Ch. 9 Taxes

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Text of Ch. 9 Taxes

  • 1. Taxes


  • What is the decision being made in this cartoon?
  • Are these two things controllable?

3. Economic Impact of Taxes

  • Taxes and other forms of govt. revenue influence the economy by affecting
    • Resource allocation
    • Consumer behavior
    • National productivity and growth

4. Resource Allocation

  • Taxes are directly related with the movement in the market.
  • They are levied on goods/services and production.
  • This directly affects supply, demand, and equilibrium price.

5. Behavior adjustment

  • Taxes are used to either help out or punish consumers
    • Homeowners get tax breaks on mortgages
    • Sin taxes are levied on alcohol, tobacco, etc.

6. Productivity and Incidence of Tax

  • Taxes affect productivity because of the taxation of income.
  • They change the incentives to save, invest, and work.
  • The final burden of the tax can be measured by supply and demand.
  • It is much easier for the producer to shift the burden of the tax to the consumer.

7. The Criteria for Effective Taxes

  • Equity- Fairness is so important for effective taxes. The goal is to try and avoid loopholes so everyone gets to pay a fair share.
  • Simplicity- Laws should be written so both the payer and tax collector can understand them.
    • Individual income tax-complex
    • Sales tax- simple


  • Efficiency-should be relatively easy to administer and reasonably successful at generating revenue.
    • Individual income taxvery efficient
    • Tall taxes are not so efficient.

9. Two Principles of Taxation

  • Benefit PrincipleThose who benefit from govt. goods should pay in proportion to the amount of benefits they receive.
  • Ability to Paypeople should be taxed according to their ability to pay, regardless of the benefits that they receive.

10. Types of Taxes

  • Proportional tax- imposes same percentage rate of taxation on everyone.
  • Progressive tax- imposes a higher tax on people with higher incomes.
  • Regressive tax- imposes higher rate on low incomes.

11. Individual Income Taxes (Fed.System)

  • The 16 thamendment allows Congress to levy taxes.
  • Govt. collected nearly 45% of its income from individual income tax.
  • It is paid through payroll deduction over time.
  • It is a progressive tax and has a provision for indexing. Indexing keeps workers from paying more in taxes due to inflation.

12. FICA

  • Employers and employees share the burden of paying these taxes.
  • You see a deduction in your check for both Medicare and Social Security.
  • Social Security is a 6.2% flat tax rate.
  • Medicare is taxed at a 1.45% rate.

13. Other Federal Taxes

  • Excise Tax is levied on things like gas and liquor.
  • Estate taxes are levied when property is transferred form one individual to another.
  • Gift taxes are made on donations, the giver is the person responsible for this tax.

14. Corporate Tax and Duty

  • Corporations have to pay taxes on income and this accounts for the third largest category of taxes.
  • Customs duties are levied on goods brought into the United States.
  • About 1% of federal revenue is collected through miscellaneous fees.


  • Who is this man working for?
  • What is this cartoon saying about the government?
  • How is irony incorporated in this cartoon?

16. State Govt. Revenue sources

  • Intergovernmental revenue is the largest form of state revenue. This is funds collected by one level of govt. and redistributed to another level.
  • Sales taxes are the second largest form of state revenue.
  • Other forms of revenue comes various state supported sources such as university tuitions, interest earnings, etc.

17. Local Government revenue

  • Local govts. receive the largest part of their revenue from intergovernmental revenues. Intended for education/welfare.
  • Property taxes raise a significant amount of revenue for local govt.
  • Public utilities and state owned liquor stores raise the third largest form of revenue for local govt.

18. Tax Reform

  • Tax reform (1981)Reagan proposed the Economic Recovery Tax Act to reduce taxes for many business owners.
  • Businesses received tax relief in the form of accelerated depreciation which allowed a reduction in federal income tax payments.
  • They also received tax credits on investment.

19. Tax Reform (1986, 1993)

  • In 1983, more than 3,000 millionares paid no income tax.
  • Congress passed a tax reform that reduced brackets to two.
  • Added surcharge to tax higher income more.
  • Govt. spending was high.
  • Omnibus Budget Reconciliation Act was passed so the govt. could balance the budget.
  • Added two more marginal brackets.

20. Tax Reform in 1997 and 2001

  • Taxpayer Relief Act was passed to help out many individuals.
  • Taxes were cut across the board due to a high surplus in revenue.
  • Added a 10% bracket and lower the percentile for the top two brackets.
  • High child tax credits were added as well.

21. The Value Added Tax

  • People want to shift the tax from income to consumption.
  • (VAT) is placed on the value added to each stage of production.
  • Production of g/s would be taxed as the product is passed from producer to consumer.

22. Advantages vs. Disadvantages

  • Hard to avoid because the tax collector levies on total amount of sales less the cost of inputs.
  • Is widely spread
  • Easy to collect
  • Would affect peoples behavior.
  • Is invisible to consumer.
  • Would compete with state sales taxes.

23. Advantages vs. Disadvantages of Flat Tax

  • Simplicity offered to taxpayer.
  • Closes most loopholes
  • Reduces the need for tax accountants.
  • Removes many of the behavior incentives already built into tax code.
  • No one knows exactly what rate is needed to replace the revenues already collected from the current system.