A look at taxes and how they're paid.

1. Taxes Government and the Economy

2. Taxes So the government needs money to operate and it gets most of this through taxes: required payments to a local, state, or national government. This is its revenue. You may not like paying taxes (I certainly don’t), but it’s necessary for the government to provide necessary services and functions, e.g. armed forces, roads, courts, schools, etc.

3. Federal Taxes and the Constitution The Constitution gives the Federal government the power to collect taxes (you may remember that one of the weaknesses of the Articles of Confederation was that the national government lacked the ability to collect taxes). Article I, Section 8, Clause 1 gives Congress the power to tax. “The Congress shall have power to lay and collect taxes, duties, imposts and excises, to pay the debts and provide for the common defense and general welfare of the United States; but all duties, imposts and excises shall be uniform throughout the United States;” The Const does say, however, that the taxes must be equal among the states… a higher tax can’t be charged in one state than in another. There are other limits: can’t tax churches and can’t tax exports… both are prohibited. Taxes must also be for the “general welfare”

4. Federal Taxes and the Constitution The Federal income tax was actually unconstitutional until the 16th Amendment was passed in 1913: “The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.” A 30 word amendment gave Congress the authorization to enact a tax which now makes up nearly 50% of Federal revenue. It was passed because the Federal government was outgrowing its traditional revenue sources and needed more money. It was also a bit of class warfare against the rich.

5. Tax Bases and Tax Structures A tax base is the income, property, good, or service that is subject to a tax. There are different things that fall into this: personal income tax, corporate income tax, property tax, sales tax, etc.

6. Tax Bases and Tax Structures Three big different kinds of taxes: Proportional taxes The percentage of income paid is the same at all levels. It doesn’t matter if you make $30,000 a year or $500,000, you pay the same percentage, say, 10%. The first person pays $3,000 and the second $50,000. The second pays more money, but it’s still the same percentage of income.

7. Tax Bases and Tax Structures Three big different kinds of taxes: Progressive Taxes Percentage of income paid in taxes increases as income increases. The more you make, the greater percentage you pay. Let’s say the person making $30,000 pays 5% and the person making $500,000 pays 20%.

8. Tax Bases and Tax Structures Three big different kinds of taxes: Regressive Taxes Percentage of income paid in taxes increases as income decreases. Sales tax is an example of this. Let’s say Bob makes $1,000 a week and Joe makes $2,000 a week. They both buy $200 worth of groceries at the store with a sales tax of 5%, meaning they both paid $10 in tax. For Bob, this $10 constitutes 1% of his weekly income. For Joe, this $10 constitutes 0.5% of his weekly income. Bob is paying a larger percentage of his income to the sales tax than Joe is, despite the fact that Bob makes less that Joe.

9. A good tax (?) A good tax should have four characteristics: Simplicity: Simple and easy to understand. Easy to keep records, prepare forms, predict, and pay. Efficiency: Able to both paid and collected without wasting the time and effort of government bureaucrats or of the taxpayers. Certainty: Clear when due, how to pay, and how much to pay. Equity: Should be fair.

10. Fair? (!) What constitutes fairness in taxation?

11. Who pays taxes? Really… you do. When it comes down to it, the individual pays all taxes, including business taxes. The payment may be direct when the tax burden is passed on to you as a consumer, but it can also be passed on to you indirectly if you’re a shareholder or an employee. It can further be passed on really indirectly to you just as an innocent bystander. These are the tradeoffs.

12. Who pays taxes? Direct payment by you.

13. Who pays taxes? Direct payment by you:

14. Who pays taxes? Indirect payment Let’s say you’re a worker and your potential employer has to pay amounts matching how much you pay to FICA (Medicare and Social Security) as well as pay state and federal unemployment tax. Now, you may think this doesn’t affect you because you’re employer is paying this, not you. BUT… that money your employer has to pay calculates into whether he hires you. That money is part of the total cost of your hire. If he judges that the costs of hiring you outweigh the possible benefits (or, with those costs being too high), they just won’t hire you. The cost of having you as an employee isn’t simply your wage, it’s also the taxes the business of having you. This acts as an indirect cost to you.

15. Who pays taxes? Indirect payment Let’s say you’re a shareholder in a company (you own some stock). You get paid a dividend for the stock you own when the company makes a profit. The bigger the profit, the bigger the dividend. The amount the company has to pay in income tax from its profit is profit that isn’t paid out to you as dividends. You lose out on money and it can act as a disincentive for you to invest in the company or to invest more. Instead, you’ll invest your money somewhere where you’ll make more money. (You’ll also get taxed on the dividend you receive since it counts an unearned income.)

16. Who pays taxes? Indirect payment The really indirect cost to you is in opportunity cost – tradeoffs. A company can make a decision between competing uses of its money. Let’s say paying taxes or hiring more employees. It’s not much a choice because the company must pay its taxes. So the opportunity cost of paying taxes is hiring employees. It may also be making improvements on its capital. Or doing research and development on new products. Or improving existing products. Or making production cheaper and reducing the cost of its products.

17. Who pays taxes? Indirect payment The really indirect cost to you is in opportunity cost – tradeoffs. The company may even locate in a completely different state or different country. In all these cases, it’s a lot of people who suffer for it. Workers suffer because businesses don’t hire as much because they pay out too many funds, don’t have the funds because investors aren’t investing as much, or the business locates elsewhere. Consumers suffer because the incidence of the tax gets passed along to them and because businesses will shortchange their production process in order to pay the tax and still make a profit.

18. Who pays taxes? My opinion: Governments like to impose taxes on businesses because 1. It’s a hidden tax on individuals who don’t realize they’re the ones who are really paying the tax costs. They’re being taxed but don’t think they are. 2. It’s a method of electoral politics through class warfare and on businesses. Get elected or reelected by sticking it to those fat cats and to The Man. Get rid of all corporate business taxes. Also greatly reduce or eliminate capital gains taxes on dividends.