ECON 200 Chapter 20
ECON 200 Chapter 20 ECON 200
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This 4 page Class Notes was uploaded by Lucy Notetaker on Saturday October 8, 2016. The Class Notes belongs to ECON 200 at University of Maryland taught by Dr. Robert Schwab in Fall 2016. Since its upload, it has received 47 views. For similar materials see Principles of Economics: Microeconomics in Economics at University of Maryland.
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Date Created: 10/08/16
Econ 200 Chapter 20: Taxation and the Public Budget Hello my lovely Econ people. We meet again after exam 1. I hope everyone had a good exam and is ready to jump back in with taxes! Why Tax? th - April 15 isn’t just a day to make people cry, the government has two main motives to tax 1. Raising Revenue- Taxes help the government stimulate the economy, provide needs to people (housing, food stamps), and help the country (military) 2. Changing Behavior- Money talks and taxes can make people cut back on something. Taxing “bad” or “unhelpful” products such as alcohol and tobacco is an example. - Most taxes decrease total surplus, because of deadweight loss, but some increase surplus too - On the graph, changing behavior is shown on the demand curve and revenue is the rectangle between price buyers pay and what sellers receive Principles of Taxation Some taxes are definitely better than others. We judge taxes based on efficiency, revenue and incidence 1. Efficiency- sometimes a tax will be inefficient, but not necessarily bad because the revenue generated is fixing another problem. There are two types of inefficiencies - Deadweight Loss- the loss of total surplus that occurs because the quantity of a good that is bought and sold is below market equilibrium. This “money” completely disappears. Nobody gets it, not even the government. Deadweight loss is determined by price elasticity. The more elastic, the more deadweight loss. - Lump-Sum/Head Tax- Technically part of deadweight, but it is a tax that charges everyone the same tax, regardless of circumstance or economic behavior. It will maximize efficiency and minimize deadweight loss, but will cause no change in behavior. Also it’s unfair to the poor. - Administrative Burden- someone has to collect and enforce the tax, so these are the logistical costs. The more complicated the tax, the higher the burden because it takes more people to “run” it. For efficiency purposes, we should keep the tax simple (sales tax) 2. Revenue- So how much money will this tax raise? Let’s do math! - Tax Revenue=tax per unit (*) number of units - For this to be fair, use the quantity demanded after the tax is implemented, not before - Typically when the tax is higher the quantity effect starts to catch up to the price effect - Also the more elastic, the faster the revenue maximizing point will occur (think about it, a highly elastic good can only go up a couple dollars before people seek out alternatives) - After this point is reached, lowering the tax will increase revenue - Basically revenue is just a test of balance 3. Incidence- a description of who bears the burden of a tax - This is why we don’t use head taxes, because the poor are at a disadvantage. We have to be fair when deciding who bears a tax burden - Statutory Incidence- who legally pays the tax to government has no affect on (next bullet) - Economic Incidence- who loses surplus - Whichever side is more inelastic will bear more of the burden - Example: Let’s say there is a 6% sales tax on muffins. The statutory incidence is on the buyers, because they pay 6% more, but the economic incidence might fall on the bakers, because consumers will opt for a substitute good (cupcakes) or cut out muffins altogether. A Few Types of Taxes Proportional- a tax that takes the same percentage of income from all taxpayers (flat tax) - Martha and Mary are both taxed 20% of their income even though they have very different salaries Progressive- a tax that charges low income people a smaller percentage of their income compared to high income people - Since Martha only makes 10,000 a year compared to millionaire Mary, Martha only pays 10% of her income while Mary pays 30% of her income Regressive- a tax that charges lower income people a larger percentage of their income than high income people - Martha and Mary both pay $5,000 a year in taxes. Not a big deal for Mary, but it’s 50% of Martha’s income Taxonomy of Taxes Let’s start with the fiscal year. It’s from October to the next September and the US government collects 2.345 trillion dollars. Let’s break that down and see where this wad of cash comes from - The personal income tax and payroll tax contribute to 90% with the corporate income tax making up only 10% - State is a little different because sales tax gives more than the personal tax Income Tax- a tax charged on the earnings of individuals and corporations - Wages, interest in savings accounts, rentals, investments, lottery and game shows - The government takes a guess at your expected income and withholds funds, but if your actual earnings don’t match then they give it back Example of above bullet- When I was working at American Eagle I got an income tax taken out of my paycheck. At the end of the year though I got a check in the mail with that money back because I only worked one season and didn’t hit my expected income. - If it’s higher than expected, you write a check to the government - The higher your income, the higher you tax rate - Marginal Tax Rate- the tax rate charged on the last dollar a taxpayer earns - To calculate, you must tax each bracket, not your whole income. Using the table on pg. 488 for my example, let’s say you make 85,650 dollars. You must calculate 10% of the first 8,700, then add it to 15% of the next 30,000 then so on. - You can’t just pick your bracket, move to the right and calculate 30% of 100,000 dollars. You’ll end up paying so much more - This is a progressive tax - There are certain deductions (spouse, children, disable relative, charitable donations, college tuition, business expenses - Capital Gains Tax- a tax on income earned by buying investments and selling them at a higher price - This gets complicated and it’s controversial because capital gains favor the wealthy Payroll Tax- a tax on wages paid to an employee - This is all the minuses that you’ll on a paycheck (federal, social security, Medicare)hence the name payroll - Some people consider payroll taxes to be regressive because it hurts lower wage earners Corporate Income Tax- A progressive tax in which smaller corps, pay less percent of their income. Burden is not always on the corporation though. Other Taxes Sales Tax- charged based on the value of good or service being purchased (5% tax on goods, the more expensive your goods, the more you pay) Excise Tax- a sales tax on a specific good or service (20% tax on alcohol) - Sales Taxes are great for the state (haha that rhymes) Property Tax- a tax on the estimated value of a home or other property - Typically used for local governments and it funds public school Estate Tax- “death tax” on what people give to you after death The Public Budget - Taxes contribute to GDP, the high income countries have a higher percentage of their taxes contributing, while the opposite is true for low income (US is an exception) Expenditures - Public revenue and public spending is a messy relationship because it’s hard to balance a budget - Discretionary Spending- public expenditures that have to be approved each year (military and medical research) - Entitlement Spending- public expenditures that “entitles” people to benefits by virtue of age, income or another factor (Social Security) - Entitlement spending is far more of our expenditures Balancing the Budget - Budget Deficit- the amount of spending is beyond the revenue coming in - Budget Surplus- the amount of revenue outweighs spending (a concept very foreign to the US *sorry too political) - Balancing is hard because planning is not an exact science, but deficits typically come in bad times and then surpluses in good times - It’s a cycle (but sometimes it’s easy to endlessly spend) That’s it everyone, no conclusion because I’m saving electronic paper…
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