Chapter 21

 

                                  Taxes

 

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%