Chapter+12+(JEM)+-+The+Design+of+the+Tax+System

The Design of the Tax System
The U.S Government raises revenue by taxing in various ways.
 * **Federal Governmen****t** taxes on individual incomes mostly. [[image:img_0106.jpg width="144" height="60"]]
 * **Local governments** and **States** tax on sales taxes and property taxes mostly. [[image:States_green.jpg width="119" height="67"]]

Then is tax efficient? Let's see the taxes and its' efficiency
 * **Deadweight Losses**
 * Since taxes distort incentives they "entail" deadweight losses. For example, if government taxes ice creams then people would tend to buy more yogurts than higher costs ice creams.
 * **Administrative Burden**
 * Many taxpayers-especially those in higher tax brackets-hire tax lawyers, spend time, or perhaps hire accountants to help them with their taxes.

Economists look at **average tax rate** and **marginal tax rate** to discuss the efficiency and equity of taxes

= =
 * Average tax rate - Total taxes paid divided by Total Income **
 * Marginal tax rate** -Extra taxes paid on an additional dollar of income

How is this applied? Let's see! If government taxes 20% on below $100,000 and 50% tax on additional money over $100,000, then the average rate would the cost of those two put together and marginal tax rate would be just 50%. Thus, other theory is applied like **"LUMP-SUM" tax**. It is a tax that is the same amount for every person.

However, there are contrasting ideas and principles on taxing the citizens
 * **Benefits principle**
 * the idea that people should pay taxes based on the benefits they receive from government services
 * **Ability-to-pay principle**
 * the idea that taxes should be levied on a person according to how well that person can shoulder the burden


 * Vertical equity:** The idea that taxpayers with a greater ability to pay taxes should pay larger amounts


 * 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 taxpayers pay smaller fraction of their income than do low-income taxpayers


 * Progressive tax:** A tax for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers

People still debate over this topic on where to determine what is efficient and what is equitable tax. For example, horizontal equity is hard to determine, because taxpayers with similar abilities is hard to consider. If two men both earn $50,000 a year, but one man is married and has three-kids and the other man is a single man but has a mother who has a cancer, then are these two men in same situation? This is why U.S tax code is uneasy to compromise.
 * Horizontal equity**: The idea that taxpayers with similar abilities to pay taxes should pay the same amount


 * Helpful PPT!**
 * [[file:Chap_12.ppt]]**

 //  A tax that taxes income at an average rate that decreases with the level of income is a   // //regressive income tax// //progressive income tax// //marginal tax// //proportional income tax//  //** A tax that taxes income at an average rate that decreases with the level of income is a  ** //   **//regressive income tax //**  //progressive income tax// //proportional income tax// //marginal tax//  A tax that taxes income at a constant rate, regardless of the level of income is a    **//<span class="Apple-style-span" style="color: rgb(0, 0, 0); font-size: 12px; font-weight: normal; -webkit-border-horizontal-spacing: 5px; -webkit-border-vertical-spacing: 5px;">progressive income tax //**  <span class="Apple-style-span" style="font-size: 12px; line-height: normal; -webkit-border-horizontal-spacing: 5px; -webkit-border-vertical-spacing: 5px;">//marginal tax// <span class="Apple-style-span" style="font-size: 12px; line-height: normal; -webkit-border-horizontal-spacing: 5px; -webkit-border-vertical-spacing: 5px;">//proportional income tax// <span class="Apple-style-span" style="font-size: 12px; line-height: normal; -webkit-border-horizontal-spacing: 5px; -webkit-border-vertical-spacing: 5px;">//regressive income tax// <span class="Apple-style-span" style="font-size: 12px; line-height: normal; -webkit-border-horizontal-spacing: 5px; -webkit-border-vertical-spacing: 5px;"> <span class="Apple-style-span" style="font-size: 12px; line-height: normal; -webkit-border-horizontal-spacing: 5px; -webkit-border-vertical-spacing: 5px;">Answers? <span class="Apple-style-span" style="font-size: 12px; line-height: normal; -webkit-border-horizontal-spacing: 5px; -webkit-border-vertical-spacing: 5px;">1) Progressive income tax <span class="Apple-style-span" style="font-size: 12px; line-height: normal; -webkit-border-horizontal-spacing: 5px; -webkit-border-vertical-spacing: 5px;">2) Regressive income tax <span class="Apple-style-span" style="font-size: 12px; line-height: normal; -webkit-border-horizontal-spacing: 5px; -webkit-border-vertical-spacing: 5px;">3) Proportional income tax
 * Quick Quiz!**