Chapter 14: Second Half

State and Local Taxes/ Details About Taxes…

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• -Sales taxes- taxes on the value of certain retail sales of goods and services.

• Added to the end of a bill as a percentage.

• Firms that sell these goods and services are responsible for collecting and sending in these taxes.

• SO WHO PAYS?!?!?!

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• Gross Receipts Taxes- calculated as a percentage(usually a fraction of a percent) of a firm’s receipts from wholesale and retail activities.

• Buyers are unlikely to know these are being passed onto them.

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• BOTH SALES TAX AND GROSS RECEIPTS TAX are principle sources of income for many states because they are easy to collect/administer. o Stores/ businesses have to collect them and do at

the point of a sale/ exchange of money for goods or services

• These taxes are often regressive so items like food, medicines, and rent are often free of sales/ gross receipts tax.

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• -Property Taxes- Real Property Taxes- levied on buildings and land, by far more wide spread.

• Personal property- expensive items such as jewelry, furniture, securities, clothing, automobiles.

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• -Assessment of Property Taxes• Local government officially evaluates each

taxpayer’s holdings. • The community’s total assessment serves

as the basis for the setting the real property tax rate.

• IT IS EXTREMELY REGRESSIVE because it is a flat rate regardless of who owns what.

• Smaller properties also tend to be OVERRATED rather then larger ones

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• -User Taxes- taxes that are imposed on people who use a product or service.

• These taxes include:o Gasoline taxeso License and registration fees for motor vehicleso Hunting and fishing licenseso Highway and bridge tolls.

• State Gasoline taxes are used to continue the upkeep, construction, and repairs for the roads.

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• - Other User Taxes in NJ-

o Hunting and Fishing Licenses

o Professional Licenses

o Business Licenses

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• -Personal Income Taxes:

• Most states and some localities impose personal income taxes that are similar in concept to federal personal income taxes.

• This makes up about 25% of state revenue and only 6% of funds raised by localities.

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• -Inheritance Taxes- Similar to the Federal Estate, aka DEATH TAX, states can have inheritance taxes

• -Payroll and Business Taxes- are often used to finance unemployment insurance programs, as well as health, disability, and retirement programs collected in variety of forms by state and local governments,

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• -Corporate Income Taxes- Some states and localities impose taxes on corporations that do business in that state or locality. Similar to federal Corporate Income Tax.

• -Unincorporated Income Taxes- To raise money from businesses that are not corporations (and thus do not pay CIT’s) some states and localities impose this tax.

• This name comes from the fact that sole proprietorships and partnerships are not incorporated businesses.

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• -Grants-in-Aid: Grants in aids are given for a specific purpose by the federal government to the states and localities. NOT A TAX obviously, but a crucial source of income for them. In 2000, $292 Billion or 15% of state and local governments total receipts.

• Example of the Interstate Highway Act • The Interstate Commerce Act for example is a

program that matches every $1 spent by states with $9 in federal funding for highway construction

The Kitchen Sink of Taxes

• Is The Tax System Working Well? -Criticisms of the Tax System (3)

• 1. It has not raised enough revenue

• 2. Too complex and inefficient for its own good

• 3. Too many people are able to evade paying taxes

The Kitchen Sink of Taxes

• What are ingredients of a good tax systems? –

• Wealth of Nations 1776 by Adam Smith THE BIBLE OF THE MARKET SYSTEM, along with the other amazing observations of economics, set for three standards for a fair tax system in Great Britain.

The Kitchen Sink of Taxes

• -Fairness- 1st Standard: Taxes should be fair and taxpayers should believe taxes are fair. Smith argued taxes should be a percentage of one’s income.

• -Clarity and Certainty- 2nd Standard: Everyone should be able to understand what the rate of the tax is and how the tax is to be paid. Smith felt that if people knew exactly what they were paying taxes for, they would more willing to pay them.

The Kitchen Sink of Taxes

• -Simplicity and Efficiency- 3rd Standard: Taxes should be easy to collect, difficult to evade, and inexpensive to administer.

• -Flexibility: (Added standard of Modern day economists): Taxes should adjust to economic conditions. Depending on the economic climate, taxes are easier or harder to pay. The income tax is the best example because if people make less, they pay less.

The Kitchen Sink of Taxes

• Fairness in Taxation- “WHEN QUESTIONED with fairness, 2 opposite principles come up:

• -Benefits-Received Principle- Belief that taxes ought to be paid by individuals in proportion to the benefits they receive from the governments. In other words, “User Tax”.

• PROBLEM: If it is a program that helps the poor, can the poor pay for it? NO

• Should just parents with kids in public schools pay for public schools? NO All property owners must pay

The Kitchen Sink of Taxes

• Fairness in Taxation- “WHEN QUESTIONED with fairness, 2 opposite principles come up:

• -Ability-to-Pay – Most widely supported principle of taxation is that people should be taxed in accordance with their ability to pay. This principle says the more you make, the more you pay which is a “progressive tax”.

The Kitchen Sink of Taxes

• Progressive, Regressive, and Proportional Taxes

• -Progressive Taxes: “More money, more taxes” Example: Federal Income Tax

• -Regressive Taxes: “Less money made, high percentage of money is taxed” For example a cigarette smoker who makes $25,000 versus a cigarette smoker who makes $100,000 when they buy their pack of cigarettes.

• -Proportional Tax- Taxes that take the same share of everyone’s income at ALL LEVELS. Try Engel’s law?

• Problem or not a problem?

The Kitchen Sink of Taxes

• Tax Incidence: Who Really Pays?• -Shifting- the process of transferring the

burden of a tax from those on whom it is levied

o For example, an excise is paid for by consumers, not the manufacturers of harmful goods and services

• -Incidence- refers to whom the burden of the tax falls upon.

o For example: From retailers to their customers with excise taxes. The Incidence is now on the customer, not the retailer.

The Kitchen Sink of Taxes

• Direct and Indirect Taxes • - Direct Taxes- taxes levied on people and

cannot be shifted are called direct taxes.o Examples include: income taxes and inheritance/ estate taxes

for surviving family members (DEATH TAX).

 • -Indirect Taxes- Taxes that can be shifted to

others are indirect taxes. They are usually levied on goods and services rather that people. o Examples include excise taxes, sales taxes, and tariffs because

the person or company on whom the taxes is levied can shift the burden on to another.

The Kitchen Sink of Taxes

• Interesting example: “real property tax” is usually a direct tax. However if it is an apartment complex, and the government raises taxes, it becomes indirect as the building owner passes this tax to their renters in the form of higher rent.

• -Hidden Taxes- taxes that are hidden in the selling price of an item without the buyer’s knowing about them

• For example, an imported sweater from Peru, the consumer was not aware that they paid the tariff within the price of that sweater.

The Kitchen Sink of Taxes

• The Effects of Tax Incidence- This is something legislators, from the Federal to local level have to consider when passing a new tax. o For example, a new “wheat” tax: Will farmers pay that? Food

processing companies? … or consumers?

• -Passed onto Consumers- Passed to consumers because farmers will not pay it, nor will bakeries making wheat products

• -Absorbed by Producers- If farmers or bakeries do “absorb” the tax, they will have lower profits.

The Kitchen Sink of Taxes

• -Reducing Profits of Businesses: If producers eat the tax instead of passing it on to their consumers

• -Reduced Wages: Will this tax require these

producers, such as farm help or bakery workers, to take a salary cut in order to not charge their customers and keep profits the same. Will the labor accept that?

• -Results of Prices on Substitute Products- With wheat going higher, will flour, oats, or rye products go up. With a higher price on one product, the demand for the substitutes of that product will go up.