1. Role of Government
Topic: TAXES

2. Circular Flow

3. 2 Principles of Taxation
Benefit:
Those who benefit should pay in proportion to benefits
EX: Gas/Tires
Ability-to-Pay:
Regardless of benefits
For low-incomes every penny counts.

4. Perfect Tax Structure Provides incentives to work, save and invest.
Fair.
Simplicity (easy to understand).
Individual Income Tax: tax on earnings (complex)
1000s of pages/IRS collects taxes.
Sales Tax: general tax on consumer purchases (simple).
Sin-Tax: decrease consumption of undesirable products.
Efficiency: easy to administer, and generates sufficient revenue to fund spending.

5. 3 Types of Taxes
Proportional: same % rate of taxation for everyone regardless of income.
Progressive: Higher tax rate on those with higher incomes.
Regressive: Higher tax rate on those with lower incomes.

6. Examples Income $10,000 $100,000 Proportional:
City Occupation Tax: $97
Progressive:
Federal Income Tax: 10%
Federal Income Tax: 25%
Regressive:
Sales Tax:
$5,000 purchased
4%-$200 or 2%
$20,000 purchased
4%-$800
or .8%

7. Types of Taxes % of Income in Taxes Income (1000s) 6% 5% 4% 3% 2% 1%20 40 60 80
100
120
Income (1000s)