Taxation: Different Types, Different Reasons

Economics Name: ______
E. Napp Date: ______

A tax is a sum of money demanded by a government.

Tax money is used for the construction of roads, the defense of the nation, and other necessary items that hopefully improve life in a nation.

In the 1770s, Adam Smith explained the characteristics of a “good tax”. A “good tax” should be easy to pay, cheap to collect, certain so that you know what you are paying and also equitable or fair.

There are three different ways for a government to tax its citizens.

Progressive
Taxation / Proportional
Taxation / Regressive
Taxation
·  As income increases, a person pays a higher percentage of his income in taxes.
·  The U.S. Federal Income tax is progressive. A person with a higher income pays more tax money to the government than a lower income earner. / ·  Every person pays the same percentage of his income.
·  This type of taxation is not used in the United States.
·  Every taxpayer would pay a “flat tax”. For example, ten percent of all income. / ·  As income decreases, a person pays a higher percentage of his income in taxes.
·  A tax on gasoline hurts poor people more than the rich because poor people have less money. Therefore, they pay a greater percentage of their total income.

Fill in the table below to show whether a tax is progressive, proportional or regressive.

A tax on gasoline / Name the tax. Explain your answer.
The U.S. Federal Income Tax / Name the tax. Explain your answer.
A cigarette tax / Name the tax. Explain your answer.

Hint: This exercise is a critical thinking exercise. First, you must determine if the tax affects all people equally or differently.

The Power of an Excise Tax

An excise tax is a federal or state tax on non-essential consumer goods. Generally, a government implements an excise tax to discourage consumption of a good. According to the Law of Demand, consumers buy less as prices rise. Therefore, by taxing a good, the government has essentially raised the price of the good. This increased cost leads fewer individuals to purchase the good or encourages individuals to buy less of the good. An excise tax is a great way to change habits while still recognizing a person’s freedom and liberty.

Questions about Excise Taxes as well as Types of Taxes (from previous page):

1-  What is a tax? ______

2-  List three different ways for a government to tax its citizens: ______

3-  How does a progressive tax differ from a proportional tax? ______

4-  How does a regressive tax differ from a progressive tax? ______

5-  What is an excise tax? ______

6-  Why do government leaders impose or set excise taxes? ______

7-  Why does the government place an excise tax on cigarettes? ______

8-  Why do excise taxes reduce consumption of certain goods? ______

9-  Explain the Law of Demand. ______

10- According to Adam Smith, what are the components or parts of a “good tax”? ______

11- Why is a tax on gasoline a regressive tax? ______

12- Why must governments tax? ______

Did the Loss of Tax Revenue lead to the Fall of the Roman Empire?

Most students know the basic facts about the fall of the Roman Empire. By the 400s A.D., the Western Roman Empire declined. Invaders and corrupt emperors led to the Empire’s decline. However, a recent historian has suggested that the Western Roman Empire declined due to a loss of tax revenue. In other words, the historian suggests that the Western Roman Empire declined because the government was no longer able to collect enough taxes. So, are taxes really that important? Well, let’s examine the logic:

Bryan Ward-Perkins claims that invaders, corrupt leaders, and yes, a loss of tax revenue led to the collapse of the Empire. It was this terrible combination that robbed the Western Roman Empire of its army, and, thus, the means of protecting itself, which eventually led to the breakdown of the Roman system. The invaders could, therefore, be allowed to flow into the Empire and take its land at will, permanently robbing it of more taxpaying citizens. The loss of tax led to the loss of Rome's western navy, which allowed the Vandals to invade and conquer previously untouched lands in Africa - and even later on - in Sicily, robbing the Empire of its only steady supply of money and men.

Questions:

1: How did the loss of tax revenue lead to the fall of the Western Roman Empire? ______

2: If a government fails to collect taxes, what will that society lose? ______

3: So, what is the connection between the Roman army and tax collection? ______

4: How did the invaders affect Rome’s ability to tax? ______

5: So, if a great empire could collapse due to the loss of tax revenue, what would happen to the United States if it failed to collect taxes? ______

"Taxes are what we pay for civilized society.''

~ Oliver Wendell Holmes, Jr., U.S. Supreme Court Justice

Explain the Justice’s quote: ______

“Where there is an income tax, the just man will pay more and the unjust less on the same amount of income.”

~ Plato

Explain the Greek philosopher’s quote: ______

1-  What is an inheritance tax? (Think of the definition of inheritance) ______

2-  Explain the meaning of the cartoon. ______

Explain the Quote:

"No government can exist without taxation. This money must necessarily be levied on the people; and the grand art consists of levying so as not to oppress.''

~ Frederick the Great, 18th Century Prussian king

Explain the meaning of the quote: ______

"The power of taxing people and their property is essential to the very existence of government.''

~James Madison, U.S. President

Explain the meaning of the quote:

______

List five ways taxation benefits citizens:

1.  ______

2.  ______

3.  ______

4.  ______

5.  ______

Word Bank:

April 15, Tax, Progressive, Proportional, Regressive, Excise, Cigarette, Audit, IRS, Roman, Inheritance, Prison, Roads

J

An Audit Occurs When the IRS Decides to Carefully Check Your Tax Forms to Make Sure You Paid the Correct Amount in Taxes!

The following story is excerpted from www. Beaconsmallbiz.com

“(The) audit experience begins with The Scary Letter from IRS. In formal language, it tells you that you have been selected for audit, when and where you are to meet, what to bring, and what specifically they are looking for.

The most important thing in the letter, though, is who to contact about the audit.

Contact them...Your Position is that you are a loyal and honest taxpayer, and that … you have nothing to hide.

When the audit begins, you go into a little room with two locked doors and a telephone. Pick up the phone and tell whoever answers that you’re here to be audited and they will come and escort you back.

The Tax Compliance Officer works in a … room (with) two small chairs. The computer monitor is…on the desk, but turned in a way that you can’t see what’s being displayed…After a few pleasantries, they get right to it. They usually start with income sources.

It’s surprising to hear them run through all the different ways we can receive money. We’re not just talking about employment income. They also run through gifts from parents and others, loans, settlements, awards. And they always seem to end with how much cash you are carrying…They write things—usually numbers—on preprinted sheets. Occasionally they glance intently at that computer monitor you can’t see, and the worst part is when they gaze intently for a long time. What have they just seen that gives them pause?

Questions:

1-  What is an audit? ______

2-  What is the first step in the audit process? ______

3-  Why is it important to contact the person in charge of the audit? ______

4-  What are the different ways that a person can receive money? ______

5-  What do you think the Tax Compliance Officer is looking for during the audit? ______