Course Notes 2.25-2.28

Course Overview

  • Notes from the period 2/25-2/28.

  • Reminders: Quizzes were due, return quizzes, fiscal quiz.

Big Ideas

Budgeting Challenges

  • Why is it so tough to cut spending?

  • How should we be taxed?

Debrief Criteria

Tax Types and Their Characteristics

Revenue Generation

  • Sales Tax: Common state tax on retail goods.

  • Social Security: Payroll tax funding retirement and disability benefits.

  • Corporate Income Tax: Tax on corporate profits.

  • Consumption Tax: Tax on spending for goods and services.

  • Value-Added Tax (VAT): Tax on product value at each production stage.

Fairness of Taxes

  • Capital Gains Tax: Tax on profit from investment sales.

  • Sin Tax: On harmful products (tobacco, alcohol).

  • Estate Tax: Tax on assets transferred upon death.

  • Luxury Tax: Tax on non-essential high-cost items.

Political Appeal

  • Medicare Tax: Payroll tax funding healthcare for the elderly.

  • Social Security: Widely accepted, benefits many citizens.

  • Tariffs: Taxes on imports that protect domestic industries.

  • Sin Tax: Often popular as it discourages unhealthy behaviors.

  • VAT: Seen as a stable revenue source.

Progressivity vs. Regressivity

Progressive Taxes

  • Medicare Tax: Benefits are based on contributions.

  • Capital Gains Tax: Higher rates for wealthy investors.

  • Corporate Income Tax: Paid by profitable corporations.

  • Social Security Tax: Higher contributions from higher incomes.

  • Estate Tax: Targets wealth transfer among the rich.

  • Luxury Tax: Aims at luxury goods consumed by the wealthy.

Regressive Taxes

  • Sales Tax: Higher relative burden on low-income individuals.

  • Consumption Tax: Similar impact on purchasing power of poorer households.

  • Sin Tax: Disproportionately affects lower income earners.

  • Gas Tax: Taxes on fuel that impact all users regardless of income.

  • Tariffs: Can increase prices for consumers.

Economic Impact

  • Corporate Income Tax with lower rates encourages growth.

  • Sales and Gas Taxes provide essential public funding.

  • Estate Tax: Generates revenue while addressing wealth inequality.

Fiscal Policy and Borrowing

Definitions

  • Federal Deficit: When expenses exceed revenues in a fiscal year.

  • Federal Surplus: When revenues exceed expenses.

  • Debt: Total amount owed by the federal government.

Pros of Borrowing

  1. Creates creditworthiness.

  2. Allows for temporary use of other’s money.

  3. Stimulates the economy through enhanced spending.

  4. Generates beneficial social impact with investments.

  5. Debt-to-GDP ratio levels can be acceptable.

Cons of Borrowing

  1. Crowding Out: Higher government borrowing can increase interest rates, limiting private sector borrowing.

  2. Foreign Influence: Excessive borrowing can give foreign entities power over domestic policy.

  3. Interest Payments: Increase the overall debt burden.

  4. Burden on future generations due to accumulating debt.

Tax Prioritization Exercise

Tax Ranking Task

  • Participants ranked various taxes based on perceived benefits and impacts:

  1. VAT

  2. Sin Tax

  3. Capital Gains Tax

  4. Medicare Tax

  5. Social Security Tax

  6. Sales Tax

  7. Individual Income Tax

  8. Estate Tax

  9. Gasoline Tax

  10. Emissions Tax

  11. Corporate Income Tax

  12. Consumption Tax

  13. Wealth Tax

  14. Tariffs

  15. Luxury Tax

Detailed Tax Analysis

Gasoline Tax

  • Imposed per gallon, contributes significantly to federal and state revenues.

  • Affected by economic conditions; seen as regressive.

Consumption Tax

  • Tax on goods/services, varies by state.

  • Encourages savings; considered regressive.

Value Added Tax (VAT)

  • Applied within production, comprehensive, and difficult to evade.

  • Can increase cost of living; may discourage spending.

Sin Tax

  • Targets harmful goods/services, easy to collect, yet regressive.

  • Can have a disincentivizing effect on bad behaviors.

Capital Gains Tax

  • Tricky balancing act between equity and economic growth.

  • Currently lower than some earnings taxes to encourage investment.

Corporate Income Tax

  • Tax based on revenues and deductions; controversial among policymakers.

Social Security Tax

  • Funds retirement and disability benefits; pay-as-you-go system.

Wealth Tax

  • Proposed as a solution to wealth inequality, has potential loopholes.

Estate Tax

  • Tax on wealth transfer at death; funds public services but criticized for potential double taxation.

Tariffs

  • Tax on imports, protect domestic industries but increase prices for consumers.

Individual Income Tax

  • Major source of revenue; regressive effects depending on state policies.