Tax Notes

Question 1

What is a tax?

Answer 1

A charge imposed by the government on people for public purposes used for public goods

Examples: Public portapotty, schools, traffic lights

Question 2

How do we choose things that we want from taxes?

Answer 2

Voting

Question 3

What are the Positives of Taxes?

Answer 3

• 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

Question 4

What is fiscal policy?

Answer 4

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.

Question 5

What are the 3 main reasons to have taxes?

Answer 5

1. Raise Revenue
2. Influence Behavior
3. Maintaining Fairness

Question 5

What are the Negatives of Taxes?

Answer 5

• Takes away people’s choices (25%)
• Slows down the economy
• Inefficient government use of funds

Question 6

Which is the most important main reason and why?

Answer 6

The most important reason to have taxes is to raise revenue so the government can pay for public services like schools, roads, and healthcare.

Question 7

2 Principles to decide WHO should pay taxes:

Answer 7

1. 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?

2. 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.

Question 8

What does YTD mean?

Answer 8

Year to date

Question 9

Gross pay vs Net pay?

Answer 9

Gross pay is the amount before taxes and Net pay is the amount after taxes are applied.

Question 10

How to calculate the % of something?

Answer 10

Lower number over the Higher number.

Question 11

Two reasons taxes can be good?

Answer 11

• Promote wellbeing in society
• Public safety + national education

Question 12

What is a Regressive Tax?

Answer 12

As income goes up, tax rate goes down (regresses)

Example: Michigan state sales tax is regressive

Question 13

What is a Progressive Tax?

Answer 13

As income goes up, tax rates go up

Example: Income Tax

Question 14

What is a Proportional Tax?

Answer 14

Income goes up, tax rate stays the same

Example: Medicare

Question 15

What is a SIN Tax?

Answer 15

A SIN tax is a tax on things like cigarettes, alcohol, and gambling because they’re considered harmful. It aims to discourage

Question 16

What is a direct tax?

Answer 16

A direct tax is a tax you pay directly to the government, like income tax.

Question 17

What is an indirect tax?

Answer 17

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.

Question 18

Bucket analogy? 12% bucket with 12% tax rate

Answer 18

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.

Question 19

Why is Progressive tax more fair than regressive tax

Answer 19

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.