Taxes What is a tax?- A tax is a required payment to a local, state, or national government Why does a government require taxes? Taxes are the primary source of revenue for the government to pay for its public goods and services What gives a government the right to tax? Written in that government’s constitution 16th Amendment

Taxes What is the Tax Rate?—the % of the tax base that goes toward taxes Are there limits on taxes? Yes 1. purpose must be “for the common defense and general welfare 2. federal taxes must be the same in every state 3. other rules limit the kinds of taxes

Examples of Taxes Federal Income Tax State Income Tax State/City Sales Tax Social Security Tax Excise Tax—cigarette, liquor, gas, etc. Property Tax— homes, cars, boats, etc.

Types of Taxes 1. Proportional Taxes—This tax takes the same % from individuals at all income levels. 2. Progressive Taxes—This tax takes a larger % of income from a high-income person than from a low-income person. 3. Regressive Taxes—This tax takes a larger % of income from members of low-income groups than from members of high income groups.

Types of Taxes Proportional—Ex. Bob earns $10,000/yr. And Amy earns $100,000/year. State of CO. Has a 4.65% state tax. Bob pays $465/yr. Amy pay $4650/year. Progressive-- $24,000/year X 15% tax bracket($3600) $263,750/year X 39.6% tax bracket ($104,445). Regressive—Dan earns $18,00/year; Angela earns $24,000/year. Each buys a $20 CD and pays 8% sales tax or $21.60 for CD. % wise, Dan pays higher % of his salary.

Collecting Taxes Largest Sources of Tax Revenue: Individual income taxes Corporate income taxes Social Security taxes Property taxes Sales taxes

Sources of Tax Revenue 1. Individual Income Taxes Progressive income tax Collected by the federal, state, local gov’ts. Workers pay through payroll taxes Employers deduct taxes from your checks Sometimes known as “pay as you go” tax

Sources of Tax Revenue 2. Corporate Income Taxes: Corporate profits are taxed by the gov’t Many corporations pay reduced taxes due to tax breaks which help promote plant modernization. Ex. New Walmart in Mesa is getting $84M in tax incentives to build there.

Sources of Tax Revenue 3. Social Security Taxes and Medicare: (FICA) Withheld from workers pay checks Taxes are used to finance social welfare programs. Social Security payments to retirees, disabled, survivors, etc. Medicare provides health care to older Americans Regardless of income, all workers pay the same 5.65 % of their income (up to 106,800) for social security taxes.

Sources of Tax Revenue 4. Property Taxes: Taxes apply to houses, land, factories. Can also include personal property—ex. Automobiles, boats, jewelry. These taxes are used locally for such things as education, police, fire protection.

Sources of Tax Revenue 5. Sales Taxes: Regressive tax assigned to certain goods and services by state and local governments. Some states, medicine, food, and other necessities are NOT taxed. Other Taxes and Revenues: Excise Tax—tax on manufacture, sale, or consumption, of a particular good/service. Ex. Tobacco, liquor, gasoline, firearms, gambling

Other Taxes and Revenues Estate Tax—Tax placed on assets of a person who has died. Generally, does not apply unless assets greater than $600,000 Gift Tax—Tax placed on the transfer of certain gifts, money. Gift giver does not have to pay if not greater than $11,000/yr. Customs Duty—Tax on imported goods.

Other Taxes Capital Gains: Income made on the sale of stocks, bonds, real estate and other investments