After studying this chapter you will be able to: Explain the rudiments of how taxes work, describe the concepts of horizontal and vertical equity and how they apply to the issue of taxation, summarize the trade-off that exists between simplicity and horizontal equity when people are making tax policy, describe how taxes can alter the incentives of people to work and save, list examples of where taxes are used to motivate socially desirable outcomes. | Chapter 36 Personal Income Taxes Chapter Outline HOW INCOME TAXES WORK ISSUES IN INCOME TAXATION INCENTIVES AND THE TAX CODE THE TAX DEBATE OF THE 1990s AND BEYOND Where Personal Income Taxes Fit In 2000 the federal government collected $1,956 billion in taxes. $952 billion of that was collected from the personal income tax. The remainder was collected in payroll taxes (for Social Security and Medicare), corporate income taxes, tariffs and other taxes. How Income Taxes Work When people get a new job they fill out a W-4 which is used to calculate withholding (an estimate as to how much tax you are going to owe on the earned income). This money is taken out of a paycheck and sent, by the employer to the federal government. The estimate is reconciled with actual income taxes owed with the Income Tax Return filed by April 15th of the following year. The Vocabulary of Income Taxes Adjusted Gross Income (AGI) total net income from all sources Exemptions an amount by which AGI is reduced . | Chapter 36 Personal Income Taxes Chapter Outline HOW INCOME TAXES WORK ISSUES IN INCOME TAXATION INCENTIVES AND THE TAX CODE THE TAX DEBATE OF THE 1990s AND BEYOND Where Personal Income Taxes Fit In 2000 the federal government collected $1,956 billion in taxes. $952 billion of that was collected from the personal income tax. The remainder was collected in payroll taxes (for Social Security and Medicare), corporate income taxes, tariffs and other taxes. How Income Taxes Work When people get a new job they fill out a W-4 which is used to calculate withholding (an estimate as to how much tax you are going to owe on the earned income). This money is taken out of a paycheck and sent, by the employer to the federal government. The estimate is reconciled with actual income taxes owed with the Income Tax Return filed by April 15th of the following year. The Vocabulary of Income Taxes Adjusted Gross Income (AGI) total net income from all sources Exemptions an amount by which AGI is reduced that is determined by the size of the family Deductions amounts by which AGI is reduced; the greater of either the standard deduction (the minimum level of deduction)or itemized deductions (deductions for particular expenses on which the government does not want taxes paid) Taxable Income AGI-Exemptions-Deductions More Vocabulary Filing Status the type of household for tax purposes (Single, Married Filing Jointly, Married Filing Separately and Single Head of Household) Marginal Tax Rate the percentage of each dollar in that bracket that must be paid in tax Tax Credits The reductions off of the amount of tax owed. How the Pieces Fit Together: 2000 Tax Year Horizontal Equity equal people should be treated equally Vertical Equity people across the income scale are treated fairly with regard to ability to pay Progressive Income Tax with higher income you pay a higher rate of tax. The marginal tax rate rises from 15% to 28% to 31% and higher as taxable income rises. Issues in Income Taxation:
