1. Chapter Nine – Sources of Government Revenue

2. Section One – The Economics of Taxation
Economic Impact of Taxes
i. Total tax revenue even when adjusted for inflation has risen dramatically
a. Resource Allocation
i. Affects factors of production (makes the supply curve move left)
ii. When prices rise some consumers choose to buy other goods, fundamentally altering some industries
b. Behavior Adjustment
i. Used to encourage or discourage some behavior
- deduct mortgage interest
- sin taxes (liquor, tobacco)

3. c. Productivity and Growth
i. Could discourage productivity (higher income taxes)
ii. At what level do productivity and growth suffer?
d. The Incidence of a Tax
i. The final burden of a tax
- higher prices
- lower wages

4. Criteria of Effective Taxes
a. Equity
i. People want them to be fair
- Flat Tax or Progressive Tax?
b. Simplicity
i. Sales tax is much simpler than the Income Tax
c. Efficiency
i. Easy to administer
ii. Raise enough revenue to be worthwhile

5. III. Two Principles of Taxation
a. Benefit Principle
i. Those who benefit from the governments goods and services should pay in proportion to the amount of benefits they receive (gas tax built into the price)
ii. Benefits often difficult to measure
iii. Those who receive the benefits are often the least able to pay
b. Ability-to-Pay-Principle
i. Higher taxes for people with higher incomes (Progressive Taxes)
ii. The assumption is the wealthy will suffer less by paying higher taxes

6. Types of Taxes
i. Proportional Tax – Same percentage rate on everyone
ii. Progressive Tax – Higher percentage rate of taxation on people with higher incomes
iii. Regressive Tax – Higher percentage rate of taxation on lower incomes
- Often times based on consumption

7. Section Two – The Federal Tax System
Individual Income Taxes
a. Payroll Deductions
i. Employers automatically deduct income taxes from your paycheck
ii. Tax returns are due April 15th
b. A Progressive Income Tax
i. Average tax rate goes up as your income goes up
c. Indexing
i. An upward revision of tax brackets to keep workers from paying more taxes just because of inflation

8. II FICA Taxes
a. Social Security Taxes
i. Capped at a fixed income level then regressive afterwards
ii. It’s proportional until the cap
b. Medicare
i. Set at a flat rate and not capped

9. Corporate Income Taxes
i. Taxes corporations pay on their profits
Other Federal Taxes
a. Excise Taxes
i. Tax on the manufacture or sale of an item (gasoline, liquor)
ii. Tend to be regressive
a. Estate and Gift Taxes
i. Estate Tax - tax the government levies on the transfer of a property when someone dies
ii. Gift Tax – tax on the donations of money or wealth and is paid by the person who makes the gift

10. b. Customs Duties
i. Charge levied on goods brought in from other countries
ii. Congress decides what to tax and at what rate
c. Miscellaneous Fees
i. User Fees – Based on the benefit principle
- more favorable than taxes

11. Section Three – State and Local Taxes
State Government Revenue Sources
a. Intergovernmental Revenue Sources
i. Funds government receives from another level of government
- federal transfers to the states
- over 20% of all state revenues

12. b. Taxes and Fees i. Sales taxes are the 2nd largest source of revenue for states
- about 20%
ii. Other taxes or fees cover retirement funds and pension plans
- 3rd largest source of revenue
iii. Individual income taxes are the 4th largest source of state revenue

13. c. Other Revenues
i. Earnings on surplus funds
ii. Tuition and other fees collected by state funded institutions
d. The Choice of Tax
i. Many states run lotteries to collect funds
ii. Money must be collected in one form or another

14. II. Local Government Revenue Sources
a. Intergovernmental Revenues
i. 1/3rd of their revenues from state governments
- usually intended for education or welfare
b. Property Taxes i. 2nd largest source of revenue
ii. Determined on land value
c. Other Sources
i. Earnings on public utilities
ii. Some cities have a separate sales tax
Examining Your Paycheck
i. These funds are deducted from your paycheck

15. Section Four – Current Tax Issues
Tax Reform
The Value Added Tax
a. Concept of Value Added
i. tax each stage of value added to a product
- logger-mills-manufacturer-wholesaler-retailer
b. Advantages of a VAT
i. the tax is spread making it harder to shift the burden
ii. Its hard to avoid and easy to collect
iii. Some argue it encourages savings
c. Disadvantages of a VAT
i. tends to be invisible to consumers
ii. It would compete with state sales taxes

16. III. The Flat Tax
a. Advantages of a Flat Tax
i. It’s simple
ii. It closes tax loopholes
iii. Reduces the need for tax accountants, preparers and some of the IRS
b. Disadvantages of a Flat Tax
i. eliminates some of the incentives already built into the tax code
- mortgage deductions, charitable donations
ii. May benefit people with high incomes rather than the middle class
IV. The Inevitability of Future Reforms
i. the income tax is very complex