Chapter12+JDEM





=Introduction=

====// As we learned about dead weight losses from taxes, this chapter we are going to learn about the design of tax systems. It is quite useful to know how U.S. government raises and spend money as American citizens and students. We will see how government balances the equity and efficiency looking at the principles of taxation. It may be easy to state these words, but catching two birds isn't too easy. //====

=Federal Government=

The federal government takes about 60 percent of the taxes in the economy!

Receipt


Every year, the revenue of taxes the government is taking increases. Let's take a look at types of taxes we pay!

Total income minus an amount based on the number of children, and minus the certain expenses, then the "taxable income" is achieved.
 * Individual Income tax:** This is the type of tax that takes up the largest revenue for the federal government's tax revenue. Every April 15th, American families have to write out a tax form to organize how much tax they owe the government. In the form, they are required to report its income from everywhere: wages, interest from savings, dividends from corporations, and even small profits from small businesses etc. Then, based on the report written, the government considers the tax liability of the family. Not only simply proportional to the income, tax liability is calculated through much more complicated calculation.



Here is the federal income tax rate. Looking at the money going up (ex: tax rate 10 % covers "not over $16700" in 2009 but was for "not over $16050") it can be assumed that the GDP per capita decreased during last year.

This table represents the marginal tax rate. It determines how much more tax has to be paid for increase in income. Due to this rule, higher income families have to pay higher amount of taxes. (Tax rate rises as income rises)


 * Payroll taxes:** Payroll tax is the tax on the wages that firm pays for its workers. Money collected from this tax is called the "social insurance taxes" because the revenue from this tax is used to pay for Social Security and Medicare.




 * Corporate Income Tax:** The revenue from this tax is quite small comparatively to the individual income taxes or social insurance taxes, however this is important too. The government decides the tax rates of each corporation according to the amount of profit the corporation is making. Corporate profits are taxed twice. They are taxed once by the corporate income tax, and it is taxed once more by the individual income tax when corporations use its profits to pay dividends to the share holders.


 * Excise taxes:** Last but not least, Excise tax takes up 7 % of the whole tax revenue. This tax is specifically on small items such as cigarettes and drinks. Estate taxes and customs duties are also included in this tax.

Spending
Spending of the government's tax revenue can be explained by one simple graph below.



Now knowing how the money is spent by the government, there are two key terms that must be learned. **Budget deficit** is when the government is using more money than the actual revenue collected from tax. Budget surplus is something opposite, it is when the government is using less money than the money collected from the tax.

=Dead Weight Loss= Previously covered in chapter 8, we learned that all taxes create Dead Weight Loss. Let's take a look at why Dead Weight Losses are created. Without the tax, the product will only cost what's needed to make it. However, when tax is put in, the original consumer and producer surplus are cut in to smaller burdens. This causes a Dead Weight Loss.

=Principles Considered when determining the tax rates to individuals=

This principle is simply an idea emerged from "If people are getting more benefit from the government services than other people, those people should pay more tax than others!". This one considers public goods just like private goods. Surprisingly, this principle also can be used to argue "Wealthy people should pay more tax than regular people" since wealthy people benefit more from the public than other people.
 * 1. Benefits principle**

This principle considers how well a person can shoulder the burden. This principle is justified by claims of "All citizens should take equal sacrifices for the country". This principle leads to two types of equity which are the following: - Vertical Equity: This idea states that people with greater ability to pay taxes should pay larger amounts of taxes. - Horizontal Equity: This idea states that people with similar abilities to pay taxes should pay the same amount of taxes.
 * 2. The Ability-To-Pay principle**

There are three types of taxes

Progressive Tax: Taxing higher if the income is higher.
=Conclusion= This chapter was mostly about learning different terms to use for tax in government. The government is in a very tiring place in the middle where there are many controversies about how people should be taxed differently. Balancing the equivalence and the efficiency of the society must be a very hard job for the government. = = =media type="youtube" key="oqMVpcbhpqw" height="344" width="425"=

Here is a little propaganda by Disney. This holds a message of "If you are a dutiful American, you must pay the taxes"



**1. Deadweight losses occur in markets in which** a. firms decide to downsize. b. the government imposes a tax. c. profits fall because of low consumer demand. d. equilibrium price rises, causing a loss in consumer surplus.

a. profit. b. the amount the firm receives for the goods or services it sells. c. the number of employees. d. All of the above are correct.
 * 2. The government taxes corporate income on the basis of**

a. proportional tax b. Gressive Tax. c. Retrogressive Tax. d. Firm and Holders Tax
 * 3. Which is a correct type of tax?**

a. the tax payment itself b. deadweight losses c. administrative burdens d. goods and services provided by the government.
 * 4. Which of the following is NOT a cost of taxes to taxpayers?**

a. control income tax b. social insurance tax. c. wage value tax d. land and capital tax click here to check your answers
 * 5. In the United States the payroll tax is also referred to as a**

=Glossary= Taxable Income: After taking out the money such as money spent on kids and expenses, the money left is called the taxable income. This is the actual amount of money that is calculated to determine how much tax the family owes the government. Tax Liability: The amount of tax the family owes to the government is determined by the "Tax Liability" Marginal Tax rate: This determines how much more tax is required to pay for certain more dollars of income. Social insurance taxes: The revenue from this tax is used to pay Social Security and Medicare. Corporation: Business that is set up as a separate legal entity. Excise taxes: Taxes on small items such as cigarettes. Budget deficit: When government spending is over the government receipts. Budget surplus: When government spending is less than the government receipts. Average Tax Rate: Total taxes paid divided by the total income. Marginal Tax Rate: Marginal taxes paid on extra dollars of income. Lump-sum tax: Tax that is the same amount for every person. Benefits Principle: It is an idea that people should pay the amount of tax according to how much benefit they receive from the government services. Ability-To-Pay principle: Idea that taxes should be paid according to how well that person can shoulder the burden. Horizontal Equity: This idea states that people with similar abilities to pay taxes should pay the same amount of taxes. Vertical Equity: This idea states that people with greater ability to pay taxes should pay larger amounts of taxes. Proportional Tax: Taxing according to the income, and the rate is same for all income. Regressive Tax: Taxing lower if the income is higher. Progressive Tax: Taxing higher if the income is higher.

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