ECON CHAPTER 20

what is the connection between what you pay and what you get for payroll tax?

- the connection between what you pay and what you get is indirect -Social security is on a pay-as-you-go model, people who are currently working pay taxes which are then spent to provide benefits for people who are currently retired

how is payroll tax regressive?

-FICA- people who make more than $110,000 pay a lower percentage of their total earnings the more they earn (because a lot of times they get their money from other sources like investments) -taxes income only earned through wages

how income tax works

-In the US the federal government with holds federal income tax from your paycheck based on your expected annual income -When you file taxes at the end of the year, you report your actual earnings. If they are lower than the expected earnings, the government returns some of the taxes -If actual earnings are higher than expected, you have to write check to government for additional money owed

expenditures

-Revenue collected at a certain time or place can be moved around to pay for expenditures in a different time or place -Governments borrow against future revenues to finance expenditures today -US government spends most of its tax revenues on health expenditures, social security, and national defense

quantity effect of tax

-The higher tax rate causes fewer units to be sold- the quantity effect -The net effect on revenue depends on whether the quantity effect outweighs the price effect

why tax? raising revenue

-allows governments to provide goods and services to citizens (ex. national defense and highway building) -tax funded programs like education are intended to increase surplus and growth -food and health care are intended to help basic human needs

why tax? changing behavior

-alter the incentives faced my market participants -drive a wedge between the price paid by buyers and received by sellers, resulting in a lower equilibrium quantity of the good being consumed

who are pay-roll taxes charged on?

-both employees and employers, with the total tax bill split down the middle -The employee's portion shows up on your paystub as FICA withholding (Federal Insurance Contribution Act) , employer withholds that amount and sends it to the government at the same time -self employed pays both parts

some types of income are not taxed

-employer paid medical insurance -interest on state and local bonds -imputed rent from owner occupied homes

tax revenue effect

-imposing tax in markets where demand and supply are inelastic causes less efficiency and raises more revenue -Tax will increase price, drive down demand, reduce equilibrium quantity bought and sold -At the beginning, raising the tax rate increases revenue. At a certain point, further increases in the tax rate decrease the amount of revenue collected

pros and cons to lump-sum tax

-no incentive to change behavior -way to go if only goal was to maximize efficiency and minimize deadweight loss -many people find it unfair -Reduces total amount of revenue that can be raised, because the size of the tax is limited to the poorest citizens ability to pay

corparate income tax

-progressive- smaller corporations pay a lower percentage of their income -burden of the tax could be in varying degrees from shareholders- (through lower dividends) , employees (through lower wages), or customers (through higher prices)

what does administrative burden include?

-time and money spent by government agencies to track and follow up on tax -taxpayers' time and expense of filling their returns and hiring accountants and lawyers to give them tax advice -The more complex the tax, the higher the administrative burden will be -if maximizing efficiency was the only goal, simpler taxes would trump complicated ones

how is payroll different from income?

1. charged on "earned" income- excludes investments and gifts 2. In 2013 all wage earners were charged at the same rate for social security and medicare 3. Income taxes go into general government revenue, payroll tax (FICA) is a direct contribution to social security and medicare

marriage penalty and marriage bonus

A marriage penalty and bonus is the change in a couple's total tax bill as a result of getting married and thus filing their taxes jointly

benefits of capital gains tax

Critics contend that because higher-income people earn more through capital gains, the benefits of the tax go mainly to the wealthy

government calculates taxes

Government calculates taxes by fiscal year, starting in october or one calendar year through september of the following year

policy makers and the burden

Policy makers have the power to redistribute the tax burden between consumers and producers

adjusted growth income

Some types of income receive preferiential treatment -capital gains -tax only low when realized, lower rates, good news when you die

inelasticity in tax

The side of the market that is more inelastic- the side that responds less to the change in prices- will bear more of the tax burden

incidence

a description of who bears the burden of a tax

deadweight loss

a loss of total surplus that occurs because the quantity of a good bought and sold is below the market equilibrium quantity

