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Tax

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Mandatory payment to local, state, or national government (Income tax and sales tax are a part of everyday life)

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Revenue

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Government Income from taxes and other non-tax source (Funds programs and services government provides: highways, police, and parks)

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Principles of Taxation

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1. Benefits-Received Principle 2. Ability-to-Pay Principle Questions: Should everyone pay the same percentage of income?

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Benefits-Received Principle

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People who benefit directly should pay Amount paid should be in proportion to benefits recieved

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Ability-to-Pay Principle

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Benefits received should not matter Amount taxed should depend on person's ability to pay

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Criteria's For Taxation

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1. Equity 2. Simplicity 3. Efficiency Criteria sometimes conflict; a given tax may not meet all

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Equity

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Tax applied uniformly; people in same situations pay the same

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Simplicity

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Easy for taxpayers to understand and government to collect

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Efficiency

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How well tax raises revenue with least administrative cost Also, How small the effort and expense required to pay the tax

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Tax Base

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Each type of wealth subject to taxes Growing or shrinking tax base means changes in amount of taxable wealth

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Types of Tax Base

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1. Individual Income Tax 2. Corporate Income Tax 3. Sales Tax 4. Property Tax

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Individual Income Tax

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On income from all source

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Corporate Income Tax

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On corporation's profits

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Sales Tax

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On value of product; a percentage of sale price

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Property Tax (def)

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On value of assets, generally real estate; part of rent

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Tax Structure

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1. Proportional Tax 2. Progressive Tax (Marginal Tax Rate) 3. Regressive Tax

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Proportional Tax

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Flat Tax, all tax payers pay the same percentage of income

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Progressive Tax (Marginal Tax Rate)

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Higher income earners pay higher percentage of income Most closely linked to ability-to-pay principle

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Regressive Tax

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Lower income earners pay higher percentage of income Examples: sales tax, property tax

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Marginal Tax: 4 Filing Statuses

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1. Single 2. Married Filing Jointly or Qualifying Widow 3. Married Filing Separately 4. Head of Household

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Incidence of a Tax

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Final Burden of the tax or impact on taxpayer Measured by who actually pays tax Business tax may get passes on to consumer as higher prices

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Effects of Elasticity on Taxes

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If product has elastic demand, seller pays more of tax (Quantity of demanded will decrease if prices change) If product has inelastic demand, consumer pays more of tax (Quantity demanded will decrease only slightly)

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Impact of Taxes on the Economy

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Taxes impact Resource allocation, Productivity and growth, Economic behavior Government chooses what to tax and how to tax based on: Income it wants to raise Economic effects it want to achieve

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Impact 1: Resource Allocation

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Tax on a good or service increases cost of production If demand remains the same, price goes up (Probably shift in resources) If supplier unable to pass increased cost to consumer (may shift production to another, more profitable good or service)

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Impact 2: Productivity and Growth

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When taxes on interest and dividends high, people save less Impacts amount of money available to producers to invest in business Some economist think high taxes reduce incentives to work Others think high taxes promote underground economy

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Impact 3: Economic Behavior

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Tax Incentive: Use of taxes to influence economic behavior Tax credits, rebates encourage behavior good for society, economy Sin taxes imposed on unhealthful, damaging products activities (Demand is relatively inelastic; is more elastic with steep tax increase/Very large increase may keep tax revenues up in spite of lower demand)

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Federal Tax

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Federal government gets about $2.5 trillion in revenue yearly Taxes important sources of revenue Largest source is individual income tax 2nd largest is social insurance tax Other tax source corporate income, estate, gift, exercise, customs

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Withholding

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Payroll tax taken before worker gets paycheck

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Internal Revenue Service (IRS)

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Collects money; administer tax system

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Taxable Income

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Taxable proportional exemptions, deductions reduce it

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Tax Returns

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Forms used to report income, taxes owed to government (If too much withheld, taxpayers gets refund, if not enough; taxpayer pays rest)

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Indexing

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Federal Income tax is progressive --> Rates go up as taxable income does Tax Bracket: Tax rate for an income span Indexing revises tax brackets, prevents higher taxes due to inflation

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Taxes to Ease Hardships

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FICA/Social Security and Medicare Unemployment compensation for limited aids workers who lost job (Administered by states; employers pay)

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Federal Insurance Contributions Act (FICA)

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Employers and workers both pay

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Social Security

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Aids older citizens, disabled, children who lost parent

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Medicare

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Natural health insurance mainly for people over 65

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Corporate Income

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Corporate Income is third largest source of federal tax revenue 8% of all businesses that file returns subject to this tax Corporations deduct expenses, such as equipment, research

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Common Criticism

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Double taxation of corporate profits, shareholders (Capital gains tax rate has decreased in response)

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Other Taxes (List)

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Estate Tax, Gift Tax, Excise Tax, Custom Duty, and User Fee

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Estate Tax

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On property transferred to others after owner's death Government takes a third of what you have

