1. Sources of Government Revenue Section 1
Chapter 9
Sources of Government Revenue
Section 1

2. Why do we need taxes??
Taxes are required to raise money to run the federal, state, and local governments

3. Taxes influence the economy in 3 major ways…

4. 1. Resource Allocation
When a tax is placed on a certain item, the higher price may discourage buyers - lowering the demand for the good
Example: Luxury taxes on expensive cars

5. 2. Behavior Adjustment
Some taxes are used to encourage or discourage economic activities
Example: Sin tax – a high tax on a socially undesirable product (liquor, cigarettes)

6. 3. Productivity and Growth
Taxes can change the incentives to save, invest, and work
Some people feel that if taxes are too high it may lower incentive to work

7. **the party being taxed is not always the one who bears the burden**
Who Taxes Effect
Incidence of a Tax – the final burden of the tax
**the party being taxed is not always the one who bears the burden**
Example: City raising the tax rates on an electric company – Who bears the incidence of a tax?

8. Types of Taxes
There are 3 general types of taxes that exist in the United States today
1. Proportional
2. Progressive
3. Regressive

9. 1. Proportional Taxes
Imposes the same percentage rate of taxation on everyone, regardless of income
Average Tax Rate – total taxable income divided by the total income
*if a person’s income goes up, the percentage of total income paid in taxes does not change*

10. 2. Progressive Tax
A tax that imposes a higher percentage rate of taxation on persons with higher incomes
Usually use a marginal tax rate, the tax rate that applies to the next dollar of taxable income
**The percentage of income paid in taxes increases as income increases**

11. 3. Regressive Tax
A tax that imposes a higher percentage rate of taxation on low incomes than on high incomes
*If the state sales tax is 4%, the person with the lower income is paying a higher percentage of total income in taxes

12. Individual Income Taxes
In 1913, the 16th Amendment was ratified allowing Congress to levy an income tax

14. Progressive Tax Income
Individual income taxes are progressive taxes

15. State and Local Tax Systems

16. State government Revenue Sources
Intergovernmental Revenue – funds collected by one level of government that are distributed to another level of government for expenditures
Largest source of state revenue
States receive funds from the federal government for welfare, health, etc.

17. Sales taxes are the 2nd largest source of revenue for states
States that do not have general sales taxes:
Alaska
Delaware
Montana
New Hampshire
Oregon

18. Local Government Revenue
Local governments receive the largest part of the revenues from intergovernmental transfers by state governments
Property Taxes – a tax on tangible and intangible possessions such as real estate, buildings, furniture, or bank accounts
Tax Assessor – the person who assigns value to property for tax purposes

19. Examining Your Paycheck
Check our your Payroll Withholding Statement, the summary statement attached to a paycheck that summarizes income

20. More Taxes…
Value-Added Tax –a tax placed on the value that manufacturers add at each state of production
Advantages: easy to collect, widely spread especially in Europe
Disadvantages: invisible to customers

21. Flat Tax – a proportional tax on individual income after a specified threshold has been reached
Advantages: simplicity, closes or minimizes loopholes
Disadvantages: removes many of the behavior incentives already built (donations to charitable organizations)