Chapter+12+THE+DESIGN+OF+TAX+SYSTEM+Erica+JennY+Kelsey


 * Budget Deficit:** The amount by which a government 's spending exceeds its income over a particular period of time.
 * Budget Surplus:** The amount by which a government 's income exceeds its spending over a particular period of time.

=A Financial Overview of the U.S. Government=

The Federal Government:
http://www.heritage.org/research/features/budgetchartbook/images/fed-rev-spend-2008-boc-R2-Federal-Government-Tax-Revenue.gif Receipts: The government gains its revenue through individual income taxes, social insurance taxes, corporate income taxes, and etc. Spending: The government spends its money on social security, national defense, income security, medicare, health, net interest, and etc.
 * Individual income tax is the largest source of revenue and it is computed as total income minus and amount based on the number of dependents and minus certain expenses that policy makers have deemed 'deductible'.
 * Social insurance taxes are sometimes called payroll taxes because it is a tax on the wages that a firm pays its workers. It is designed to pay for Social Security and Medicare. Social Security is an income-support program for the elderly to maintain the living standards. Medicare is the government health program for the elderly.
 * Corporate income taxes are the taxes that the government imposes based on the corporation's profits.
 * Some of the other taxes are excise taxes, estate taxes, and customs duties.
 * When the total receipts of the federal government fall short of total spending, such a situation is called a budget deficit.
 * When receipts exceed spending, it is called a budget surplus.

State and Local Government:
Receipts: U.S. state and local government gets its receipts from sales taxes, property taxes, individual income taxes, corporate income taxes, federal government, and etc. Spending: U.S. state and local government spends its money on education, public welfare, highways, and etc. Obama: Raise Taxes, Capital Gains - "For Purposes of Fairness" media type="youtube" key="WpSDBu35K-8" height="344" width="425" http://kr.youtube.com/watch?v=WpSDBu35K-8
 * The most important taxes for state and local government are sales taxes and property taxes. Sales taxes are imposed through calculating a percentage of the total amount spent at retail stores. Property taxes are levied through a percentage of the estimated value of land and structures and are paid by property owners.
 * The government additionally spends its money on services such as libraries, police, garbage removal, fire protection, park maintenance, and snow removal.

Second Section: Erica =**TAXES AND EFFICIENCY**=

DEFINING TERMS

 * 1) Average tax rate: Total taxes / Total income
 * 2) Marginal tax rate: The extra taxes paid on an additional dollar of income.
 * 3) Lump-Sum tax: A tax that is the same amount for every person.

Tax policies tries to avoid OR minimize these Efficient tax policy has LESS DWL & Administrative burden.
 * DWL that results when taxes DISTORT THE DECISION that people make
 * The administrative burdens that tax payers bear as they comply with the tax laws.

WHAT IS ADMINISTRATIVE BURDEN?
-> The administrative burden of regulation is, simply put, the amount of time and money needed to meet the inspectorates’ need for information. Therefore this is government expenditure to collect tax.

LUMP-SUM TAXES
Lump-sum tax is the most efficient tax system SO FAR because it levies the SAME amount of money for every person. It is most efficient because a person's decisions don't alter the amount owed. It doesn't create DWL because it doesn't distort incentives. This is efficient BUT NOT equal because... If A has a income of $1,000, and B has a income of $500. When the tax is $500, B has no money to survive, while A has $500 left. WE ALSO NEED TO CONSIDER __//**EQUITY.**//__

Third Section: Kelsey

The **ability to pay principle** is the idea that taxes should be placed on people according to the ability of a that person can shoulder the burden to pay.
THIS PRINCIPLE LEADS TO TWO COROLLARY NOTIONS OF EQUITY: **Vertical equity** and **Horizontal equity **.

[[image:http://kevincolby.com/wp-content/uploads/2008/07/tax-evaders-india_261.jpg width="326" height="375" align="right"]]
Proportional, Regressive and progressive. **Proportional** is a tax for which high income and low income taxpayers pay the same amount of proportion of tax.
 * Vertical equity i** s the idea that tax payers with a greater ability to pay taxes should pay larger amounts. There are different system taxing methods such as:

FOR EXAMPLE I earn 200 and Tom earns 1000 and we both pay 20% of out tax. Thus for me, I will have to pay $40 while tome will have to pay $200.

**Regressive** is a tax for which high income taxpayers pay a smaller fraction of their income that do lower income taxpayers. **Progressive** is a tax for which high income taxpayers pay a larger fraction of their income than do low-income taxpayers.

Tax incidence and Tax Equity
when considering changes in the tax laws, policy makers face a trade off between efficiency and euqioty! Much of the debate over tax policy arises because people give different weights to these two goals. Picture: __http://kevincolby.com/wp-content/uploads/2008/07/tax-evaders-india_261.jpg __**
 * Economics cannot determine the best way to balance the goals of efficiency and equity.

**BENEFITS PRINCIPLE:**

 * This basically is saying wealthy people need to pay more tax than poor people. Because the wealthy benefit more from public services. For example, they get police protection from thefts. It is a public good, but poor people have nothing to be stolen compared to wealthier people. Therefore, rich people use protection of police more often and useful compared to poor people.**

**THE ABILITY-TO-PAY PRINCIPLE**
|| || $100,000 || $100,000 || || //__Vertical__// **represented with BLUE, is saying that.. Professor with the highest profit MUST pay HIGHER TAXES. THREE TAX SYSTEMS IN VERTICAL EQUITY**
 * This means that tax should be levied on a person according to how well that person can shoulder the burden. This principle suggests that all citizens should make an EQUAL SACRIFICE. Ability to pay principle has two types of equal distribution**
 * 1) **VERTICAL**
 * 2) **HORIZONTAL**
 * DOCTOR || LAWYER || PROFESSOR ||
 * $200,000 || $200,000 || $200,000
 * $100,000
 * $50,000 || $50,000 || $50,000
 * **Proportional tax: SAME TAX%**
 * **Progressive tax: Rich pays more tax, Poor pays less (DEMOCRATIC)**
 * **Regressive tax: Rich pays less, Poor pays more ->**

__//Horizontal**//__ represented with RED, is saying that.. All jobs with similar profit (ability to pay) should be levied the same amount of tax.

Questions:
 * 1) What are the most important taxes for the federal government?
 * 2) What are the most important taxes for the state and local government?

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