Role of Government Topic: TAXES

Circular Flow

2 Principles of Taxation Benefit: Those who benefit should pay in proportion to benefits EX: Gas/Tires Ability-to-Pay: Regardless of benefits For low-incomes every penny counts.

Perfect Tax Structure Provides incentives to work, save and invest. Fair. Simplicity (easy to understand). Individual Income Tax: tax on earnings (complex) 1000s of pages/IRS collects taxes. Sales Tax: general tax on consumer purchases (simple). Sin-Tax: decrease consumption of undesirable products. Efficiency: easy to administer, and generates sufficient revenue to fund spending.

3 Types of Taxes Proportional: same % rate of taxation for everyone regardless of income. Progressive: Higher tax rate on those with higher incomes. Regressive: Higher tax rate on those with lower incomes.

Examples Income $10,000 $100,000 Proportional: City Occupation Tax: $97 Progressive: Federal Income Tax: 10% Federal Income Tax: 25% Regressive: Sales Tax: $5,000 purchased 4%-$200 or 2% $20,000 purchased 4%-$800 or .8%

Types of Taxes % of Income in Taxes Income (1000s) 6% 5% 4% 3% 2% 1% 20 40 60 80 100 120 Income (1000s)