Taxes and Public Policy

Role of Government• Provide society with a set of public goods and services. • Protect society from harmful goods and services.• Regulate business so competition provides society with lower prices and more good and services.

Revenue is collected by taxing three economic bases:

income consumption wealth

How does Government pay for these services?

"Taxes are what we pay for a civilized society."

Oliver Wendell Holmes, 1809-1894

former Justice of the United States Supreme Court

Taxes, Taxes and More Taxes!!

Personal Income Tax

Corporate Income Tax

State Income Tax

FICA (payroll tax for Social Security)

Local Income Tax

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Taxes, Taxes and More Taxes!!

State Sales Tax (most of us in TN pay 9.75%)

Local Sales Tax

Federal Excise (per-unit) Tax

State Excise (per-unit) Tax

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Taxes, Taxes and More Taxes!!Federal Estate Tax (this is a tax on the value of your assets (retirement funds, property, etc. upon your death)

Federal Gift Tax (this is a tax on a sizable gift of either money or property that you get from someone)

Capital Gains Tax (this is a tax on personal profits based on the sales of assets like stocks or bonds)

Real Estate Property Tax (this is a yearly tax on the estimated value of your property)

Personal Property Tax (a tax on valuable personal property used in a business)

WEALTH

Two Goals for Tax Systems

Tax equity: The fairness of a tax system.

Tax efficiency: How a tax system maintains the incentives to be productive.

Two Principles of Tax Equity

Benefits received principle: states that a fair tax is one that taxes people in proportion to the benefits they receive when government spends those tax revenues.Ability-to-pay principle: states that those who can afford to pay more taxes than others should be required to do so.

Three Tax StructuresProgressive tax: collects a higher percentage of high incomes than of low incomes.Regressive tax: collects a higher percentage of low incomes than of high incomes.Proportional tax: collects the same percentage of income, no matter what the income. This is NOT a sales tax!

Major Sources of Revenue for the Federal Government

Personal Income TaxesCorporate Income TaxesEstate, gift, excise and other taxesContributions to Social Security

0

10

20

30

40

50

60

Personal Income Taxes

Social Security and Medicare Taxes

Corporate Income Taxes

Estate, Gift, & Excise Taxes

Percentage of Federal Revenue

Federal Tax Revenue Sources:The majority of federal revenue is derived

from the personal income tax (2008)

50%

33%

6% 8%

Married Individuals Filing Joint

2009 Tax … a Proportional Tax: Taxable income:

Over But not over +% On amount over

$0 $ 16,700 10 $0

$ 16,700 $ 67,900 15 $ 16,701

$ 67,900 $137,050 25 $ 67,901

$137,050 $208,850 28 $137,051

$208,850 $372,950 33 $208,851

$372,950 ....... 35 $372,951

Corporate Income Tax Rates—2004 … another Proportional Tax, but with Some

Regressive ElementsTaxable income

Over Not over Tax rate

$ 0 $ 50,000 15% 50,000 75,000 25% 75,000 100,000 34% 100,000 335,000 39% 335,000 10,000,000 34% 10,000,000 15,000,000 35% 15,000,000 18,333,333 38%

18,333,333 .......... 35%

Social Security TaxThe Social Security tax is the second largest source of federal revenue. For 2009, the maximum salary for applying the 6.2% social security rate is $106,800, while the Medicare rate remains 1.45% and applies to all wages.Although both employees and employers contribute toward Social Security taxes, the burden of employers’ contributions is shifted to workers in the form of lower pay.

Federal Excise Taxes Paid in Dollars by Income Class, 2001

Less than

$20,000

$20,000 to 40,000

$40,000 to $75,000

$75,000 to 200,000

$2000,000 and over

All

Alcohol $1.9B $1.7B $2.1B $1.8B $.3B $7.7B

Tobacco $2.6B $2.0B $2.0B $1.0B $.14B $7.6B

Gasoline and Motor

Fuel

$5.0B $6.2B $8.3B $7.6B $5.3B $32.4B

Telephone Services

$1.6B $1.3B $1.5B $1.2B $.6B $6.0B

Airport taxes

$1.5B $1.6B $2.3B $2.5B $1.4B $9.2B

A Federal Estate Tax Return must generally be filed for the estate of every U.S. citizen or resident whose gross estate, taxable gifts, and specific exemptions exceed $1,500,000 for decedents dying in 2004-2005.

Year ExclusionAmount

Max/Toptax rate

2001 $675,000 55%2002 $1 million 50%2003 $1 million 49%2004 $1.5 million 48%2005 $1.5 million 47%2006 $2 million 46%2007 $2 million 45%2008 $2 million 45%2009 $3.5 million 45%2010 * Repealed * 0% *2011 $1 million 55%

For 2004, an annual gift tax exclusion is provided that permits tax-free gifts to each donee of $11,000 for each year.

A husband and wife who agree to treat gifts to third persons as joint gifts can exclude up to $22,000 a year to each donee.

An unlimited exclusion for medical expenses and school tuition both paid directly to the institution for the benefit of any donee is also available in addition to the annual gift tax exclusion.

It is all relative!

If you owe $50, you are a delinquent account.

If you owe $50,000, you are a small

business.

If you owe $50 Million, you are a corporation.

If you owe $50 Billion, you are the

government.

What Characteristics of a “Fair” Tax?

1. Should be efficient.

2. Should not demand a government dossier on the private affairs of every citizen.

3. Should give the citizen first use of earnings, otherwise it becomes a form of slavery.

4. Should be easy to understand, with the tax burden clearly visible.

5. Should not be used to dictate personal economic decisions.

6. Should not push people into poverty.

7. Should be as cheat proof as possible.

8. Should help the United States compete in world markets.

9. Should encourage, not discourage work, family and freedom.

Possibilities for Tax Reform?

Value-Added Tax (VAT)

Consumption Income Tax

Flat Tax

The Value-Added TaxA VAT collects the difference between what companies earn in revenues and what they pay out in previously taxed costs.

–Taxing value-added yields the same tax revenues as a retail sales tax.

Consumption-Income tax Income tax that exempts savings

Rationale: Savings are for future consumption, which will be taxed at that time.

Far simpler than current personal income tax plan

Rather similar to a sales tax so it is regressiveExemptions to reduce regressivity: • Food, shelter, medical• Give standard refund based on family size

The Flat TaxA truly flat tax would:have a single rate and be

applicable to all income.minimize distortions of relative

prices within the economy.be simple and broadly based.be proportional in nature.

End.

Good luck with the last quiz and free response of our study of

Microeconomics.