excise tax

a sales tax on a specific good or service ex. cigarettes, gasoline -US has no federal sales tax, but sales taxes are a major source of revenue for state governments

income tax

a tax charged on the earnings of individuals and corperations -largest source of income is work, others include investment, saving accounts, etc. -The higher your income, the higher your income tax "bracket", those in higher tax brackets pay higher percentage of their income

capital gains tax

a tax on income earned by buying investments and selling them at a higher price -income is taxed at a lower rate than most other income

property tax

a tax on the estimated value of home or other property -often fund public schools

pay-roll tax

a tax on the wages payed to an employee

progressive tax

a tax that charges low income people a smaller percentage of their income than high income people, people of low income pay smaller percentage

regressive tax

a tax that charges low-income people a larger percentage of their income than it charges high income people

lump-sum tax (head tax)

a tax that charges the same amount to each tax-payer, regardless of their economic behavior or circumstances (rarely see them)

sales tax

a tax that is charged on the value of a good or service being purchased -many states exempt certain classes of items considered to be necessities (food, clothing)

proportional/ flat tax

a tax that takes the same percentage of income from all tax-payers, people in proportion to their income

efficiency of progressive income tax rates

bring in tax revenue without causing much deadweight loss

tax revenue

equal to the tax rate multiplied by the quantity traded under the new equilibrium

impossibility of marriage tax

impossible to create tax system that meets three principles 1. taxes should be progressive 2. the family is the appropirate unit of taxation 3. marriage neutrality

inefficiency with tax

just because a tax creates inefficiency, doesn't mean that the tax is bad. The tax may create inefficiency, the revenue it generates may be used to fix another one. The net effect is specific to each tax.

many minor taxes

on imports, on large financial gifts, taxes on money and assets that are left to heirs when you die

how is payroll tax is like a forced saving for retirement?

people who pay FICA during their working years are eligible for Social Security and Medicare benefits when they retire

adjusted incomes

people will be charged less if they have a child with disabilities

where does tax money come from?

primarily from personal income taxes, payroll taxes, and corperation income taxes. Then the rest is from excise taxes and other

entitlement spending

public expenditure that "entitles" people to benefits by virtue of age, income, or some other factor Ex. social security, medicare -Expenditures on these programs cannot be decreased without changing the eligibility requirements and benefits set in the laws on which the programs are based

discretionary spending

public expenditure that have to be approved each year Ex. military, public construction, road building, medical research -majority of federal expenditures are nondiscretionary, going toward programs for which spending is mandated and regulated by permanent laws

balanced budget laws

require the government to spend no more than it owes in any given year

what is pay-roll tax used for?

social security and medicare

total amount of surplus lost

surplus lost to buyers and sellers but converted into tax revenue that funds public services. deadweight loss is a value that disappears as a result from it, buyers, sellers, and government do not benefit

Estate tax or "death tax"

tax rate based on value after death

marriage bonus

taxes might go down if you get married -typically occurs when two individuals have very different incomes Marriage bonuses can be as high as 20 percent of a couple's income

marriage penality

taxes might go up if you get married -when two individuals have equal incomes marriage penalties can be as high as 12 percent of a couple's income

budget deficit

the amount of money a government spends beyond the revenue it brings in

budget surplus

the amount of revenue a government brings in beyond what it spends

administrative burden

the logistical costs associated with implementing a tax

deadweight loss and price elasticity

the more price-elastic the demand or supply curve, the larger the drop in equilibrium quantity caused by increase in price, and the larger deadweight loss will be. Deadweight loss is minimized when a tax is levied on something for which people are not likely to change their behavior.

why is american individual income tax progressive?

the more the people earn, the higher the percentage of their total income

marginal tax rate

the tax rate charged on the last dollar a taxpayer earns

how are the benefits people receive from social security progressive?

those who had higher income working receive higher benefits

difficulty of balancing budget

unlikely that revenues will exactly equal planned expenditures in any given year

statuary incidence

who is legally bounded to pay the tax has no effect on actual economic incidence- who actually loses to the government