1. Taxes

2. I.Principles of Taxation a.Economists use certain principles & criteria to evaluate whether or not taxes should be paid and who should pay them. b.Benefits-Received Principle: def- people who benefit directly from public goods should pay for them in proportion to the amount of benefits received. i.Ex: financing road construction and maintenance through taxes on gas. c.Ability-to-Pay Principle: def- people should be taxed based upon their ability to pay, no matter the level of benefits they receive. i.Ex: People with higher incomes will pay more than people with lower incomes.

3. II. Tax Base i.Def: a form of wealth, such as income, property, goods or services that is subject to taxation. a.Individual Income Tax: def- a tax that is based on an individual’s income from all sources: wages, interest, dividends, and tips. b.Corporate Income Tax: def- a tax based on a corporation’s profits. c.Sales Tax: def- a tax that is based on the value of designated goods or services at the time of sale.

4. d. Property Tax: def- a tax based on the value of an individual’s or business’s assets, usually real estate. i.The tax is based upon the value of their buildings and on the land which the building stands. e. If personal income rises, the individual income tax base grows. i.If there are fewer homes or businesses in a certain area or if their value declines, the property tax base shrinks because there is less wealth for the government to tax.

5. III. Tax Structures i.The way that taxes are imposed on the different tax base gives to the 3 different tax structures. a.Proportional Tax: def- based on the percentage of income from all taxpayers regardless of income level. i.Also called a flat-tax, because the rate is the same for all taxpayers. b.Progressive Tax: def- places a higher percentage rate of taxation on higher-income earners than on low-income earners. i.Tax rate increases as a person’s income increases. ii.Ex: the federal income tax.

6. 2014 Federal Income Tax Bracket

7. c. Regressive Tax: def- takes a larger percentage of income from people with low incomes than from people with higher incomes. i.Tied to sales, not income. Although the sales tax rate is applied equally to all items subject to the tax, the tax as a percentage of income is regressive. 1.Low income earners tend to spend a higher proportion of income than do high income earners. d. Ex: Property taxes. Low income homeowners tend to spend a higher percentage of their income on housing than do high income homeowners. i.Property taxes will then take a higher percentage of their income. ii.Poorer communities often charge a higher tax rate, because the property has a lower value and therefore the tax base is smaller.