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Chapter 14 Section 1: What are taxes?
• “Tell us therefore, What thinkest thou? Is it lawful to give tribute unto Caesar, or not? But Jesus perceived their wickedness, and said, Why tempt ye me, ye hypocrites? Shew me the tribute money. And they brought unto him a penny. And he saith unto them, Whose is this image and superscription? They say unto him, Caesar's. Then saith he unto them, Render therefore unto Caesar the things which are Caesar's; and unto God the things that are God's.” Matthew 22:17-21
Objectives:
o We will examine the sources
of government’s authority to
tax.
o We will describe the types of
tax bases and tax structures
and who bears the burden
of taxes.
On Whose Authority?
• Unlike how this nation was
founded, we authorize the
federal government, through
the Constitution and our
elected representatives in
congress to raise money in the
form of taxes.
The Purpose of Taxation:
• A tax is required payment to a
local, state, or national
government.
• Taxation is the primary way that
the government collects money.
• Taxes give the government the
money it needs to operate.
The Purpose of Taxation: • The income received by a
government from taxes and other
nontax sources is called revenue.
• Without revenue from taxes the
government would not be able to
provide goods and services that
we not only benefit from, but what
we expect the government to
provide.
The Purpose of Taxation:
• We expect the government to:
• Defense, building highways,
education and law
enforcement.
• We also ask the government to
provide help to people in need.
The Power to Tax: • The Constitution they created
assigned each branch of the government certain powers and responsibilities.
• The first power granted to the legislative branch, Congress has the power to tax.
• This clause is the basis for all federal tax laws.
Limits on the Power to Tax: o The Constitution also spells out specific limits
on the government’s power to tax.
o Two of those limits are in the taxation clause.
o First, the purpose of a tax must be “for the common defense and general welfare.”
o A tax cannot bring in money that goes to individual interests.
o Second, federal taxes must be the same in every state.
o The federal gas tax, for example, cannot be 4 cents per gallon in Maryland and 10 cents per gallon in South Dakota.
Limits on the Power to Tax: o Other provisions of the Constitution
also limit the kinds of taxes Congress can levy or impose.
o For example, Congress cannot tax church services, because that would violate the freedom of religion promised by the First Amendment.
o Another clause of the Constitution prohibits taxing exports.
Limits on the Power to Tax: o The government can collect taxes only on imports;
goods brought into the United States (Congress can restrict or prohibit the export of certain goods, however, such as technology or weapons.
o Another clause of the Constitution (Article 1, Section 9, Clause 4) prohibited Congress from levying direct taxes unless they were divided among the states according to the population.
o The Sixteenth Amendment overturned this clause when it legalized a direct tax on citizens’ personal income.
o This income-tax amendment was ratified in 1913.
Tax Structures and Tax Bases o Despite constitutional limits on its power,
the government actually collects a wide variety of taxes.
o Economists describe these taxes in different ways.
o These three tax structures are progressive, proportional, and regressive.
o Second they describe a tax according to the object taxed, the tax base.
Tax Structures and Tax Bases o A Progressive Tax: Is a tax for which the
percentage of income paid in taxes increases as income increases.
o People with higher incomes pay a higher percentage of their income in taxes.
o People with very small incomes might pay no tax at all.
o A progressive tax rate structure is because income rises, the percentage of income paid in taxes also rises.
Proportional Taxes:
o A proportional tax is a tax for which the
percentage of income paid in taxes
remains the same at all income levels.
o With a proportional income tax, whether
income goes up or down, the percentage
of income paid in taxes stays the same.
Regressive Taxes: o Is a tax for which the percentage of income paid
in taxes decreases as income increases.
o For example, although the sales tax rate remains constant, a sales tax is regressive.
o This is because higher-income households spend a lower proportion of their incomes on taxable goods and services.
o As a result, although they may pay more actual dollars in sales taxes, the proportion of their income spent on sales taxes is lower than that of lower-income households.
Discussion Questions
• What type of tax do you think is the most
fair? (Progressive, Proportional, Regressive)
Tax Base: o Is the income a property, good, or service
that is subject to a tax.
o Different taxes have different bases.
o The individual tax is based on a person’s earnings.
o The Corporate income tax uses a company’s profits as its base.
o The property tax is based on real estate and other property.
Tax Base:
o The tax base for the sales tax is
good or services that are sold.
o When government policymakers
create a new tax they first decide
what the base will be for the tax:
income, profits, property, sales, or
some other category.
Who Bears the Tax Burden? o Incidence of a Tax: That is the final burden
of a tax.
o When policymakers consider a new tax, they examine who will actually bear the burden.
o As in the example above, producers can “pass on” a portion of the burden to the consumers.
o Generally the more inelastic the demand, the more easily the seller can shift the tax to consumers.
o The more elastic the demand, the more the sellers bears the burden.
Characteristics of a Good Tax: o Although it is something difficult to
decide whether a specific tax is proportional, progressive or regressive, economists generally agree on what makes a good tax.
o Simplicity: Tax laws should be simple and easily understood.
o Taxpayers and businesses should be able to keep the necessary records and pay the taxes on a predictable schedule.
Characteristics of a Good Tax:
o Efficient Government:
Administrators should be able to
assess and collect taxes without
spending too much time or money.
o Similarly, tax payers should be able
to pay taxes without giving too
much time or paying too much
money in fees.
Characteristics of a Good Tax: o Certainty: Is also a characteristic of
a good tax.
o It should be clear to the taxpayer when a tax is due how much money is due, and how the tax should be paid.
o Equity: The tax system should be fair, so that no one bears too much or too little of the tax burden.
Determining Fairness: o First idea is called the benefits received
principle.
o According to this principle a person should pay taxes based on the level of benefits he or she expects to receive from the government.
o People who drive should pay gasoline taxes that are used to build and maintain highways.
o In that way the people who receive the most benefit from the roads also contribute the most to their upkeep.
Determining Fairness: o The second idea about fairness is
called the ability-to pay principle.
o According to this principle people should pay taxes according to their ability to pay.
o The ability-to pay principle is the idea behind a progressive income tax: people who earn more income pay more taxes.
Determining Fairness: o Balancing Tax Revenues and Tax Rates: How
much revenue does a good tax generate?
o The answer is enough but not too much.
o That is, enough so that citizens’ needs are met but not so much that the tax discourages production.
o If a company has to pay $100,000 in taxes, it will not be able to use that $100,000 to expand production.
o If tax rates are lower, the company can use more of its income to stimulate production rather than to pay taxes.
Discussion Questions
• Do you think the rich and companies that
make huge profits should pay higher taxes
than the rest of the population?
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