Lecture14(Ch14) taxes

Types of Taxes • • • • • • • personal income tax (all types of income) payroll tax (15.3 % of wage and salary income) corporate income tax (corporate profits) excise tax (gasoline, liquor, sales) estate and gift tax tariffs on imports property taxes Federal Taxes 14_01 PERCENT OF FEDERAL TAX REVENUE 50 40 30 20 10 Personal income taxes Payroll taxes Corporate income taxes Excise taxes Tariffs Estate and gift taxes Income Tax Terminology • taxable income = income less • exemptions ($2550 per person) • deductions (e.g $4000 for single taxpayer • marginal tax rate – tax paid on an additional dollar earned • average tax rate – total taxes as a percent of total income 14_02 Schedule X  Use if your filing status is Single If the amount on Form 1040, line 37, is: But not Over  Taxable income $0 24,000 58,150 121,300 263,750 ABBREVIATED 1040 FORM Line 37 Taxable income Line 38 Tax Enter on Form 1040, line 38 over  $24,000 58,150 121,300 263,750 - 15% -$3,600.00 + 28% 13,162.00 + 31% 32,738.50 + 36% 84,020.50 + 39.6% of the amount over  $0 24,000 58,150 121,300 263,750 Schedule Y-1  Use if your filing status is Married filing jointly or Qualifying widow(er) If the amount on Form 1040, line 37, is: But not Over  $0 40,100 96,900 147,700 263,750 Enter on Form 1040, line 38 over  $40,100 96,900 147,700 263,750 - 15% -$6,015.00 + 28% 21,919.00 + 31% 37,667.00 + 36% 79,445.00 + 39.6% of the amount over  $0 40,100 96,900 147,700 263,750 Marginal tax rates Progressive, Regressive, or Proportional? 14_03 MARGINAL TAX RATE (PERCENT) 40 30 20 10 50,000 100,000 150,000 200,000 250,000 TAXABLE 300,000 INCOME (DOLLARS) What is the Flat Tax? • Big exemption – $35000 would be the “zero-bracket” amount for a family of four • Flat rate for all income above • Hall-Rabushka version: – Tax wage and salary income at the household level – Interest, dividends taxed at the firm level Review of the Effect of Putting a Tax on a Commodity • Price rises, but by less than the tax • Quantity declines • Deadweight loss – size depends on how much quantity declines • Incidence of the Tax – who bears more of the burden of the tax • consumers or firms? – Depends on how much the price rises 14_04A P Deadweight loss is small Large change in price Supply with tax Supply without tax Demand Q Small change in quantity Low Elasticity of Demand 14_04B P Supply with tax Small change in price Deadweight loss is large Supply without tax Demand Q Large change in quantity High Elasticity of Demand Payroll Tax: Firm versus Worker 14_06 WAGE PAID TO WORKER Supply WAGE PAID TO WORKER Wage paid to the worker rises slightly, but after the tax is paid, the decline in the after-tax wage is the same as when the employer pays the tax Decline in aftertax wage Wage paid to worker falls New supply Old supply Tax Old demand Demand New demand HOURS OF WORK Here the employer pays the tax: the labor demand curve shifts down HOURS OF WORK Here the worker pays the tax: the labor supply curve shifts up But the eventual impact is the same: the length of the black arrows are the same on the left and the right Effects of Tax Rate Changes on Tax Revenues (T14.1 Modified) Tax Revenues T = twL $8000 Tax Rate (t) Wage Per hour (w) $20 Hours Worked (L) 1000 $8400 $20 700 $6400 $20 400 The Laffer Curve 14_07 TAX RATE (PERCENT) 100 Revenue first increases as the tax rate increases and then declines TAX REVENUE The Dynamic Scoring Debate • Consider cutting the tax rate from to • Before the tax cut, L = 700 hours – thus: 0.6 times $14000 = $8400 • Static scoring, L stays at 700 hours – thus: 0.4 times $14000 = $5400 • Dynamic scoring, L rises to 1000 hours – thus: 0.4 times $20000 = $8000 The Equality-Efficiency Trade-Off: As tax rates get higher (in an effort to improve equity) there is less production (less efficiency) and perhaps less revenue to redistribute Transfer Payments • Means-tested programs – family support programs (formerly AFDC until welfare reform of 1996) – medicaid – food stamps – Earned Income Tax Credit (EITC) • Social Insurance Programs – social security – medicare – unemployment insurance 14_08 Two Welfare Reform Options TOTAL INCOME Welfare payment Income from work HOURS OF WORK TOTAL INCOME Welfare is paid to those with high incomes Reform by phasing out payments more slowly TOTAL INCOME HOURS OF WORK Welfare payment is small to the very poor Reform by paying HOURS OF WORK Income Distribution in the U.S Household Quintile Lower 20% Percent of Income Cumulative Percent Second 20% 11 16 Third 20% 17 33 Fourth 20% 24 57 Top 20% 43 100 14_11 Lorenz Curve CUMULATIVE PERCENT OF INCOME 100 80 Curve of perfect equality 60 Area representing deviation from perfect equality Lorenz curve for United States, 1990 40 20 B A 20 Curve of complete inequality 40 60 80 100 CUMULATIVE PERCENT OF HOUSEHOLDS Recent increase in income inequality (Gini Coefficient) 14_12 • But why? – return to education is rising? – international trade? – productivity growth? GINI COEFFICIENT 0.5 0.4 0.3 0.2 0.1 0.0 1950 1960 1970 1980 1990 Poverty Rate in the United States 14_13 PERCENT 40 35 30 25 Poverty rate 20 for children 15 Overall poverty rate 10 Poverty rate for aged 1960 1970 1980 1990 1994 14A A View of World Income Inequality CUMULATIVE PERCENT OF INCOME 100 80 60 40 20 20 40 60 80 100 CUMULATIVE PERCENT OF HOUSEHOLDS People Moving from Quintile to Quintile • About 60 percent of households move from one quintile to another quintile over a ten year span – About one-half of those in the bottom quintile move out of the bottom quintile – About one-half of those in the top quintile move out of the top quintile 1000 Points of Light? ... imports property taxes Federal Taxes 14_01 PERCENT OF FEDERAL TAX REVENUE 50 40 30 20 10 Personal income taxes Payroll taxes Corporate income taxes Excise taxes Tariffs Estate and gift taxes Income...Types of Taxes • • • • • • • personal income tax (all types of income) payroll tax (15.3 % of wage and salary... taxpayer • marginal tax rate – tax paid on an additional dollar earned • average tax rate – total taxes as a percent of total income 14_02 Schedule X  Use if your filing status is Single If the