Review

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Review

• What is the fundamental economic problem?
• What are the requirements for something to be
  scarce?
• What are the three questions that all societies
  must face?
• What are the four factors of production?
• What are the three major economic systems? Who
  answers the questions in each?
• What type of economic system is the U.S.?
  Explain?
• What are fixed costs?
• What are variable costs?
• Pepsi and coke are ___________________ goods.
  Peanut butter and jelly are ____________ goods.
• What are the three major types of unemployment?
  Explain each.

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Taxes

• The source of government revenue

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What does this mean?
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Why tax?

• Source of government revenue
• What does the Government spend money on????
• Public Goods (Nat. Defense, Schools, Parks,
  Roads, Social Programs, Police, Firemen)
• Repayment of debt with interest
• Research and Development (technology)
• Entitlements Medicare, Medicaid, and Social
  Security

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Where does all the money go?

• http//www.nytimes.com/interactive/2012/02/13/us/p
  olitics/2013-budget-proposal-graphic.html

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What are the Types of Taxes?

• Proportional Taxes
• A tax with a constant paid regardless of income
• Flat tax
• Progressive Taxes
• A tax where the paid in taxes increases as
  income increases
• U.S. Personal Income Tax
• Regressive Taxes
• The lower your income the higher you pay in
  taxes
• Sales Tax

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Proportional, regressive, or progressive?
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sales tax two families?

• Family of 4 with income of 100,000 annually
• If they save 30 of their income, how much do
  they spend on consumer goods (assume they spend
  the rest for purposes of simplicity)?
• 70,000
• Suppose there is a 5 sales tax how much do
  they pay in taxes
• .05 x 70,000 3,500
• What percentage of their total income do they pay
  in taxes?
• 3,500/100,000 x 100 3.5

• Family of 4 with income of 20,000 annually
• At this income level, how much will this family
  be able to save?
• How much do they spend on consumer goods?
• 20,000
• Suppose there is a 5 sales tax how much do
  they pay in taxes
• .05 x 20,000 1,000
• What percentage of their total income do they pay
  in taxes?
• 1,00/20,000 x 100 5

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Who should pay taxes?
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Principles of taxation Who should pay?

• Ability to Pay Principle
• A citizen will pay more tax if he or she is able
  to pay more
• Income Tax- Wealthy more taxes, impoverished pay
  less
• Benefit Principle
• Citizens who will benefit from the use of the tax
  will pay for it.
• Excise taxes on gas go to fund road work and
  other projects
• Sales tax / Property tax in an area go to fund
  schools in that area

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Criteria for Effective Taxes

• Equity-
• Tax must be fair and not discriminate or target
  individuals based on race or gender or age
• Simplicity
• The Tax must be some what easy and understandable
  for citizens
• Tax loopholes??
• Efficiency
• The tax must generate an acceptable flow of
  income for the government.

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Impact of Taxes

• Generate Income
• Adjust Behavior How?
• Sin Tax- high tax placed on a product that has is
  viewed negatively in society
• Tobacco, Liquor, fast foot
• Allocate Resources
• Taxes change the price of products and will
  change the QD of the product and the S of the
  product

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Impact of Taxes

• Productivity and Growth
• High taxes will stunt economic growth
• Low taxes will limit ability of government to
  function
• WHY?

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Federal Tax System

• Income Tax-
• Personal
• Corporate
• Capital Gains Tax
• Excise Tax- Flat tax placed on the production and
  sale of specific items
• Tariff- Tax on imported goods

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Federal Tax System

• Payroll deductions- taxes that automatically come
  out of your pay check
• FICA Taxes
• Medicare and Social Security Taxes
• The Internal Revenue Service (IRS)
• Federal Agency that collects taxes
• Tax Returns
• Tax Evasion

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State and Local taxes

• Property Tax
• Sales Tax
• Splost

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The State Dollar-
Where It Comes From
Property Tax 32
Individual Income Tax 22
Alcoholic Beverages Sales Tax 1
Tobacco Product Sales Tax 1
Motor Vehicle License 2
Corporate Income Tax 3
General Sales Tax Gross Receipts 25
Motor Fuel Sales Tax 4
All Other 10
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The State Dollar-
Where It Goes
Education 30
Social Services 21
Insurance Trust Expenditure 7
Transportation 7
Government Administrative 4
Utility Expenditure 7
Interest on General Debt 4
General Expenditure 5
Public Safety 8
Environment and Housing 7
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What Tax am I????

• http//www.youtube.com/watch?vlafDykKJ_9I
• The only reason I exist is to get people to stop
  people using specific product.
• The I take gets bigger as you make more money.
• I am a special tax, I am not on everything just
  one specific product, the product is good to use
  and the money I generate goes to specific cause
  like roads or education.
• I am a constant, as your income goes up or down I
  stay the same .
• I am everywhere, where ever there is a market I
  am there.
• If you are making legal money I get a cut.
• If your income is big then I am small, and if
  your is small I seem larger than life.
• If you want something from over the seas it has
  to get past me.
• I am the basic economic problem that everyone
  faces.
• When someone does not pay their taxes they have
  committed ________