Tax Notes Flashcards
What is a tax?
A charge imposed by the government on people for public purposes used for public goods
Examples: Public portapotty, schools, traffic lights
How do we choose things that we want from taxes?
Voting
What are the Positives of Taxes?
- Pay for public goods; you get the benefits even if you didn’t pay for it
Public Parks: Public parks are maintained through tax revenues. Even if a person does not pay taxes directly, they can still enjoy the benefits of the park
- Redistribution of wealth; from rich to the poor and poor to the rich
- Correct for negative externalities
- Stabilize economy through tax laws through fiscal policy
What is fiscal policy?
Fiscal policy is how the government uses spending and taxes to manage the economy.
For example, when taxes go down, growth of the economy goes up, and vice versa.
What are the 3 main reasons to have taxes?
- Raise Revenue
- Influence Behavior
- Maintaining Fairness
What are the Negatives of Taxes?
- Takes away people’s choices (25%)
- Slows down the economy
- Inefficient government use of funds
Which is the most important main reason and why?
The most important reason to have taxes is to raise revenue so the government can pay for public services like schools, roads, and healthcare.
2 Principles to decide WHO should pay taxes:
- Benefit Principle: those who gain from the spending of taxes should be the ones who pay the taxes to provide the benefits.
Ex: Residents that live near the park should pay for its upkeep through local property taxes because they benefit from its amenities like playgrounds and green space.
Problem: Everyone gets benefits from a public good, how to who to charge? Difficult to measure the benefits people receive to the amount they should pay
Problem 2: Those who needs services most have less ability to pay?
- Ability To Pay Principle: Those who can best afford to pay taxes should pay most of the taxes.
Ex: Progressive income tax system where higher-income individuals pay a higher percentage of their income in taxes.
Problem: It can be a disincentive towards hard work and success by taxing higher earners at higher rates, even though it makes taxes more affordable for lower incomes.
What does YTD mean?
Year to date
Gross pay vs Net pay?
Gross pay is the amount before taxes and Net pay is the amount after taxes are applied.
How to calculate the % of something?
Lower number over the Higher number.
Two reasons taxes can be good?
- Promote wellbeing in society
- Public safety + national education
What is a Regressive Tax?
As income goes up, tax rate goes down (regresses)
Example: Michigan state sales tax is regressive
What is a Progressive Tax?
As income goes up, tax rates go up
Example: Income Tax
What is a Proportional Tax?
Income goes up, tax rate stays the same
Example: Medicare
What is a SIN Tax?
A SIN tax is a tax on things like cigarettes, alcohol, and gambling because they’re considered harmful. It aims to discourage
What is a direct tax?
A direct tax is a tax you pay directly to the government, like income tax.
What is an indirect tax?
An indirect tax is a tax on goods or services that you pay when you buy things, like sales tax on items at a store.
Bucket analogy? 12% bucket with 12% tax rate
Think of the 12% bucket as a section where your income sits.
If your income fills up this bucket or is below it, you pay 12% tax on everything in that bucket. If your income spills over into a higher bucket, only the overflow gets taxed at a higher rate.
Why is Progressive tax more fair than regressive tax
Progressive tax is considered more fair than regressive tax because it takes a larger percentage of income from higher-income individuals and a smaller percentage from lower-income individuals. This means that those who can afford to contribute more to society pay a higher proportion of their income in taxes, while those with lower incomes are taxed at a lower rate, which helps to redistribute wealth and reduce income inequality. In contrast, regressive tax systems take a larger percentage of income from lower-income individuals, which can disproportionately burden those who are less financially well-off. This makes progressive taxation generally more equitable and reflective of the ability to pay.
