1. GOVERNMENT IN THIS SECTION, LOOK AT HOW GOVERNMENT GETS ITS MONEY (TAXES), AND WHAT GOVERNMENT DOES WITH THE MONEY (GOVERNMENT FUNCTIONS)

2. TAXES GOVERNMENT “TAKE” IS SIGNIFICANT – GOVERNMENT COLLECTS ABOUT 30 CENTS FROM EVERY $1.00 OF INCOME SIGNIFICANT “JUMP” POINTS OVER TIME: WORLD WAR I 1930’S 1960’S

3. TAXES WE WILL EXAMINE FICA INCOME SALES PROPERTY - DISTINGUISHED BY WHAT TAXES (TAX BASE)

4. TWO ECONOMIC TAX CONCEPTS AVERAGE TAX RATE: TAXES PAID/INCOME MARGINAL TAX RATE: CHANGE IN TAXES PAID CHANGE IN INCOME WHY CAN BE DIFFERENT?

5. FICA FEDERAL INSURANCE CONTRIBUTIONS ACT FUNDS SOCIAL SECURITY AND MEDICARE FOR SOCIAL SECURITY: FLAT RATE (12.4%) PAID ON INCOME TO CERTAIN LEVEL ($117,000 IN 2014) - SPLIT BETWEEN EMPLOYEE AND EMPLOYER - WHY DOES TAX STOP?

6. FICA (CONTINUED) FOR MEDICARE: 2.90% OF ALL EARNINGS ALSO SPLIT BETWEEN EMPLOYER AND EMPLOYEE SURTAX ON INVESTMENT INCOME FOR “RICH” IF SELF-EMPLOYED, PAY ALL

7. FICA MARGINAL TAX RATES EARNINGS UP TO $117,000, 12.4% + 2.9% = 15.3% INCREASE IN EARNINGS ABOVE $117,000, ONLY MEDICARE TAX OF 2.9% THESE ARE HIGHER FOR INVESTMENT INCOME OF THE “RICH”

8. INDIVIDUAL INCOME TAX MOST COMPLICATED FEDERAL AND STATE SOME STATES DON’T HAVE ENORMOUS GENERATOR OF TAXES

9. INCOME TAX TERMINOLOGY GROSS INCOME – TOTAL INCOME BEFORE ADJUSTMENTS TAXABLE INCOME – INCOME ON WHICH TAX IS PAID, AFTER ADJUSTMENTS PERSONAL EXEMPTION (2014: $3950) DEDUCTIONS (2014: STANDARD: SINGLE: $6200; COUPLE: $12,400)

10. TAX BRACKETS TAXABLE INCOME IS DIVIDED INTO SEGMENTS, AND EACH SEGMENT IS TAXED AT A DIFFERENT RATE Example: Single person, 2014 Taxable income between : Taxed at : $0 - $8925 10% $8926 - $36,250 15% $36,251 - $87,850 25% $87,851 - $183,250 28% $183,251 - $398,350 33% $398,351 - $400,000 35% $400,001 and over 39.6%

11. EXAMPLE: SINGLE PERSON, $200,000 GROSS INCOME, ONE EXEMPTION, AND TAKING THE STANDARD DEDUCTION TAXABLE INCOME: $200,000 - $3950 - $6200 = $189,850 TAX CALCULATION $8925 x 0.10 = $892.50 ($36,250 - $8925) = $27,325 x 0.15 = $4098.75 ($87,850 - $36,250) = $51,600 x.25 = $12,900.00 ($183,250 - $87,850) = $95,400 x.28 = $26,712.00 ($189,850 - $183,250) = $6,600 x.33 = $2178.00 TOTAL TAX = $46,781.25

12. AVERAGE AND MARGINAL TAX RATES AVERAGE TAX RATE: $46,781.25/$200,000 = 0.23 OR 23% WHAT IS THE MARGINAL TAX RATE? RATE AT WHICH ONE MORE DOLLAR OF TAXABLE INCOME IS TAXED ANSWER: 0.33 OR 33%

13. NORTH CAROLINA ALSO HAS AN INCOME TAX NORTH CAROLINA INCOME TAX RATE IS 5.8% SO THE VERY HIGHEST INCOME PERSONS COULD FACE A COMBINED FEDERAL AND STATE INCOME TAX RATE OF 39.6% + 5.8%, OR 45.4%, ON ADDITIONAL TAXABLE INCOME

14. TAX SYSTEM CLASSIFICATIONS INCOME TAX IS EXAMPLE OF A PROGRESSIVE TAX SYSTEM – HIGHER DOLLARS TAXED AT HIGHER RATES OPPOSITE IS A REGRESSIVE TAX SYSTEM – HIGHER DOLLARS TAXED AT LOWER RATES THIRD CATEGORY IS A PROPORTIONAL (OR “FLAT”) TAX SYSTEM – ALL DOLLARS ARE TAXED AT SAME RATE

15. VALUE OF A TAX DEDUCTION AND OF A TAX CREDIT Value of a tax deduction: $ deduction x marginal tax rate $1000 x.25 = $250 in saved taxes Value of a tax credit: $ credit = amount of saved taxes $1000 tax credit saves $1000 in taxes

16. SALES TAX USED BY STATE AND LOCAL GOVERNMENTS PAY TAX RATE ON VALUE OF RETAIL SALES CONSIDERED “REGRESSIVE” – WHY? BECAUSE HIGHER INCOME PEOPLE SPEND A LOWER % OF THEIR INCOME THAN LOWER INCOME PEOPLE

17. EXAMPLE JANE SALLY INCOME $20,000 $100,000 SPENDING $20,000 $70,000 6% TAX ON SPENDING $1200 $4200 TAX AS A % OF INCOME 6% 4.2% BUT WHAT IF SALLY SPENDS HER SAVINGS LATER?

18. PROPERTY TAX MAIN REVENUE SOURCE FOR LOCAL GOVERNMENTS TAX ON RESIDENTIAL AND COMMERCIAL PROPERTY – BUILDINGS, VEHICLES, ETC. ONE ISSUE – PUTTING A VALUE ON THE PROPERTY – UP-TO-DATE?

19. TAX INCIDENCE – WHO ULTIMATELY PAYS A TAX THOSE PAYING A TAX MAY TRY TO PASS THE COST OF THE TAX TO OTHERS LANDLORD PAYS PROPERTY TAX, BUT INCREASES RENT TO COVER THE TAX COMPANY INCREASES THE PRICE OF PRODUCT TO COVER THE COST OF A TAX

20. HOW EASY IS THIS TO DO? DEPENDS ON PRICE ELASTICITY OF DEMAND MORE INELASTIC THE DEMAND CURVE – EASIER TO PASS ON COST OF THE TAX TO THE BUYER MORE ELASTIC THE DEMAND CURVE – HARDER TO PASS ON THE COST OF THE TAX TO THE BUYER

21. 1990’S TAX ON YACHTS GOV’T THOUGHT AN EASY WAY TO INCREASE TAX REVENUE YACHT BUILDERS PASSED ON TAX TO BUYERS BUYERS STOPPED BUYING U.S. MADE YACHTS – SO COLLECTED VERY LITTLE TAX REVENUES TAX WAS REPEALED!

22. MANY DEBATES ABOUT TAXES WHAT SHOULD BE TAXED? FLAT OR PROGRESSIVE RATES? BROAD BASE AND LOW TAX RATE, OR NARROW BASE AND HIGH TAX RATE? DEDUCTIONS – TOO MANY? TAXES TOO HIGH; TAXES TOO LOW? – DEPENDS ON WHAT GOV’T SHOULD DO!