1. Bell Work What are some examples of taxes that people pay?
Why do you think we have to pay taxes?

2. In Lak’ech by Luis Valdez
Tu eres me otro yo
Si te hago daño a ti,
Me hago daño a mi mismo
Si te amo y respeto
Me amo y respeto yo
You are my other me
If I do harm to you,
I do harm to myself
If I love and respect you
I love and respect myself

3. Bell Work What are some examples of taxes that people pay?
Why do you think we have to pay taxes?

4. Today I will
Discuss the effects of taxes on resources, behavior, productivity and growth in a society
Describe the three general criteria for effective taxes
Summarize the two principles of taxation that are currently in use in the U.S.
Name the three types of taxes that exist in the U.S. today
Analyze the potential effects of alternative tax approaches
Summarize tax reform attempts since 1981

5. Key Vocabulary Tax Distribution of income Loophole
Internal Revenue Service

6. Taxes
Chapter 14, Lesson 1

7. Economic Impact of Taxes
Resource Allocation
A tax placed on a good raises its price
Price increase causes lower demand
Lower demand reduces production
Lower production moves those resources into other industries

8. Economic Impact of Taxes
Behavior Adjustment
Mortgage interest deduction encourages home ownership
Sin Tax
A relatively high tax designed to raise revenue and reduce consumption of a socially undesirable product

9. Economic Impact of Taxes
Income Redistribution
Distribution of Income
The way in which income is allocated among families, individuals and other groups
Can be affected by taxes
Tax money that gets distributed to needier regions of the country

10. Economic Impact of Taxes
Productivity and Growth
Changes the incentives to save, invest and work
At some point, we could reach a level of taxes at which productivity and growth would suffer

11. Economic Impact of Taxes
Incidence of a Tax
The final burden of the tax
Who actually pays the tax
A tax on a producer increases the cost of production and causes a change in supply
If demand is elastic, it is more difficult for the producer to shift the incidence of the tax to the consumer
If demand is inelastic, more of the tax can be shifted to the consumer

12. Characteristics and Types of Taxes
Criteria for Effective Taxes
Equity – fairness. Taxes should be impartial and just. Tax loopholes (exceptions) should be avoided.
Simplicity – people are more willing to tolerate taxes when they understand them
Efficiency – easy to administer and successful at generating revenue

13. Characteristics and Types of Taxes
Two Principles of Taxation
Benefit Principle
Those who benefit from government goods and services should pay in proportion to the amount of benefit they receive
Benefits are hard to measure
Those who receive some benefits may be the least able to pay
Ability to Pay
People should be taxed according to their ability to pay, regardless of the benefits they receive

14. Characteristics and Types of Taxes
Three Types of Taxes
Proportional Tax
AKA flat tax. Everyone pays the same rate regardless of income.
Tends to have a larger impact on people with lower income levels
Example – Medicare is 1.45% of income for everyone

15. Characteristics and Types of Taxes
Three Types of Taxes
Progressive Tax
Imposes a higher percentage rate of tax on higher incomes than on lower incomes
Tends to have a larger impact on people with higher income levels
Example – individual income taxes

16. Characteristics and Types of Taxes
Three Types of Taxes
Regressive Tax
Imposes a higher percentage rate of taxation on lower incomes than on high incomes
Tends to have larger impact on people with lower incomes
Example – Sales tax

17. Alternative Tax Approaches
The Flat Tax
Proportional tax. Everyone pays the same percentage rate
Advantages
Simplicity
Close loopholes
Disadvantages
Removes incentives built into current tax code (home ownership, charitable giving)
Regressive – shifts more of the tax burden onto lower income groups
No evidence that it would stimulate economic growth

18. Alternative Tax Approaches
The Value-Added Tax
Adopting a national sales tax by taxing consumption rather than income
Tax is added to the value that manufaturers add at each stage of production
Advantages
Built into the price of every product produced
Tax incidence is widely spread
Easy to collect
Disadvantages
Virtually invisible
Regressive

19. Tax Reform Highlights
1981
Ronald Reagan believed that high taxes were the main stumbling block to economic growth
Economic Recovery Tax Act
Lowered the marginal rates in all 16 tax brackets
Reduced the highest rate from 70% to 50%

20. Tax Reform Highlights 1986 1993 Alternative Minimum Tax
The personal income tax rate that applies whenever the amount of taxes falls below a designated level
Makes it harder for the rich to avoid paying taxes altogether
1993
More than a decade of tax cuts had driven up the national deficit
Two top tax brackets of 35% and 39.6% were added to increase revenues

21. Tax Reform Highlights 1997 Tax revenues were up
Republicans gained control of Congress and fulfilled campaign promises
Capital gains tax reduced from 28% to 20%
Estate tax reduced
Numerous loopholes for high income earners were created
Became the most complicated tax law ever

22. Tax Reform Highlights 2001 Revenues were exceeding spending
Expected to continue through 2010
Options:
Pay some of the money borrowed in the 1980s
Fund new programs
Reduce taxes
Bush administration opted to cut taxes by $1.35 billion
Reduced the top 4 tax brackets of 27, 30, 35, and 39.6% to 25, 28, 33, and 35% - set to take effect in 2006
Created a 10% tax bracket for people who earned $0 - $9,275
Eliminated the estate tax on the top 2% of taxpayers

23. Tax Reform Highlights
2003
Accelerated the start of the reduced top 4 tax brackets (implemented immediately instead of the scheduled 2006)
Child tax credit increased from $600 to $1000
Capital gains tax reduced from 20% to 15%
Resulted in a return to deficit spending
We went from having a surplus to the largest deficit in history

24. Tax Reform Highlights The “Permanent” Tax Cuts of 2011
Republicans in Congress wanted to make the Bush Era tax cuts permanent
The Great Recession and increased spending by the Obama Administration needed to resolve it increased the deficits even further
Made making the cuts permanent impossible

25. Tax Reform Highlights
2013
Reinstated a 35% and 39.6% tax bracket as a way of reducing the deficit

26. Activity
Working in pairs, calculate the taxes you would owe under each of the different tax systems in each scenario.
Then answer the questions to analyze the different outcomes.