Chapter 6IntroductionLearning ObjectivesLearning Objectives (cont'd)Chapter OutlineDid You Know That...Paying for the Public SectorPaying for the Public Sector (cont'd)Systems of TaxationSystems of Taxation (cont'd)Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Sources of Government Tax ReceiptsFigure 6-1 Sources of Government Tax ReceiptsThe Most Important Federal TaxesTable 6-1 Federal Marginal Income Tax RatesThe Most Important Federal Taxes (cont'd)Slide 23Slide 24Table 6-2 Federal Corporate Income Tax ScheduleSlide 26Slide 27Slide 28Slide 29Slide 30Tax Rates and Tax RevenuesTax Rates and Tax Revenues (cont'd)Slide 33Slide 34Figure 6-2 States with the Highest and Lowest Sales Tax RatesE-Commerce Example: Even During a Revenue Boom, States Seek to Tax Internet SalesSlide 37Figure 6-3 Maximizing the Government’s Sales Tax RevenuesTaxation from the Point of View of Producers and ConsumersTaxation from the Point of View of Producers and Consumers (cont'd)Figure 6-4 The Effects of Excise Taxes on the Market Supply and Equilibrium Price and Quantity of GasolineWho Pays the Tax?Financing Social SecurityFinancing Social Security (cont'd)Slide 45Figure 6-5 Private Rates of Return on Social Security Contributions, by Year of RetirementSlide 47What Will it Take to Salvage Social Security?What Will it Take to Salvage Social Security? (cont'd)Example: Business Incorporation Could Dodge a Broadened Payroll TaxSlide 51Slide 52Slide 53Figure 6-6 Projected Social Security Rates of Return for Future RetireesIssues and Applications: Can Social Security Learn from the Private Sector?Issues and Applications: Can Social Security Learn from the Private Sector? (cont'd)Summary Discussion of Learning ObjectivesSummary Discussion of Learning Objectives (cont'd)Slide 59Slide 60Slide 61Slide 62End of Chapter 6Chapter 6Funding the Public SectorCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-2IntroductionDo you think that so-called “private accounts” could help save the Social Security system?Is the Social Security system really in trouble?Copyright © 2008 Pearson Addison Wesley. All rights reserved.6-3Learning Objectives•Distinguish between average tax rates and marginal tax rates•Explain the structure of the U.S. income tax system•Understand the key factors influencing the relationship between tax rates and the tax revenues governments collectCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-4Learning Objectives (cont'd)•Explain how the taxes governments levy on purchases of goods and services affect market prices and equilibrium quantities•Understand how the Social Security system works and explain the nature of the problems it poses for today’s studentsCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-5Chapter Outline•Paying for the Public Sector •Systems of Taxation•The Most Important Federal Taxes•Tax Rates and Tax Revenues•Taxation from the Point of View of Producers and Consumers•Financing Social SecurityCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-6Did You Know That...•In total, the passenger train company Amtrak receives $1 billion in subsidies?•Federal, state, and local governments collect tax revenue from a variety of sources in order to subsidize many other goods and services?Copyright © 2008 Pearson Addison Wesley. All rights reserved.6-7Paying for the Public Sector•Three sources of government funding1. Fees, or user charges2. Taxes3. BorrowingCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-8Paying for the Public Sector (cont'd)•Government Budget ConstraintThe limit on government spending and transfer paymentsImposed by the fact that every dollar spent must be provided for by taxesCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-9Systems of Taxation•Tax BaseThe value of goods, services, wealth, or incomes subject to taxation•Tax Rate The proportion of a tax base that must be paid to a government as taxesCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-10Marginal tax rate = Change in taxes dueChange in taxable incomeSystems of Taxation (cont'd)•Marginal Tax RateThe change in the tax payment divided by the change in incomeCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-11Systems of Taxation (cont'd)•Tax BracketA specified interval of income to which a specific and unique marginal tax rate is applied•Average Tax RateThe total tax payment divided by total incomeCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-12Systems of Taxation (cont'd)• Proportional Taxation A tax system in which, regardless of an individual’s income, the tax bill comprises exactly the same proportionCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-13Systems of Taxation (cont'd)Proportional taxationMarginal tax rate = Average tax rateIncome Rate Tax liability$10,000 20% $2,000$100,000 20% $20,000Copyright © 2008 Pearson Addison Wesley. All rights reserved.6-14Systems of Taxation (cont'd)•Progressive TaxationA tax system in which, as income increases, a higher percentage of the additional income is paid as taxesCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-15Systems of Taxation (cont'd)Progressive taxation: income taxMarginal tax rate > Average tax rateIncome Rate Tax liability$0–$10,000 5% $500$10,001–$20,000 10% $1,000$20,001–$30,000 30% $3,000$4,500Copyright © 2008 Pearson Addison Wesley. All rights reserved.6-16Systems of Taxation (cont'd)•Regressive TaxationA tax system in which as more dollars are earned, the percentage of tax paid on them fallsCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-17Systems of Taxation (cont'd)Regressive taxation: Social SecurityMarginal tax rate < Average tax rateIncome Rate Tax liability$50,000 10% $5,000$100,000 5% $5,000Copyright © 2008 Pearson Addison Wesley. All rights reserved.6-18Sources of Government Tax Receipts•QuestionWhat types of taxes do federal, state and local governments collect?•Answers Federal government: individual income taxes, corporate income taxes, Social Security taxes, import and excise taxesState and local governments: sales taxes, property taxes, personal and corporate income taxesCopyright © 2008 Pearson Addison Wesley. All rights reserved.6-19Figure 6-1 Sources of Government Tax ReceiptsCopyright © 2008 Pearson Addison Wesley. All rights