Econ 130 Ch6 notes

Chapter 6: Funding the Public Sector

6.1 Paying for the Public Sector

• Three Sources of Government Funding:

  • Fees (User Charges): Payments from individuals for specific services.

  • Taxes: Compulsory financial charges imposed by the government.

  • Borrowing: Government debt instruments to fund activities.

6.2 Systems of Taxation

• Tax Base:

  • The value of goods, services, wealth, or income subject to taxation.

• Tax Rate:

  • The percentage of the tax base that must be paid to the government.

6.3 Marginal and Average Tax Rates

• Marginal Tax Rate:

  • Formula: ( \frac{\Delta \text{taxes due}}{\Delta \text{taxable income}} )

• Tax Bracket:

  • A specific interval of income that applies to a unique marginal tax rate.

• Average Tax Rate:

  • Total tax payment divided by total income.

6.4 Types of Taxation

• Proportional Taxation:

  • Tax bill comprises the same percentage regardless of income level.

  • Example Calculation:

    • Income of $10,000 at 20% = $2,000;

    • Income of $100,000 at 20% = $20,000.

• Progressive Taxation:

  • Higher incomes incur a higher percentage of tax on additional income.

  • Example:

    • Income from $0–$10,000 taxed at 5%,

    • $10,001–$20,000 at 10%, up to $20,001–$30,000 taxed at 30%.

• Regressive Taxation:

  • Tax burden decreases as income increases, leading to a lower effective tax rate at higher incomes.

  • Example:

    • Income of $50,000 at 10% = $5,000;

    • Income of $100,000 at 5% = $5,000.

6.5 The Most Important Federal Taxes

• Federal Taxes:

  • Major revenue sources include:

    • Individual income taxes (largest source),

    • Corporate income taxes,

    • Social Security taxes,

    • Import and excise taxes.

• State and Local Taxes:

  • Major sources include:

    • Sales taxes,

    • Property taxes,

    • Personal and corporate income taxes.

6.6 Federal Income Tax Overview

• Federal Personal Income Tax:

  • Accounts for 50% of all federal revenue.

  • Applies to U.S. citizens and resident aliens, inclusive of foreign income.

6.7 Marginal Income Tax Rates

• Tax Brackets for Single Persons and Married Couples:

  • Example rates for income levels:

    • $0–$9,700 at 10%,

    • $9,701–$39,475 at 12%,

    • $39,476–$84,200 at 22%, ongoing escalated rates for higher incomes.

6.8 Arguments for Progressive Taxation

• Pro:

  • Aims for income redistribution and ability to pay.

• Counterargument:

  • Lack of strong evidence for significant income redistribution.

6.9 Capital Gains and Losses

• Capital Gain:

  • Positive difference between the purchase price and the sale price of an asset, adjusted for inflation.

  • E.g., buying a stock for $5 and selling for $15 results in a $10 capital gain.

• Capital Loss:

  • Negative difference between the purchase price and the sale price.

6.10 Corporate Income Tax

• Corporate Tax Overview:

  • Represents 7% of federal tax revenue and 2% of state and local revenues.

  • Corporations taxed on net profits.

• Double Taxation Explained:

  • Corporations first taxed on profits and further taxed on dividends distributed to shareholders.

6.11 Tax Incidence and Social Security Tax

• Tax Incidence:

  • Consumers, stockholders, and employees bear the burden of corporate income tax.

• Social Security Taxes:

  • Imposed on earnings up to $133,000; both employers and employees contribute 6.2%.

6.12 Unemployment Insurance Taxes

• Overview:

  • Employers pay 0.6% on the first $7,000 of wages for employees earning over $1,500, with states able to levy an additional tax.

6.13 Sales Taxes and Tax Analysis

• Sales Tax Overview:

  • Taxes on the price of goods and services, generally yielding more revenue than income taxes.

• Ad Valorem Taxation:

  • A percentage of the market price of each purchased unit.

• Static Tax Analysis:

  • Assumes that tax rate changes do not affect the tax base.

• Dynamic Tax Analysis:

  • Higher tax rates may reduce the tax base as consumer behavior alters in response to incentives.