The Four Economic Effects of Taxes
1. Resource Allocation
4.Incidence of a tax
The factors of production are effected by taxation
ex.) Luxury Tax
Taxes can encourage or discourage a behavior
ex.) excise tax or sin tax
Productivity and growth
Higher taxes may discourage saving, investing, and work, thus lowering, economic growth
Incidence of a tax
The analysis of the effect of a particular tax on the distribution of economic welfare. Many tax payers become bears of a tax "burden" because they do not get the benefits of it.
Qualities of an effective tax (3)
1.Equity and fairness (no loopholes)
3. Efficient and easy to administer
Two principals of taxation
1. Benefit Principal- those who get the benefit should pay more
2.Ability to pay principal- those who can afford to pay more should pay more
Types of Taxes (3)
1. Proportional: Everyone pays the same percentage
2.Progressive: Those who make more pay more
3. Regressive: Those who make more pay a lower percentage
Eight Sources of Federal Revenue
1.Individual Income Tax
3. Corporate Income Tax
4.Excise Tax (on manufactured goods)
5. Estate Tax (death tax)
6. Gift Tax
7. Customs and Duties (on imported goods)
8. Fees (national parks, grazing fees)
What Constitutional amendment made the Income Tax legal?
The 16th Amendment
What government group is in charge of Income Tax collection?
What tax form do we fill out every single year that allows for tax returns and tax refunds?
How is the tax collected?
The amount is withheld on the paycheck. (If too much is withheld there is a tax return. If too little is withheld the individual is responsible for turning it in)
What is FICA?
It is a tax that is split between the employee and the employer. Part of it is social security where the employee and the employer each give 6.2 percent until $102,000 dollars then the tax on each additional dollar is recessive. The second part is Medicare 1.45% per employee and the same for the employer.
The Top 8 Sources of State Revenue
1. Intergovernmental Revenue
2. Sales Tax (4% in GA)
3. Employee Retirement
4. Individual Income Tax (6% in GA)
5. Higher Education Fees
6. Corporate Income Tax
8. Hospital Fees
Top 4 sources of local revenue?
2. Property tax
3. SPLOST/ Utilities
4. Liquor sales
1981 Reagan Tax reforms
lower taxes for all; accelerated depreciation; investment tax credit
1986 Reagan Tax Reforms
Lowered tax brackets from 16 to 3; surcharge for wealthy; alternative minimum tax
1992 Clinton tax reforms
added two top brackets of 36% and 39%
1997 Clinton tax reforms
cut in capital gains tax and lower death tax
2001 Bush Tax Reforms
Add 10% to bottom tax bracket; gradual reduction over next ten years; higher child tax credits; higher deductions for college
What is VAT?
It is the Value Added Tax in which tax is added at each stage of production.
What are advantages of the VAT? (4)
1. Encourage saving
2. easy to collect
3. Spreads Tax Burden
4. hard to avoid
What are disadvantages of the VAT? (2)
2. Competition with state tax
What is the Flat Tax?
It is a proportional tax on individual income after a specified threshold has been reached.
What are the advantages of a Flat Tax? (3)
2. minimizes loopholes
3. reduces the need for tax accountants, tax preparers, and large portions of the IRS.
What are the disadvantages of a Flat Tax? (2)
1. Removes behavior incentives
2. The rate may be more of a burden on lower income tax payers if the tax rate needed to replace the current system is too high.