Notes #14 – Taxes, Taxation and where our money goes! Economics Mr. Burdette MHS

What are taxes? Cost of being a society Money charged to civilians for many different actions (we will get to the multitude in a bit)

What do they pay for? Pay for social, economic, infrastructure goals Salaries of government employees

Are they avoidable? Are taxes avoidable – Ben Franklin “Only two things guaranteed in life… Death and Taxes” – So how do I avoid them?

How to avoid taxes Don’t purchase any goods Don’t work for money Don’t purchase gasoline or any other excised good Don’t own property

Founder’s Views of Taxes Taxation sparked the American Revolution – Taxes can be levied, or collected, only for the country’s “common Defense and general Welfare.” I.E. NOT for the benefit of individual citizens – Federal Taxes must be the same in every state (rule of law)

Smith’s Views on Taxes Taxes Must Be: – Equitable – Certain – Convenience – Efficiency

Equity "The subject of every State ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the State.” Why is it important to have taxes that are equitable?

Certainty "The tax each individual is bound to pay ought to be certain, and not arbitrary. The time of payment, the manner of payment, and the quantity to be paid, ought all to be clear and plain to the contributor, and to ever other person.“ What does it mean to be certain in taxes? (summarize the quote) How clear and certain is the tax code that the United States implements to determine how tax system?

Convenience "Every tax ought to be levied at the time, or in the manner in which it is most likely to be convenient for the contributor to pay it.“ What is the purpose of taxes being convenient? (summarize quote) Is the United States tax code convenient? How long does it take to complete one’s taxes?

Efficiency "Every tax ought to be so contrived as both to take out and to keep out of the pockets of the people as little as possible, over and above what it brings into the public treasury of the State.“ Summarize Adam Smith’s last Tax Maxim

Who should be paying for government programs?

Who should pay? Ability-to-pay Principle – Pay according to earnings

Who Should Pay? Benefits-Received Principle – Pay if you receive benefits from a program (highways – tolls)

Which one makes the most sense to you?!

Moral Hazard and Taxes Moral Hazard – A situation where a party take risks because the costs incurred will not be felt by the party taking the risk. – This helped cause the housing bubble – How does this relate to the ability-to-pary principle of taxation?

The Slippery Slope of Taxation Tax Incidence – Taxation RARELY falls on the person that is responsible for it: – Hotel taxes – added to consumers bill – Corporate Income tax – Paid by the consumer or employee in the form of higher prices/lower salaries – Payroll Tax/unemployment tax – Less people are employed and salaries are lower

Taxation Can Kill! Taxes can kill off business in highly elastic markets – I.E. the small change in a price can lead to much lower demand and therefore, is a business killer Deadweight Loss – The cost of the tax (lost productivity) is greater than the revenue of the tax – Taxes REDUCE incentive to be productive!!!

Tax Structure Proportional Taxes – “Flat Tax” – Everyone pays the same percentage – 10% is 10% no matter the income Progressive Taxes – Takes a larger proportion of income as income grows Regressive Taxes – Takes a smaller share of income as income grows – I.E. most consumption taxes

Types of taxes Individual Income Taxes Payroll Taxes Property Taxes Sales Taxes Corporate Income Taxes Excise and Luxury Taxes User Fees Estate and Inheritance Taxes

How much? How many hours are spent in a typical day of work paying off your daily tax bill? What is the difference between marginal tax rate and average tax rate? What is “tax freedom day”? When does it usually fall and why? Give two mandatory spending categories and two discretionary spending categories.