Taxes and Taxation

Evaluate how taxes should be levied to achieve tax equity.

Distinguish among proportional, progressive, and regressive tax structures and assess their pros and cons.

Compare and evaluate local tax proposals and debate their merits in a mock town meeting.

A tax is a mandatory payment to a local, state, or federal government. Taxes are collected and used for various purposes, including supporting functions of government, paying for economic infrastructure, and funding welfare and public services.

Economists differ over how to achieve tax equity, the idea that the tax system should be fair. Some support the ability-to-pay-principle, which suggests that citizens should be taxed according to their wealth. Others advance the benefits- received-principle, which says that those who benefit from a particular government program should pay for it.

A challenge in devising a fair tax system is determining who bears the burden of a tax, or the tax incidence.

Taxes sometimes incur costs by distorting the incentives that normally guide people’s choices. When taxes motivate people to be less productive, these taxes result in a deadweight loss, a reduction in productivity or economic well-being.

Americans pay many types of taxes. The tax base is what is taxed, such as personal income, a good sold at a store, or a piece of property. The tax rate refers to the percentage of income, or the value of a good, service, or asset, that is paid in tax.

Taxes are also defined by their structure. A proportional tax takes the same share of income at all income levels. A progressive tax takes a larger share of income as income increases. A regressive tax takes a smaller share of income as income increases.

Among the main types of taxes are income taxes (progressive), payroll taxes (regressive), property taxes (progressive), sales taxes (regressive), corporate income taxes (progressive), excise taxes (regressive), and user fees and tolls (proportional).

The federal government gets most of its revenue (income) from taxes. Each year, the federal government draws up a budget to determine how it will spend its revenue.

State and local governments also get most of their revenue from taxes. They spend their revenue on various services, including education, public safety, and social welfare.