Chapter+Twelve

= THE DESIGN OF THE TAX SYSTEM! = = =




Summary:
 No one actually wants to pay taxes, but in order to have public goods and for the governments to function people must pay taxes. After all its taxes that give the money governments needed to provide you with some important public goods. Governments usually keep their hands out of markets, unless it deals with tax. In this chapter we will be dealing with tax and its equity and efficiency.

Vocabulary:
 Budget deficit: an excess of government spending over government receipts Budget surplus: an excess of government receipts over government spending Average tax rate: total taxes paid divided by total income Marginal tax rate: the extra taxes paid on an additional dollar of income Lump-sum tax: a tax that is the same amount for every person Benefits principle: the idea that people should pay taxes based on the benefits they get from gov. services. Ability-to-pay principle: the idea that taxes should be levied on a person according to how well they can shoulder the burden Vertical equity: the idea that taxpayers with a greater ability to pay taxes should pay larger amounts. Horizontal equity: the idea that taxpayers with similar abilities to pay taxes should pay the same amount Proportional tax: a tax for which high income and low income taxpayers pay the same fraction of income Regressive tax: a tax for which high income pay a smaller fraction of their income than do low income tax payers Progressive tax: a tax for which high-income taxpayers pay a larger fraction of their income than do low income tax payers.

A financial overview of the U.S government
 The U.S federal government collects approximately 2/3 of the taxes in our economy.

Receipts:
 - The main way the federal government gains revenue is the individual income tax. Every year families in America are required to fill out a tax from which decides how much they have to pay. They are required to report all of their income; their total income is what decides their tax liability. - Marginal tax rate is the tax rate added to each additional dollar of income, due to this concept, higher income families pay a larger percentage of their income to taxes. - The payroll tax is another important source of income for the federal government. This is a tax on the wages that firms pay to their workers. This is also referred to as the social insurance taxes. The money collected through this taxation is spent on Social security and medical care. - Another source of income tax is corporate income tax. The government taxes each corporation according to its profit: amount received for the goods/serves it sells minus the cost of producing those goods/services.

Spending:
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> The federal government divides its spending between major categories, like social security, national defense, income security, Medicare, etc. - Social security is usually the largest spending of tax collected - National defense is the 2nd largest - Income security is the 3rd largest - Medicare is the 4th largest. Also something to keep in mind is budget deficit, which is when total receipts of the federal government fall short of total spending. And it’s opposite, budget surplus, which is when the receipt exceeds spending.

<span style="color: rgb(245, 228, 81);"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">State and Local government
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="color: rgb(245, 228, 81);"> Although not as large scaled as the federal government, these governments work the similarly. These governments collect approximately 40% of tax <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Receipt:
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> - Sales tax: are taxed as a % of the total amount spent at retail store. - Property tax: is collected by a percentage of the estimated value of land and structures and are paid by property owners. On top of these two sources of income, State/local governments also levy individual tax and corporation income tax. And, they get funds from the federal government.

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Spending:
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> - The state and local government spend most of the tax revenue on education, public welfare, highways and others. Others being things like police, libraries, fire fighters and many other, public service workers.

<span style="color: rgb(252, 144, 39);"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Taxes and efficiency
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="color: rgb(252, 144, 39);"> When designing the tax system, policy makers have 2 objectives: efficiency and equity. Efficiency of a tax system is measured by the amount of revenue earned at a smaller cost to taxpayers.

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Taxes impose 2 costs:
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> - Dead weight loss: this is the result of tax distortion on the decisions that people make. It distorts incentives creating dwl, which is a deduction on the economy’s well being. By adding tax to the economy, people act accordingly to the tax incentive rather than what they really should be acting accordingly to: the costs and benefits of the product. Refer to chapter 8 for more details on cost of taxation and the deadweight loss of tax. - Administrative burdens that taxpayers bear as they comply with the tax laws. This cost deals more with the inefficiency due to the time spent on filling out tax forms and time spent on keeping records for tax purposes and resources the gov. has to use to enforce that tax laws.

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Marginal tax rates vs. average tax rates:
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> Marginal tax is the extra taxes paid on an additional dollar of income, and average tax rates is the total taxes paid divided by total income. These are the two are the things that economists decide the efficiency and equity of income tax. When trying to stop the sacrifices made by the taxpayers, the right choice would be average tax rate, because it measures fraction of income paid in taxes. On the other hand if one is trying to stop or lessen the tax system from distorting incentives, marginal tax rate is better, because it decides the deadweight loss of an income tax.

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Lump-sum tax:
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> This is the most efficient tax possible because a person’s decision does not change the amount of tax paid, or does it create deadweight loss. This tax is when everyone pays the same amount, and even though this tax is efficient it is not fair, does not comply with equity.

=<span style="color: rgb(194, 0, 145);"><span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">Taxes and equity = <span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"><span style="color: rgb(194, 0, 145);"> This section deals with how the burden of tax should be divided between people, how to decide what’s fair and what is not. //There are two principles of taxations://

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">The benefit principle:
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;"> This principle deals with the idea that people should pay taxes according to the benefits they receive from the government services. This is a principle where public goods are grouped similarly with private goods. The idea works like this, a person who gets great benefit from a public good should pay more for it than a person who gets little benefit.

<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">The ability-to-pay principle:
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<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">**Questions:**
<span style="font-size: 110%; font-family: 'Comic Sans MS',cursive;">1. What are the two costs the taxes impose? 2. What decides the inefficiency of a tax system? 3. Can true equity be achieved? Why or why not?

1. Deadweight loss and administrative burden 2. The less deadweight loss and administrative burden a tax creates the more efficient. 3. No, it is just an opinion.
 * Answers**: