Ewww….Taxes Chapter 9

Economic Impact of Taxes Influence the economy by affecting resource allocation, consumer behavior, and nation’s productivity and growth. If taxes on goods are too high, consumers tend to cut back on buying This in turn affects the company who may have to lay off workers who then in turn cannot buy goods

Taxes can change a person’s motivation to work Sometimes taxes are used to discourage or encourage certain types of behavior Sin tax = relatively high tax designed to raise money and reduce consumption of socially undesirable products Example: cigarettes and alcohol Taxes can change a person’s motivation to work If you work more, you are just going to have to pay more taxes

Sometimes the person/business being taxes isn’t the one who bears the burden of the tax Example: city decides to tax the local electric company to raise money So the electric company raises rates on consumers…YOU!

Types of Taxes Three general types exist in US: Proportional tax = imposes the same percentage rate on everyone, regardless of income Example: income tax rate of 20% for a person making $20,000 would be the same 20% for a person making $200,000 If your income goes up, your percentage of taxes does NOT increase

Progressive tax = tax that imposes a higher rate of tax on people with higher incomes The more you make, the larger percentage of tax you pay Example: You may pay 10% if your income is $10,000 or you may pay 30% if your income is $100,000 Regressive tax = tax that imposes a higher percentage rate on lower incomes Example: if you make $10,000 a year and spend $5,000 on clothing, and your friend makes $100,000 a year and spends $20,000 a year on food and clothing, if the state sales tax if 4%, you are paying a higher % of your total income in taxes You = 2.5% of your income paid in sales tax Friend = 1.0% of their income paid in sales tax

Federal Taxes Individual income tax = tax paid on your income Payroll withholding system = your employer automatically deducts if from your check Internal Revenue Service = they collect your taxes from employer Tax return = annual report by you to the IRS summarizing your total income, deductions, and taxes withheld by employers You may owe, you may get a refund This is a progressive tax

FICA (Federal Insurance Contributions Act) = tax levied on employers and employees to pay for Social Security and Medicare They are payroll taxes because they are taken out of your paycheck Social Security (aka Old Age Insurance) 4.2% for you – 6.2% for your employer Up to $110,000 income Medicare = federal health care insurance for senior citizens regardless of income 1.45% for you and your employer No limit on income

Corporate Income Tax = tax corporation pays on its profits It is progressive Excise tax = tax on the manufacture and sale of selected items Example: gas, alcohol, tires, telephone services It is a regressive tax Estate Tax = tax on transfer of property when a person dies If the property is worth over $2,000,000 Gift tax = tax on donations of money or wealth paid by person who makes the gift Customs duties = charge levied on goods brought in from other countries Basically a tariff on imports Relatively low today

State Tax Systems Intergovernmental revenue = money collected by one level of government and given to another for expenditures. States get this money to help fund education, welfare, hospitals, roads, etc. About 20% of state government money comes from the federal government.

Sales tax = general tax placed on consumer goods Paid to the merchant who then pays the state government The sales tax is the 2nd largest source of money for the states. (AK, DE, MT, NH and OR – no sales tax) Employee retirement contributions are the 3rd largest source

State income taxes are the 4th largest source The remaining money states get is from : Tuition and other fees from state-owned universities Corporate income taxes Interest on their surplus money

Local Taxes Local gov’ts get most of their money from state gov’ts Usually for education and public welfare 2nd largest source is the property tax = tax on tangible and intangible possession Land, buildings, cars, farm animals, stocks, etc 3rd largest source is earnings from public utilities and state-owned liquor stores

Tax Reform Economic Recovery Tax Act of 1981 = greatly reduced taxes for people and businesses. By mid 1983 over 3,000 millionaires did NOT pay taxes Many corporations like Boeing and Greyhound were able to legally avoid paying taxes 1986 – tax reform law that brought the highest incomes up to 31% tax People had to pay a minimum of 20% regardless of income Corporate income tax went back up

Taxpayer Relief Act of 1997 = reduced capital gains taxes, inheritance taxes, allowed a $500 per child deduction But tax percentages remained mostly the same This actually benefitted the wealthy but not the poor Tax Bill of 2001 = cut the four top tax brackets, single people got $300 check, married got $600 check This helped get rid of a gov’t surplus of money