Chapter 9Sources of

Government Revenue

Section 1

Why do we need taxes??• Taxes are required to raise

money to run the federal, state, and local governments

•Taxes influence the economy in 3 major ways…

1. Resource Allocation• When a tax is placed on a certain

item, the higher price may discourage buyers - lowering the demand for the good

• Example: Luxury taxes on expensive cars

2. Behavior Adjustment• Some taxes are used to

encourage or discourage economic activities

• Example: Sin tax – a high tax on a socially undesirable product (liquor, cigarettes)

3. Productivity and Growth

• Taxes can change the incentives to save, invest, and work

• Some people feel that if taxes are too high it may lower incentive to work

Who Taxes Effect• Incidence of a Tax – the final burden

of the tax**the party being taxed is not always

the one who bears the burden**• Example: City raising the tax rates

on an electric company – Who bears the incidence of a tax?

Types of Taxes

• There are 3 general types of taxes that exist in the United States today

1. Proportional2. Progressive3. Regressive

1. Proportional Taxes

• Imposes the same percentage rate of taxation on everyone, regardless of income

• Average Tax Rate – total taxable income divided by the total income– *if a person’s income goes up, the percentage of total income paid in taxes does not change*

2. Progressive Tax• A tax that imposes a higher

percentage rate of taxation on persons with higher incomes

• Usually use a marginal tax rate, the tax rate that applies to the next dollar of taxable income

• **The percentage of income paid in taxes increases as income increases**

3. Regressive Tax

• A tax that imposes a higher percentage rate of taxation on low incomes than on high incomes

• *If the state sales tax is 4%, the person with the lower income is paying a higher percentage of total income in taxes

Individual Income Taxes

In 1913, the 16th Amendment was ratified allowing Congress to levy

an income tax

Progressive Tax Income

Individual income taxes are progressive taxes

State and Local Tax Systems

State government Revenue Sources

• Intergovernmental Revenue – funds collected by one level of government that are distributed to another level of government for expenditures

• Largest source of state revenue

• States receive funds from the federal government for welfare, health, etc.

• Sales taxes are the 2nd largest source of revenue for states

• States that do not have general sales taxes:

• Alaska• Delaware• Montana• New Hampshire• Oregon

Local Government Revenue

• Local governments receive the largest part of the revenues from intergovernmental transfers by state governments

• Property Taxes – a tax on tangible and intangible possessions such as real estate, buildings, furniture, or bank accounts

• Tax Assessor – the person who assigns value to property for tax purposes

Examining Your Paycheck

Check our your Payroll Withholding Statement, the

summary statement attached to a paycheck that summarizes

income

More Taxes…

• Value-Added Tax –a tax placed on the value that manufacturers add at each state of production

• Advantages: easy to collect, widely spread especially in Europe

• Disadvantages: invisible to customers

• Flat Tax – a proportional tax on individual income after a specified threshold has been reached

• Advantages: simplicity, closes or minimizes loopholes

• Disadvantages: removes many of the behavior incentives already built (donations to charitable organizations)