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
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
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
W-2 Form(Personal Income)
-pay as you go theory.
Each week taxes are deducted from your pay. Overpayment will get you a
W-4 Form(Personal Income)
-You determine how much you want withheld from your pay each
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
Tax Shelters - Legal Tax
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