1. (There are only 2 certainties in life: Death and taxes!)

2. sin taxindividual income tax sales taxbenefit principle ability-to-pay principleproportional tax progressive taxregressive tax payroll withholdingIRS tax returnFICA Medicarecorporate income tax excise taxestate tax gift taxproperty tax customs dutyintergovernmental revenue property tax

3. An enormous amount of $ is required to run the federal, State, and local governments of the U.S. Taxes & other governmental revenues influence the economy by affecting 3 things:

4. 1)Resource allocation  The factors of production are affected whenever a tax is levied (a tax on a good/ service raises the cost of production) 2)Behavior adjustment  Taxes are often used to encourage or discourage certain types of activities (Ex. home ownership, credit card use & tobacco, alcohol – sin taxes) 3)Productivity & growth  Taxes can change the incentives to save, invest & work

5. To be effective, taxes must meet 3 criteria: 1.Equity/fairness o Most people view taxes as being fairer if they have fewer exceptions, deductions & exemptions (problems?) 2.Simplicity o Tax laws should be written so taxpayer & tax collector understand them 3.Efficiency o Taxes should be relatively easy to administer & reasonably successful at generating revenue

6. Taxes in the United States are based on 2 principles that have evolved over the years:

7. 1)The Benefit principle  Those who benefit from governmental goods/services should pay in proportion to the amount of benefits they receive  There are 2 limitations: 1.Many government services provide the greatest benefit to those who can least afford to pay them 2.Benefits often are hard to measure

9. 2)The Ability-to-Pay principle  People should be taxed according to their ability to pay regardless of the benefits they receive  Based on 2 factors: 1)Societies cannot always measure the benefits derived from government spending 2)Assumes people with higher incomes suffer less discomfort paying taxes than people with lower incomes

10. Three general types of taxes exist in the United States today Each type is classified according to the way in which the tax burden changes as income changes They are:

11. 1)Proportional tax  Imposes same percentage rate of taxation on everyone, regardless of income  Example: tax rate is 20% 1)Person with $10,000 in income pays $2000 2)Person with $100,000 in income pays $20,000

12. 2)Progressive tax Imposes a higher percentage rate of taxation on persons with higher incomes Claims a larger dollar amount & a larger percentage of income as income increases Example: individual income tax

13. 3) Regressive tax  Imposes a higher percentage rate of taxation on low incomes than on high incomes  Example: Social Security Tax  Tax on income up to $80,400. If you make more than this, you don’t have to pay tax on the amount above $80,400  If you make $80,400 or less, you would pay about 7.5 cents per dollar in SS tax  If you make $300,000, you would pay about 1.7 cents per dollar in SS tax

14. Income tax –Collected through payroll withholding system (automatically deducted) –IRS, the agency in charge of collecting taxes –File a tax return in April (an annual report) FICA (Fed Insurance Contributions Act) –Tax levied on SS and Medicare, a federal health-care program available for all senior citizens

16. Corporate income tax –Tax paid on corporate profits Excise tax –Paid when purchases are made on specific goods & activities, such as gasoline, liquor, phone services, tires, legal gambling & coal Estate tax –Tax on transfer of property when one dies

17. Gift tax –Tax on donations of $ or wealth paid by the giver –Done so the wealthy do not try to avoid taxes by giving away their estates before their deaths Customs duty –Tax paid on goods imported from other countries

19. Largest source of State revenue comes from intergovernmental revenue in the form of funds collected by the federal govt then distributed to the State 2 nd largest source of State revenue is the sales tax

20. Average Sales Tax Rates

21. Largest source of local revenue comes in the intergovernmental revenue collected by the State; smaller amount from the federal govt 2 nd largest source of local revenue is the property tax – tax on tangible & intangible possessions –Examples: real estate, buildings, furniture, automobiles, farm animals, stocks, bonds & bank accounts