In this chapter you will get an overview of how the . government raises and spends money, examine the efficiency costs of taxes, learn alternative ways to judge the equity of a tax system, see why studying tax incidence is crucial for evaluating tax equity, consider the tradeoff between efficiency and equity in the design of a tax system. | 12 The Design of the Tax System “In this world nothing is certain but death and taxes.” . . . Benjamin Franklin 0 20 40 60 80 100 Taxes paid in Ben Franklin’s time accounted for 5 percent of the average American’s income. 1789 “In this world nothing is certain but death and taxes.” . . . Benjamin Franklin 0 20 40 60 80 100 1789 Today Today, taxes account for up to a third of the average American’s income. Figure 1 Government Revenue as a Percentage of GDP Copyright © 2004 South-Western State and local Federal 0 5 10 15 20 25 30 35 Revenue as Percent of GDP Total government 1902 1922 1927 1913 1940 1932 1970 1980 1990 2000 1950 1960 Table 1 Central Government Tax Revenue as a Percent of GDP Copyright©2004 South-Western The Federal Government The . federal government collects about two-thirds of the taxes in our economy. The Federal Government The largest source of revenue for the federal government is the individual income tax. The Federal Government Individual Income Taxes The | 12 The Design of the Tax System “In this world nothing is certain but death and taxes.” . . . Benjamin Franklin 0 20 40 60 80 100 Taxes paid in Ben Franklin’s time accounted for 5 percent of the average American’s income. 1789 “In this world nothing is certain but death and taxes.” . . . Benjamin Franklin 0 20 40 60 80 100 1789 Today Today, taxes account for up to a third of the average American’s income. Figure 1 Government Revenue as a Percentage of GDP Copyright © 2004 South-Western State and local Federal 0 5 10 15 20 25 30 35 Revenue as Percent of GDP Total government 1902 1922 1927 1913 1940 1932 1970 1980 1990 2000 1950 1960 Table 1 Central Government Tax Revenue as a Percent of GDP Copyright©2004 South-Western The Federal Government The . federal government collects about two-thirds of the taxes in our economy. The Federal Government The largest source of revenue for the federal government is the individual income tax. The Federal Government Individual Income Taxes The marginal tax rate is the tax rate applied to each additional dollar of income. Higher-income families pay a larger percentage of their income in taxes. The Federal Government The Federal Government and Taxes Payroll Taxes: tax on the wages that a firm pays its workers. Social Insurance Taxes: taxes on wages that is earmarked to pay for Social Security and Medicare. Excise Taxes: taxes on specific goods like gasoline, cigarettes, and alcoholic beverages. Table 2 Receipts of the Federal Government: 2001 Copyright©2004 South-Western Receipts of the Federal Government. Individual Income Tax, 50% Social Insurance Tax, 35% Corporate Tax, 8% Other, 8% The Federal Government Federal Government Spending Government spending includes transfer payments and the purchase of public goods and services. Transfer payments are government payments not made in exchange for a good or a service. Transfer payments are the largest of the government’s expenditures. The Federal Government Federal Government .
