Section 3: Current Tax Issues and Reforms Visual Summary Economic - - PowerPoint PPT Presentation

Chapter Introduction Section 1: The Economics

• f Taxation

Section 2: Federal, State, and Local Revenue Systems Section 3: Current Tax Issues and Reforms Visual Summary

Economic Impact of Taxes (cont.)

• Taxes and other governmental revenues

influence the economy by affecting – Resource allocation – Behavior adjustment

• Sin tax

Economic Impact of Taxes (cont.)

– Productivity and growth – Determining incidence of a tax

Shifting the Incidence of a Tax

Criteria for Effective Taxes (cont.)

• Taxes must meet three criteria:

– Equity—impartial and just: Makes sense to avoid tax loopholes – Simplicity—tax laws written so taxpayers and collectors can understand them

• Individual income tax—complex tax
• Sales tax—simpler

Criteria for Effective Taxes (cont.)

– Efficiency—easy to administer and successful in generating revenue

• Individuals file a tax return before April

15th each year.

• United States taxes are based on two

principles – Benefit principle of taxation

Two Principles of Taxation (cont.)

• Limitations to the benefit principle of taxation
• Those who receive government services are

least likely to afford them.

• Benefits are hard to measure and impact
• thers.

– Ability-to-pay principle of taxation

• We can’t always measure benefits derived

from government spending.

• Assumes individuals taxed more suffer less

discomfort paying taxes

Two Principles of Taxation (cont.)

• Three general types of taxes exist in the

United States today. – Proportional tax

Three Types of Taxes (cont.)

• If the percentage tax rate is constant, the

average tax rate is constant.

• Medicare tax fund

Three Types of Taxes

– Progressive tax

• Marginal tax rate

Three Types of Taxes (cont.)

– Regressive tax

Profiles in Economics: Monica Garcia Pleiman

Federal, State, and Local Revenue Systems

• The Internal Revenue Service (IRS) is

the branch of the U.S. Treasury Department in charge of collecting taxes today.

Federal Government Revenue Sources

(cont.)

• Four largest sources of government

revenue are – Individual income taxes

• Tax is mostly collected through a payroll

withholding system.

• Tax code takes into account indexing.

Federal Government Revenue Sources

Federal Government Revenue Sources

(cont.)

– FICA or Federal Insurance Contributions Act tax

• Social Security and Medicare are part of

payroll taxes.

– Borrowing by selling bonds to investors – Corporate income tax – Excise tax

The Global Economy & YOU Total Tax Revenue as a Percentage of GDP

Federal Government Revenue Sources

(cont.)

– Estate tax and gift tax – Customs duty – Miscellaneous fees like a user fee

• Largest sources of state governments

revenue – Intergovernmental revenue – Sales tax implemented by most states – Individual income taxes by most states – Other revenue sources

State Government Revenue Sources

(cont.)

State and Local Government Revenue Sources

• Largest sources of local governments

revenue – Intergovernmental transfers from state and federal governments – Property tax

Local Government Revenue Sources

(cont.)

• Tax assessor determines valuations of

property

State and Local Taxes as a Percentage of State Income

– Utility revenues from natural monopolies – Sales tax – Other revenue sources

Local Government Revenue Sources

(cont.)

Examining Your Paycheck (cont.)

• The payroll withholding statement

attached to your paycheck lists deductions taken.

Biweekly Paycheck and Withholding Statement

• The Economic Recovery Tax Act, signed

by Ronald Reagan in 1981, included large tax reductions for individuals and businesses.

• Businesses also got tax relief from

accelerated depreciation and investment tax credit.

Tax Reform (cont.)

Tax Table for Single Individuals, 2006

• In 1983 the alternative minimum tax was

passed.

• In 1993 government added tax brackets in
• rder to balance the budget.
• The Taxpayer Relief Act of 1997 was both

economical and political.

Tax Reform (cont.)

– Capital gains tax was reduced.

Total Government Receipts per Capita, Adjusted for Inflation

• Temporary tax reform in 2001—based on

the federal government collecting more taxes than it was spending

• Temporary tax reform in 2003—due to

slow economic growth, accelerated many

• f 2001 reforms
• If the present trend of government

spending more than it collects in taxes continues, it will be difficult to preserve tax cuts due to expire in 2011.

Tax Reform (cont.)

• Two alternative forms of taxation

– Flat tax – Value-added tax (VAT)

Alternative Tax Approaches (cont.)

The Value-Added Tax

• Advantages to the flat tax

– Simplicity to taxpayer – Closes most loopholes – Reduces need for many workers in IRS and tax preparers

Alternative Tax Approaches (cont.)

• Disadvantages to the flat tax

– Removes many incentives built into current tax code – Don’t know what rate is needed to replace revenues collected today – Unsure if flat tax would stimulate economic growth

Alternative Tax Approaches (cont.)

• Advantages to the VAT

– Tax is hard to avoid – Tax incidence is widespread – Easy to collect – Encourages saving

Alternative Tax Approaches (cont.)

• Disadvantage to the VAT

– Virtually invisible—other factors can change the product’s price.

Alternative Tax Approaches (cont.)

• Desires to simplify the tax code,

unexpected expenditures on war and natural disasters, and political change all result in tax reform.