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Gift Tax

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On money or property given by one living person to another

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Excise Tax

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On production or sale of specific product, such as gas

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User Fee

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Charged for use of goods or services, such as parking

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Maya MacGuineas: Reforming the Tax System

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Tax policy analyst: Wants new tax system, more responsible budgeting End most deductions, exemptions; restructure entitlement programs Phase out corporate tax; change estate tax; add environmental tax Replace FICA taxes with progressive consumption tax tied to spending (Would also be incentive to save)

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Federal Expenditures

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Mandatory Spending: Required by current law (Social Security an Medicare) Discretionary Spending: Must be authorized each year (Highway construction, maintenance of national parks)

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Type 1: Mandatory Spending

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Entitlements: Social welfare programs with specific requirements Social security restrictions: former worker, age, extra income limit Medicare provides hospital, other medical insurance; means tested Medicaid is federal-state insurance program for low-income people Other programs' funding based on number of people eligible

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Type 2: Discretionary Spending

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Defense includes salaries, weapons, military bases, homeland security Interstate highway system and other transportation Natural resources, environment; includes: parks, pollution clean up Education: science, space, technology; other research Justice administration includes enforcement agencies, federal courts

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Federal Budget and Spending

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Federal Budget/Fiscal Year President's budget prepared by Office Management and Budget (OMB) (Uses estimated tax receipts, requests of federal departments, agencies)

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Federal Budget

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Plan for spending federal revenue

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Fiscal Year

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12 month period for which expenditures are planned (October 1 through September 30)

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Congress Acts on the Budget

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Congressional Budget Office helps develop appropriation guidelines (Appropriations: Specific amounts set aside for specific purposes) Members of Congress make deals to get votes for their appropriations Congress votes on budget, sends to president for approval (Can pass resolutions for day-to-day running if no budget by Oct. 1)

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Methods of Federal Spending

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1. Direct Spending 2. Transfer Payment 3. Grant-in-Aid

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Direct Spending

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For Goods, Services government used to operate

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Transfer Payment

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To Taxpayers who do not provide goods, services (Generally mandatory spending, such as Social Security)

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Grant-in-aid

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Transfer payment to state, local government, regions (Include highway construction, some school services, Medicaid

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Impact of Federal Spending

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1. Private Sector 2. Resource Allocation 3. Income Redistribution 4. Competition with the Private Sector

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Private Sector

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Part of economy owned by individuals, businesses

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Resource Allocation

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Government decides where, on what to spend money (Influences how resources are allocated)

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Income Redistribution

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Through transfer payments, work contract awards

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Competition with the Private Sector

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By producing same goods and services

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State Revenue

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Federal government as broadest tax base; local has smallest Local government: towns, cities, countries, issue specific districts Main state revenue source: federal government, sales, income taxes

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Type 1: Sales and Excise Taxes

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Almost all states have sales tax on most goods, services (Many states exempt food, medicines; some have lower tax/Many exempt charitable, religious, educational groups) All have excise tax on cigarettes, alcohol, gasoline, diesel Many have sales taxes on car rentals, hotel rooms

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Type 2: Income Tax and Other Revenue Source

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Most states levy individual, corporate income tac; about 16% revenue Most have progressive rates to attract businesses to the state States have other revenue sources (Estate, property taxes; user, business registration, license fees)

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Balanced Budget

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Total spending equals total revenue (Usually applies to only certain kinds of spending/States can dip into reserve fund, run surplus to use in later years)

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State Budget

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1. Operating Budget 2. Capital Budget

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Operating Budget

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Covers day-to-day expenses; usually must be balances (Includes salaries; health; welfare payments; education)

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Capital Budget

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Covers major expenses or investments (No balanced budget requirements usually funded by borrowing/Includes large construction, maintenance projects, land acquisition)

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State Expenses

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Education: community colleges, state universities, local school aid Public Safety: State police, crime labs, correctional facilities Public Welfare: Hospitals, cash assistance, medical payments for needy Social Problems: Housing, disability, unemployment, job training, court system, administration, natural resources, economic developments

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Local Government Units

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Country, city, town, village, township, school and special districts Fewer options for raising revenue than other levels of government (Major revenue sources are state and federal transfers, property taxes)

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Property Tax

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Levied on real estate, motor vehicles, boats, jewelry, computers Tax Assessor: official who determines value of property Tax based on a percentage of property's value

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Other Taxes

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Local governments use sales, sin, hospitality, entertainment taxes Payroll tax levied by cities on workers who live outside the city (Workers benefit from city services, such as police, fire protection)

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Local Spending

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Public School: Elementary and Secondary Safety: Police, Fire, Emergency Medical, Disaster Help; Animal Control Welfare: Health Departments, Hospitals Utilities: Water, transit systems, sewage, trash removal, local roads, streets; recreational, cultural facilities

Chapter 14: Taxation, Government Revenue and Spending – Flashcards

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