Taxation “In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin

Why We Tax… Fiscal Policy Cost of Government & Goods /Services Redistribute Income (Lorenz Curve) Encourage / Discourage Behavior Sin Taxes (Excise Tax) –Discouraging behavior or raising revenue? Cigarettes / Tobacco Alcohol

Net Income Gross income: How much you earn Net income: how much you keep Net income = gross income - gross income*tax rate For example: If Mr. Salem made $47,500 last year. Net income = $47,500 - $47,500(.25) Net income = $47,500 - $11,875 = $35,625

In reality… US Federal Tax Rates: (only 3 % of Americans make over $250,000) Filing under a different status will change the rates.

World Tax Rates United Kingdom 21-28%0-40%17.5% Ireland 12.5 %20-4%21 % Mexico29%3-29%15 % Sweden28 %0-59%25 % Slovakia19 % Hong Kong15 %0-15%0 % U.S.A29.2%0-38%7% Country Corporate Tax rate Income Tax Sales Tax

Property Tax (Flat) Proportional Tax on something you own Usually expensive like your house or boat For example: $100,000 home –5% property tax rate 100,000 X.05 = $5,000 property tax

Tax on a household income % of changes based on income The more you make, the higher your tax “Ability to Pay Principle” Deductions make this much less progressive. -Buffet Income Tax Progressive Income Tax Rate $0-$15,0000% $15,001- $20,00010% $20,000- $30,00015% $30,000- $50,00025% $50,000- $100,00033% $100, %

Regressive Tax Smaller % taken the higher your income Sales tax For example: 5% tax, $25,000/year w/$10,000 consumption pays: 10,000 X.05 = $500, or 2% of total income $50,000/year w/$15,000 consumption pays: 15,000 X.05 = $750, or 1.5% of total income Incentive?

Estate Vs. Inheritance tax Estate Tax – Federal Government Inheritance Tax – State Govenments Sometimes called “death tax” Very hot political topic.

Gift tax Tax on gifts or rewards Games shows, gambling, lottery Rate depends on gift %

OTHER TAXES Wheel Taxes Gas Taxes Special Taxes (Arena) Capital Gains Tax Tariff Others by community or state…

Revenue / Spending

Why taxes will increase? Social Expectations “I deserve…” » Entitlements » Welfare » Lorenz Curve – graph that depicts distribution of wealth Increase Cost of Technology Increase Life Expectancy Social Security Medicare

Types of Fiscal Policy The government can operate using 3 basic types of tools – 1. Government Purchases – 2. Taxes – 3. Transfer Payments (payments to households) Social Security Unemployment compensation Welfare

Types of Fiscal Policy Expansionary Policy »Lower Taxes »Increase Spending / Transfer Payments Contractionary Policy »Raise Taxes »Decrease Spending / Transfer Payments

Problems With Fiscal Policy Effectiveness –Slow process. Changing tax laws. Political Consequences –Expansionary policy may be popular but contractionary policy may get your opponent elected. –Members of the “Fed” don’t have to be reelected. Budget Deficit (Surplus) / National Debt –Check out the U.S. Debt Clock!!!