Sources of

Government Revenue Taxes

The Good the Bad and the Ugly

1. Resource Allocation Factors of Production are

affected when a tax is levied. Taxes raise cost of production

and shifts the supply curve left.

When Prices go up we shift resources from other areas to cover the increased price.

Taxes encourage or discourage activities

Sin Tax: High tax designed to raise price and decrease consumption ◦ Ex. Liquor, Tobacco, SUV tax

Note! Usually show up as an

excise tax – paid by the producer

charged to the consumer,

Taxes can affect productivity and economic growth by changing the incentives to save, invest, and work.

On whom does the Final Burden of the tax fall? Placing tax burdens on share holders, employees,

and consumers

Ex. Smaller dividends, postpone pay raise, increase in prices

Equitable The tax must be fair

Simple The tax must be easy to

understand

Efficient Must be easy and efficient to

collect

The benefit principle of taxation is the concept that those who benefit from the spending of tax dollars should pay the taxes to provide the benefits.

The ability-to-pay principle of taxation is the concept that those who can best afford to pay taxes should pay most of the taxes.

A progressive tax is a tax that takes a larger percentage of higher incomes and a smaller percentage of lower incomes. Example: Federal Income Tax

A regressive tax is a tax that takes a larger percentage from lower incomes and a smaller percentage of higher incomes. Example: Sales Tax

A proportional tax is a tax that takes the same percentage of income from all taxpayers.

Example: Flat Tax or Value added tax

The federal government gets its revenue from a number of sources. Taxes are the primary source of revenues, but borrowing also plays a big part. The four largest sources of revenues are:

1. Individual Income Taxes

2. Social Security Taxes

3. Borrowing

4. Corporate Income Taxes

Individual Income Tax 29%

Social Security 19%

Corporate Income Tax 5%

Excise 2%

Other Taxes 10%

Borrowing 35%

100%

The government taxes peoples earnings to finance its operations.

Taxes range from 10% to 35%

These taxes are collected through the payroll withholding system (employer collected)

Note! Federal Income Tax is a

progressive tax. This type of tax

that takes a larger percentage of

higher incomes and a smaller

percentage of lower incomes.

Employers are required to withhold taxes from your paycheck. ◦ FICA - Social Security & Medicare taxes are

collected on every dollar you earn up to $106,800.00.

◦ Social Security - tax is 6.2% plus your employer matches you tax for another 6.2% or12.4% total.

◦ Medicare – tax is 1.45% plus your employer matches you tax for another 1.45% or 2.9% total.

◦ Total FICA taxes are over 15% of paid wages with no

exemptions.

Social Security

The purpose is to make available a small pension at the age of 67(?).

Medicare

The purpose is to cover most medical expenses at age 65.

Note! Both Social Security and

Medicare will be insolvent in the next

twenty years, and possibly sooner.

For Tax Year 2009

Percentiles Ranked by AGI

AGI Threshold on

Percentiles

Percentage of Federal Personal Income Tax

Paid

Top 1% $343,927 36.73

Top 5% $154,643 58.66

Top 10% $112,124 70.47

Top 25% $66,193 87.30

Top 50% $32,396 97.75

Bottom 50% <$32,396 2.25

Note: AGI is Adjusted Gross Income

Source: Internal Revenue Service

Income But not

over-- The tax is:

$0 $8,700 10% on taxable income from $0 to $8,700, plus

$$8,700 $35,350 15% on taxable income over $8,700 to $35,350, plus

$35,350 $85,650 25% on taxable income over $35,350 to $85,650, plus

$85,650 $178,650 28% on taxable income over $85,650 to $178,650, plus

$178,650 $388,350 33% on taxable income over $178,650 to $388,350, plus

$388,350 no limit 35% on taxable income over $388,350

[Tax Rate Schedule X, Internal Revenue Code section 1(c)]

Borrowing by the government is the third-largest source of revenues. Since the government can never fully project tax revenues it borrows the shortfalls.

However, the increased borrowing since 2001 has been mainly due to increased spending, not tax shortfalls.

Corporate Income Tax is the fourth largest revenue source for the federal government. Tax rates run from 15% to 35%.

Excise Taxes – is the fifth largest source of revenues. This is a tax placed on the manufacturer or sale of selected items. Examples are the gasoline, liquor, telephone, tires, cigarettes and many more products.

Gift Tax – is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not. The tax will be levied on all gifts $13,000 or greater. (2012)

Estate Tax – is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The rate is 55% on everything over $1,000,000. (2013)

U.S. Federal Revenues

printer-friendly chart

Luxembourg $29,323.19 Norway $29,174.83 Denmark $25,055.22 Sweden $22,361.69 Finland $18,462.56 Switzerland $17,559.08 Austria $17,409.89 Belgium $16,759.93 France $16,568.84 Monaco $15,983.21 Netherlands $15,657.95 Ireland $15,565.23

Kuwait $15,333.90 Germany $14,557.63 Iceland $13,998.92 San Marino $13,850.41 U. K. $13,813.47 Italy $13,233.39 Brunei $13,159.27 Liechtenstein $12,581.19 Qatar $11,783.77 Greenland $11,458.98 Australia $11,085.11 Gibraltar $11,009.89 Japan $10,995.39

State Government’s revenues come from many sources. Intergovernmental transfers, from the Federal Government is the # 1 source followed by sales tax.

Local Governments like state receive funds from both the federal & state levels of government. The largest non-transfer comes from property taxes.

Intergovernmental Transfers

Sales Tax

Corporate Taxes

Fees for Services

Note! Seven States do not have a state income taxes.

Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming

Intergovernmental Revenues

Property Taxes

Shifting the tax base from income driven to consumption driven is the purpose of the VAT or Value Added Tax. ◦ It is hard to avoid because the tax collector levies it

on the total amount of sales less the cost of inputs.

The Flat Tax ◦ This tax would close or remove loopholes along

with deductions. You would simply pay tax on all your income. Simple tax but would remove behavior incentives already in the code.