Salerno's Classroom Celebrates America!

Eco Chapt 21

AP Government Summer Assignment
AP Chapters 1,2
AP Chapter 3
AP Chapter 4
AP Chapter 5
AP Chapter 6
AP Chapter 7
AP Chapter 8
AP Chapter 9
AP Chapter 10
AP Chapter 11
AP Chapter 12
AP Chapter 13
AP Chapter 14
AP Chapter 15
AP Chapter 16
U.S. History Chapters 1, 2, 3
U.S. History Chapter 4
U.S. History Chapter 5
U.S. History Chapter 6
U.S. History Chapter 7
U.S. History Chapter 8
U.S. History Chapter 9
U.S. History Chapter 10
U.S. History Chapter 11
U.S. History Chapter 12
U.S. History Chapter 13
U.S. History Chapter 14
U.S. History Chapters 16,17,18
U.S. History Chapters 19,20,21
U.S. History Chapters 22,23
U.S. History Chapters 24,25
U.S. History Chapters 26,27
U.S. History Chapters 28,29,30
U.S. History Chapter 31
U.S. History Chapter 32
U.S. History Chapter 33
US Government Chapters 1,2
US Government Chapter 3
US Government Chapters 10,11,12
US Government Chapters 13,14
US Government Chapter 18
US Govt Chapters 19,20,21
Remembering 9/11/01
The Civil Rights Movement
Economics Chapters 1,2,3
Eco Chapt 9
Eco Chapters 6,7,8
Eco Chapt 13
Eco Chapter 15
Eco Chapt 21

Taxes In America

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Chapter 21




Adam Smith -

I.  Four basic principles of taxation



1. Justice or Equity - everyone should be there to support the government according to his or her ability to do so.


2. Certainty - the amount, manner and type should be specified and the procedure.


3. Convenience- Taxes should be paid at a convenient time for tax payer


4. Economy - paying what is necessary, not for increasing the treasury                         




II.  Theories of Taxation


1. Benefit Theory - pay taxes according to the benefits received

( If you use the gas, pay the tax)


2. ability to pay theory - pay in accordance to your ability


2 Chief Reasons why we pay taxes


a) pay for govt's expenses; salaries and programs


b) modify business cycles and stimulate economy through taxation






Types and Methods of Taxation


1. Progressive Tax - based on the theory that the more money you make, the higher your tax rate.


2. Proportional Tax - Tax rate stays the same regardless of tax base.


3. Regressive Tax – A Tax rate that takes a larger percentage of lower incomes and a smaller percentage of higher incomes. Eg sales tax - Gas




Direct Tax -  A tax paid by the person against whom the tax is levied

(Example – Personal Income Tax)


Indirect Tax  - A tax can can be shifted, at least in part, to a party other than the one whom the tax is levied (Example a government tax on a corporation can be shifted to the consumer…gas, tobacco products)




                            Taxes in the US.


1. Property Tax - taxation of all personal property including Real Estate.  Theory - the more land you own, the more taxes you can pay.

Not always true eg. farmers


2. Consumption Tax - shifted to the consumer. Eg. tax on gasoline, tobacco. (Sin Tax) High revenues, easily connected.

*Excise Tax – a sales tax only on specific items


3. Business Tax- Taxes on Corporations. Very easily collected, steady income and are also shifted.

Note: Taxes can be hidden in the price….Ballgame, Theater tickets,




4. Payroll Tax -

Social Security Tax



5. Severance Tax –

Taxes on Natural Resources




6. Personal Income Tax - a direct tax

A Progressive Tax that requires serious monitoring.


Pro  - 1) It is Progressive

2) Cannot be shifted



Con -1) yields fall during recessions

2) requires serious monitoring

3) discouraging high rates 




*** Flat Tax***- goes against the principle of the ability to pay theory


(Two incomes 100,000    -    50,000

              x 10%            x 10%


             10,000            5,000







W-2 Form(Personal Income)


-pay as you go theory.  Each week taxes are deducted from your pay.  Overpayment will get you a tax rebate


W-4 Form(Personal Income)


-You determine how much you want withheld from your pay each week.


Self employed individuals pay an  estimated tax each quarter.  Any difference is made up at tax time.


F.I.C.A. -              with-holdings, social security tax


Your pay after taxes and withholdings is called net pay


Banks and investments send 1099 form so that you can record earnings.


30% Bracket is the US average


**Average American works about 4 months to pay taxes.*** 




The Problem of Personal Income in a Progressive System


Bracket Creep


40,000                  34%

31,000                                10,540

30,000                  30%       9,000


20,000                  29%


10,000                  28%




Tax Shelters - Legal Tax Avoidance


1. Tax Free Municipal Bond -  no taxes on interest earned


2. Farm Investment- promoted by the government


3.  Drilling for Oil -  government encourages this practice as a tax shelter


4. Low Income Housing  - government funds used to promote urban renewal


5. IRA