2 Goals & Objectives Economic impact of taxes. 3 criteria for effective taxation.2 primary principles of taxation.How taxes are classified.Progressive nature of income taxes.Sources of federal revenue.State revenues.Local revenues.Paycheck/payroll deductions.Tax Reforms. VAT & Flat taxes.
7 Economic Impact of Taxes & Who really pays the tax? 1. Resource Allocation: Tax on a good or service raises the price or lessens the supplyLuxury Tax (1991)? Vehicles over $35, or more, yachts, private aircraft, etc…. “Soak the rich tax”Result: Less luxury production results in fewer jobs for workers & higher prices for consumers
9 Economic Impact of Taxes 2. Behavior Adjustment: Taxes which encourage or discourage certain types of “behavior”.1. Sin Tax: Alcohol and Tobacco2. Mortgage Tax Deductions: Buy a second home “tax loophole”3. Sugar Tax?4. Affordable Health Care Act: Smokers, Obese, & young males in good health.
11 Economic Impact of Taxes 3. Productivity and Growth: Taxes can encourage people to save more, invest more, work less, or spend less of their money.A. Capital Gains Taxes:B. Diminished Incentive: Progressive TaxesC. Entitlements:
13 Economic Impact of Taxes 4. The Incidence of a Tax: Who really pays taxes?“The party being taxed is not always the one that bears the burden of taxes?”A. Property Taxes?B. Sales Taxes?C. Corporate Taxes?D. Utility Taxes, Severance Taxes
17 Two Principles of Taxation 1. Benefit Received Principle:--those who benefit should pay in proportion to the amount they receiveDuties, Imposts, Excises: Article I Section 8 clause 1Article I, section 9 Clause 4: No direct taxes without apportionment and enumeration regard to census
19 Two Principles of Taxation 2. Ability to Pay Principle: “People should pay according to their ability to pay regardless of benefits received”.Karl Marx: “From each according to his ability to each according to his need” CommunismLBJ: “We will take from the haves and give to it to the have-nots” Socialism
21 3 Types of Taxes1. Proportional: Everyone pays the same percentage regardless on income.Benefits received principle----Flat Taxes: no loopholes, no subsidies, no entitlements
22 3 Types of Taxes2. Progressive Taxes: Higher taxes are placed on higher incomes“The more you make the more they take”Karl Marx: “the redistribution of wealth”The more able, smarter, productive you are, the more taxes you must pay….diminished incentive
23 3 Types of Taxes3. Regressive Taxes: a higher percentage of taxes on lower incomes…Sales Taxes on Food, Medicine, “needs”Property Taxes on homes, cars, trailers, etc..
25 The Federal Tax System1. Individual Income Taxes: th amendment:… Business Foreign and Domestic paid 89% of taxes see pie chart…Top 10% of workers earning over $500,000 a year or more paid income taxes1935: Public Salary Tax (Social Security)…Public Revenue Act… 800% tax increase
27 Individual Income Taxes 1. Payroll withholding system: automatic deduction: Federal Income, Social Security, Medicare, State Income, Local IncomeIRS—Internal Revenue Tax: Private Business contracted by the Federal Treasury Department to collect income taxes. Why a private company?Example: US Military Rules vs. Blackwater USA
29 FICA1. Medicare: (1965) free health care for the elderly…President Bush’s “free prescription drug benefit”…largest government program in the history of America..2. Social Security: mandated government retirement…1935
30 Payroll Taxes vs. Article I Section 8 clause 1 (Duties, Customs, Excises)
31 Corporate Income Taxes Tax a corporation pays on its profits:15% on income under $50,00025% on income under $75,00035% on income over $75,000-$1.8 million
33 Other Federal Taxes1. Excise Taxes: tax on a business that is handed down in the form of higher prices to the consumers, “Hidden Tax” “Theft Tax”2. Death Taxes: Estate and Gift Taxes18-50% of valued assets.Estate salesGift Taxes: 40% of valued asset
35 Other Federal Taxes3. Customs and Duties: prior to 1913 these were the largest forms of federal tax revenuesTaxes on Foreign Business. Why?To protect American Business and the Ameican Worker
36 Other Sources of Revenue User Fees: Ronald Reagan National Parks. Pay only when you use the parkBenefit Received Principle of TaxationProtection of citizens civil liberties
37 State and Local Tax System Intergovernmental Revenues: Education & WelfareState Income TaxesSales Taxes, Utility FeesLocalIntergovernmental RevenuesLocal IncomeProperty TaxesSales Taxes, Utility Fees
38 Current Tax Issues1981 Tax Reform; Ronald Reagan “the new right” which was the old “new left” of the 1960’sSmaller government and smaller corporationsOpposed to the MIC: Military Industrial ComplexTrickle Down Economics: Cut Taxes to increase GDP
39 Tax Reforms1986 & 1993:Millionaires paid no income taxes fromTaxes lowered with an additional surcharge: additional above the base rateAlternative minimum tax: 20% regardless of exemptions & loopholes in tax code.
40 The Value-Added Tax VAT—European tax, national sales tax, FAIR Tax. 1. Advantages:Hard to avoid.2. Disadvantages: Invisible to consumers, would compete with state and local taxes