Chapter 14 Taxes

Taxation In 2011, $2.3 trillion dollars was collected by the U.S. gov’t from taxes Over $13,000 per person in the nation Taxes can impact resource allocation, affect a nation’s productivity, and change consumer behaviors (sin tax)

Criteria for Effective Taxes 1. Equity—Fairness, tax loopholes are opposed on the grounds of equity 2. Simplicity—tax laws should be written so everyone understands them 3. Efficiency—should be easy to administer and successful at generating revenue

Two Principles of Taxation Taxes in the U.S. are based on two principles 1. Benefit Principle-people who benefit from gov’t goods/services should be pay in proportion to the amount of benefits they receive (gas tax, tire tax) 2. Ability to Pay Principle-belief people should be taxed according to their ability to pay, regardless of the benefits they receive

Types of Taxes 1. Proportional tax 2. Progressive tax 3. Regressive tax

1. Proportional Tax(Flat tax) Imposes the same percentage rate of taxation on everyone Example: Income tax rate was 22% for all taxpayers Family A-earns $10,000 a year/pays $2,000 in taxes Family B-earns $40,000 a year/pays $8,800 in taxes Family C-earns $100,000 a year/pays $22,000 in taxes

2. Progressive Tax A tax that imposes a higher percentage rate of taxation on people with higher incomes The federal income tax is a progressive tax, it increases the rate as income increases Example: Family A- $10,000/paid 15% in taxes ($1,500) Family B- $40,000/paid 28% in taxes ($11,200) Family C- $100,000/paid 33% in taxes ($33,000)

3. Regressive Tax Imposes a higher percentage rate of taxation on low incomes that on high incomes A sales tax is a regressive tax Example: State sales tax is 10% Family A-income of $20,000 spends $5,000 on a used car. Pays $500 in sales tax, 2.5% of their total income Family B- income of $200,000 spends $5,000 on a used car. Pays $500 in sales tax, .25% of their total income

Individual Income Taxes Gross pay-total amount you earned Net pay-amount you actually receive Fed. gov’t collects half its revenue from taxes on people’s earnings, largest single source of gov’t revenue

Individual Income Taxes In most cases, the individual income tax is paid through a payroll withholding system, requires employer to deduct income taxes from paycheck and send it directly to the govt The IRS (Internal Revenue Service) is the branch of the U.S. Treasury Department in charge of collecting taxes

Individual Income Taxes Between close of the tax year (Dec.31) and April 15th, employee files a tax return (annua report summarize total income and deductions) Difference between taxes paid and owed according to tax table is settled Individual income tax has a provision for indexing, to keep inflation from causing people to pay more taxes

Two Kinds of Payroll Taxes 1. Income Tax--Largest 2. FICA (Social Security)