fell on workers, not intended target, the wealthy

Criteria for Effective Taxes Fairness of tax is an opinion Viewed as fair if few: exceptions, deductions, exemptions Most agree tax loopholes should be eliminated People willing to accept taxes when they understand them Individual income tax (complex) vs. sales tax (easy)

Principals of Taxes Benefit Principal- those who benefit should pay in proportion of benefit Limitations: Gov’t services (i.e. welfare), benefits hard to measure (i.e. hotel tax) Ability to pay principal- taxed according to ability to pay Assumes: societies can not always measure benefit, People with more will be hurt less paying taxes

Types of Taxes Proportional- imposes same level on everyone Progressive- higher your income, higher your tax Regressive tax imposes a higher percentage on lower income earners