Step+12.+The+Design+of+the+Tax+System-+Clair

=THE DESIGN OF THE TAX SYSTEM =



 = __**Key terms**__ = = = budget deficit budget surplus average tax rate marginal tax rate lump-sum tax benefits principle ability-to-pay principle vertical equity horizontal equity proportional tax regressive tax progressive tax 

 = __**WHAT YOU WILL LEARN**__ = = =  What are the most important taxes for the federal government and for state and local governments? What decides the efficiency of tax system? (What are the two costs of taxes)? What does equity of a tax system refer to? Should tax laws consider efficiency more or equity? What is the difference between vertical equity and horizontal equity 

 =__**INTRO**__ = = = media type="youtube" key="3XxFz7wQmQY" height="340" width="560"

<span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> =<span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;">**__TOPICS__** = =<span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> = <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> <span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif;">//**FEDERAL GOVERNMENT**// - the government raises revenue by using various taxes. The most important ones are: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">- minor ones: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">- corporation - business that is set up s a separate legal entity - government taxes each corporation based on its profit <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">//**FEDERAL GOVERNMENT SPENDING**// - budget deficit - an excess of government spending over government receipts - budget surplus - an excess of government receipts over government spending - Over the last 5 decades, as the elderly population grew, government spending also increased, requiring more taxes
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">taxable income (individual income tax) - computed as total income minus an amount based on the number of dependents and minus certain expenses that policymakers have deemed "deductible"
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">payroll tax
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">corporate income tax
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">Excise tax

- 40 percent of all taxes paid are collected by state and local governments - most important taxes for state and local governments: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">- sales tax and property tax make up about 1/3 of all receipts of state and local governments - the biggest single expenditure for state and local government is EDUCATION - other important categories include: <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;"> - aim of a tax system is to raise revenue for the government - two objectives: efficiency and equity - EFFICIENCY - what are the costs of taxes to taxpayers? Efficent tax system imposes small costs (deadweight losses and administrative burdens) <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">- a way to get rid of some of the deadweight loss: consumption tax replacing income tax <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">- This burden of keeping records for tax purposes and the resources the government has to use to enforce the tax laws - some advisers help clients avoid taxes by "loopholes" (= abuse of some of the detailed provisions of the tax code - arise because Congress has chosen to give special treatment) - average tax rate - total taxes paid divided by total income - marginal tax rate -the extra taxes paid on an additional dollar of income - decides the deadweight loss of the income tax - the most efficient tax possible - does not cause any deadweight loss and imposes a minimal administrative burden on taxpayers
 * //STATE AND LOCAL GOVERNMENTS//**
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">sales tax - includes necessities
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">property tax
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">also levy individual and corporate income taxes
 * //STATE AND LOCAL GOVERNMENT SPENDING//**
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">public welfare (transfer payments to the poor)
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">high way (includes building of new roads and the maintenance of existing ones)
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">other public goods
 * //TAXES AND EFFICIENCY//**
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">tax payment itself
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">deadweight loss (tax distorts incentives, and the deadweight loss comes from people who leave market)
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">administrative burdens that taxpayers bear
 * //MARGINAL TAX RATES VERSUS AVERAGE TAX RATES//**
 * //LUMP-SUM TAX//**


 * //TAXES AND EQUITY//**

THE BENEFITS PRINCIPLE - the idea that people should pay taxes based on the benefits they receive from government services - tries to make public goods similar to private goods THE ABILITY-TO-PAY PRINCIPLE - the idea that taxes should be levied on a person according to how well that person can shoulder the burden - horizontal equity - the idea that taxpayers with similar abilities to pay taxes should pay the same amount - vertical equity - the idea that taxpayers with a greater ability to pay taxes should pay larger amounts <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;">
 * proportional tax
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">regressive tax
 * <span style="font-family: 'Trebuchet MS',Helvetica,sans-serif;">progressive tax

<span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif;">**//TAX INCIDENCE AND TAX EQUITY//** - tax incidence - the study of who bears the burden of taxes - taxes alter supply and demand, so they alter equilibrium prices - they affect people beyond those who actually pay the tax (indirect effects) - when considering changes in the tax laws, policymakers often face a trade-off between efficiency and equity. <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;">

=<span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> __CONCLUSION__ = =<span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> = <span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> When considering changes in the tax laws, policymakers often face a trade-off between efficiency. Usually, high efficiency means low equity, and high equity means low efficiency. So what should they refer to when they try to decide how to tax people? Well, there is no answer to this. May economics and politicians still debate today on what is more important.

=<span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> __**QUIZ**__ = =<span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> = <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> <span style="color: #000000; font-family: 'Trebuchet MS',Helvetica,sans-serif;">What is the difference between horizontal equity and vertical equity, and what are the three examples of vertical equity? How are federal government and state government spending different? What is the most efficient tax and why? What is the most equitable tax and why? Explain the two principles associated with equity of tax system and tell why they are equitable <span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;">

<span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> =<span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> __**SOURCES**__ = =<span style="color: #000080; font-family: 'Trebuchet MS',Helvetica,sans-serif;"> = http://blog.lib.umn.edu/hgroteva/innergeek/TaxMonster.JPG http://truth11.files.wordpress.com/2008/12/uncle-sam-taxes.jpg http://lowellma.files.wordpress.com/2009/12/taxes_1.jpg