T for Taxes Chapter 9 sections 1 & 2 Teacher’s edition

GPS Standard n SSEMA3: The student will explain how the government uses fiscal policy to promote price stability, full employment and economic growth. n a. Define fiscal policy. b. Explain the government's taxing and spending decisions.

EUs and EQs n EU: Incentives: The student will understand that parties respond predictably to positive and negative incentives. n EU: Interdependency: The student will understand that, because of the interdependency, a decision made by one party has intended and unintended consequences on other parties. n EQ: How can government policies affect consumer behavior, and how can consumer behavior affect government policies? n EQ: How do fiscal policy decisions affect the nation’s economy?

We SEE that a good tax is Simple, Equitable, and Efficient. SimpleEquitableEfficient

PRINCIPLES OF TAXATION n Benefit Principle: those who benefit from gov’t services should be the ones who pay for them and in proportion to what they receive. n Ability-to-Pay Principle: people should be taxed according to their ability to pay, regardless of the benefits they receive.

Types of Taxes n Proportional: imposes same percentage rate of taxation on everyone n Progressive: imposes a higher percentage rate of taxation on people with high incomes than on those with low incomes n Regressive: imposes a higher percentage rate of taxation on low incomes than on high incomes

FEDERAL TAX SYSTEM n IRS (Internal Revenue Service) is part of the Treasury Department

3 largest sources of government revenue n Individual income tax n FICA n Corporate income tax

INDIVIDUAL INCOME TAX n Paid over time through payroll withholding system n Self-employed workers must pay > 20% alternative minimum tax quarterly. n Before April 15th each year, an employee must file a tax return: an annual report to the IRS summarizing total income, deductions, & taxes withheld by employers n Progressive Tax that ranges from 15% %

What is FICA? And why does it take part of my paycheck? n FICA stands for Federal Insurance Contributions Act n FICA tax includes Social Security (6.2% of wages) & Medicare (1.45% of wages) n Total FICA tax = 7.65%

Their married name is FICA social security +medicare Always together on your paycheck!

What type of Tax is FICA? n Social Security is a proportional tax up to $102,000 (the capping point) and then it is regressive. (the capping point increases annually) n Medicare is not capped; it’s proportional at all levels of income

CORPORATE INCOME TAX n 3rd largest category of federal taxes n Corporation is recognized as a separate entity n Rates vary from 15% -35% (slightly progressive)

OTHER FEDERAL TAXES n Excise Tax: tax on the manufacture or sale of certain items, such as gasoline and liquor n Estate Tax: tax the gov’t levies on the transfer of property when a person dies n Gift Tax: tax on gift of money/wealth paid by person making gift

Major State Gov’t Revenue Sources n Intergovernmental Revenues - money from federal gov’t n Sales tax - general tax on consumer purchases n Employee Retirement Contributions n Individual Income Taxes (not all states)

Local government revenue sources n Intergovernmental transfers n Property taxes n Sales tax (SPLOST)

STATE SALES TAX States with the Highest Sales Tax: n Mississippi n Rhode Island n Washington n Texas n Illinois States Without a State Sales Tax n Alaska n Delaware n Montana n New Hampshire n Oregon

Advantages of Sales Tax n Effective way to raise large sums of money n Difficult to avoid because it affects large numbers of consumers n Relatively easy to administer - merchant collects at point of sale

QUESTION: SHOULD A FEDERAL SALES TAX REPLACE THE FEDERAL INCOME TAX? n What would be the advantages? n What would be the disadvantages? n Would you like to see this happen?

Local Property Taxes n Second largest source of revenue for local governments n Real Property: includes real estate, buildings, & anything permanently attached n Tangible Personal Property: includes tangible items, not permanently attached. n Intangible Personal Property: property with invisible value, such as stock, bond, patent, check

QUESTION: WHY ARE STATE & LOCAL GOVERNMENTS LOSING MONEY TO THE INTERNET??? n State & local governments rely heavily on sales tax for revenues n State & local governments already lose $3.3 billion each year to untaxed interstate sales n This figure will increase as more sales are made over the Internet n Should there be an Internet sales tax??? How would it work?

Parting words..... n The incidence of a tax identifies whom the final burden of paying a tax falls upon. n Proposals for a flat tax would result in a federal income tax for which all would pay the same percentage of their income. This opposes the principle of ability to pay, it would make calculating taxes much simpler, & would probably cause structural unemployment among tax lawyers & tax accountants The elasticity of demand determines the incidence of a tax.