Standard 2Understand the fundamental

concepts relevant to the institutions, structure, and

functions of a national economy

SS.912.E.2.8SS.912.E.2.8Differentiate between direct and Differentiate between direct and indirect taxes, and describe the indirect taxes, and describe the

progressivity of taxes (progressive, progressivity of taxes (progressive, proportional, regressive)proportional, regressive)

Video: Stossel is government too big?Video: Stossel is government too big?

Definitions:Definitions:Direct tax-Direct tax- a tax in which the payer remits a tax in which the payer remits the tax directly to the taxing agencythe tax directly to the taxing agencyExamples- license tag, non-escrowed Examples- license tag, non-escrowed property taxes, tollsproperty taxes, tollsIndirect tax-Indirect tax- a tax in which the payer a tax in which the payer remits the tax through an intermediary to remits the tax through an intermediary to the taxing agencythe taxing agencyExamples- sales tax, phone tax, payroll Examples- sales tax, phone tax, payroll taxtax

The The average tax rateaverage tax rate equals tax liability divided by equals tax liability divided by taxable income.taxable income.

– A A progressive taxprogressive tax is one in which the is one in which the average tax rate average tax rate risesrises with income. with income.

– A A proportional taxproportional tax is one in which the is one in which the average tax rate average tax rate stays the samestays the same across across income levels.income levels.

– A A regressive tax regressive tax is one in which the is one in which the average tax rate average tax rate fallsfalls with income. with income.

Average Tax Rate

Marginal tax rateMarginal tax rate: : calculated as calculated as the change in tax liability the change in tax liability divided by the change in taxable income.divided by the change in taxable income.

The marginal tax rate is highly important The marginal tax rate is highly important because it determines how much of an because it determines how much of an additional dollar earned must be paid additional dollar earned must be paid in taxes (and therefore, how much one in taxes (and therefore, how much one gets to keep). In this way, the marginal gets to keep). In this way, the marginal tax rate directly impacts an individual’s tax rate directly impacts an individual’s incentive to earn.incentive to earn.

Marginal Tax Rate

Marginal Tax Rate2006 Tax Table Continued

If line 40(taxableincome) is

And you are

Atleast

Butlessthan

Single Marriedfilingjointly

Marriedfilingseparately

Head of a house-hold

$32,000

Your tax is …

32000320503210032150

32200322503230032350

32400324503250032550

32050321003215032200

32250323003235032400

32450325003255032600

4564457645894601

4614462646394651

4664467646894701

4049405640644071

4079408640944101

4109411641244131

4564457645894601

4614462646394651

4664467646894701

4266427442814289

4296430443114319

4326433443414349

• An excerpt from the 2006 federal income tax table is shown here.• Note, for single individuals,

as income increases from $32,000 to $32,100 …

• In this range, what is the individual’s marginal tax rate?

• What is the individual’s average income tax rate?

their tax liability increases from $4,564 to $4,589.

Historical marginal tax rates.pdf

Tax rateTax rate::the rate (%) at which an activity is taxed.the rate (%) at which an activity is taxed.

Tax baseTax base:: the amount of the activity that is taxed.the amount of the activity that is taxed.– The tax base is inversely related to the The tax base is inversely related to the

rate at which the activity is taxed.rate at which the activity is taxed.

Tax revenues:Tax revenues:tax rate multiplied by tax base.tax rate multiplied by tax base.

Tax Rate and Tax Base

True or False?True or False?

The top 1% of income earners pay over The top 1% of income earners pay over one-third of total IRS taxes received.one-third of total IRS taxes received.

Video: Stossel how much tax do the rich Video: Stossel how much tax do the rich pay?pay?

Focus: Understanding Economics in Civics and Focus: Understanding Economics in Civics and GovernmentGovernment

Lesson 7 Taxes Change BehaviorLesson 7 Taxes Change Behavior

Mankiw(NYT)-I_can_afford_higher_taxes.pdf

Video: Snooki tanning taxVideo: Snooki tanning tax