SP - Inflation, Taxes and Unemployment (Lesson)

Inflation, Taxes and Unemployment

Introduction

The U.S. federal government collects about two-thirds of the taxes in our economy.

The largest source of revenue for the federal government is the individual income tax.

Other taxes

1. Payroll Taxes: tax on the wages that a firm pays its workers.
2. Social Insurance Taxes: taxes on wages that is earmarked to pay for Social Security and Medicare.
3. Excise Taxes: taxes on specific goods like gasoline, cigarettes, and alcoholic beverages.

Policymakers have two objectives in designing a tax system...

1. Efficiency
2. Equity

One tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers.

An efficient tax system is one that imposes small deadweight losses and small administrative burdens.

 

The Cost of Taxes to Taxpayers

Let's begin by reviewing taxes and government budgets. 

 

The tax payment itself is a cost to taxpayers.

Deadweight losses include

• Administrative burdens
• Complying with tax laws creates additional deadweight losses.

Taxpayers lose additional time and money documenting, computing, and avoiding taxes over and above the actual taxes they pay.

The administrative burden of any tax system is part of the inefficiency it creates.

• A lump-sum tax is a tax that is the same amount for every person, regardless of earnings or any actions that the person might take.

• How should the burden of taxes be divided among the population?
• How do we evaluate whether a tax system is fair?

Let's first take a look at the taxes and deadweight loss. Watch the video below.

 

 

Types of Unemployment

• The benefits principle is the idea that people should pay taxes based on the benefits they receive from government services.
• An example is a gasoline tax:
  • Tax revenues from a gasoline tax are used to finance our highway system.
  • People who drive the most also pay the most toward maintaining roads.
• The ability-to-pay principle is the idea that taxes should be levied on a person according to how well that person can shoulder the burden.
• The ability-to-pay principle leads to two corollary notions of equity.
  • Vertical equity
  • Horizontal equity
• Vertical equity is the idea that taxpayers with a greater ability to pay taxes should pay larger amounts.
  • For example, people with higher incomes should pay more than people with lower incomes.
• Vertical Equity and Alternative Tax Systems
  • A proportional tax is one for which high-income and low-income taxpayers pay the same fraction of income.
  • A regressive tax is one for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers.
  • A progressive tax is one for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers.

 

 

Unemployment and the Economy

The presentation below will cover the relationship between our economy and unemployment. 

 

Review

Review what you have learned by completing the activity below.

 

In Summary . . .

Let's review the tax systems: Vertical Equity and Alternative Tax Systems

A proportional tax is one for which high-income and low-income taxpayers pay the same fraction of income.

A regressive tax is one for which high-income taxpayers pay a smaller fraction of their income than do low-income taxpayers.

A progressive tax is one for which high-income taxpayers pay a larger fraction of their income than do low-income taxpayers.

 

IMAGES CREATED BY GAVS