Types of Taxes Case Study Getting Started: Make a list of all the different taxes you can think of: The BIG Idea: Government collects money to run its programs through different types of taxes. Those taxes may affect different income groups in different ways. What are taxes? Taxes are payments that people are required to pay to a local, state or national government. Taxes supply revenue, or income, to provide the goods and services that people expect from the government. The Constitution grants Congress the power to tax and also limits the kinds of taxes Congress can impose. Federal taxes must be for the common defense and general welfare, must be the same in all states, and may not be placed on exports. The Sixteenth Amendment, ratified in 1913, gave Congress the power to levy an income tax. When government creates a tax, it decides on the type of tax base the income, property, good, or service, that is subject to a tax. It also decides how to structure the tax. The three basic kinds of taxes are proportional, progressive, and regressive. Type of Tax Proportional Progressive Regressive Description A constant percentage of income is taken in taxes as income increases A larger percentage of income is taken as income increases A smaller percentage of income is taken in taxes as income increases Your assignment: You will examine three tax case studies, calculate the impact on each individual and classify it according to the types of taxes (above). You will need to discuss the pros/cons of these tax structures.
Case Study Scenario 1: The state of Georgia decided to enact a 15% income tax on ALL citizens of the state of Georgia. What is the tax base? (see the opening reading if you don t know what I am talking about) Bella, Rosalie, and Alice are three single women who have all been good friends since high school. Bella is an administrative assistant for an insurance agent, Rosalie is a teacher, and Alice is an accountant. They meet for lunch one Friday and discuss the new tax law. Alice, the accountant, whips out her calculator to show how each of them would be affected. Person Gross (Total) Annual Income % paid in taxes (read the scenario to get the percent) Total Tax Burden (Multiply Gross Annual Income by the tax rate in decimal form) After-Tax Income (subtract the tax burden from Gross Annual Income) Bella $20,000 15% (or 0.15) $3,000 $17,000 Rosalie $50,000 Alice $90,000 Based on the data above, the state tax would be what type of tax structure (proportional, regressive, progressive)? How do you know? Evaluate this tax structure. Is it fair? What are the pros and cons of this tax as you see it? Do some research: What are some examples of taxes that fit this description?
Case Study Scenario 2: Due to criticisms that some people do not pay income tax, the state of Georgia decides to place a 20% sales tax on all necessary goods. They are items that ALL people need and buy, so no one could escape paying taxes. What is the tax base? Bella, Rosalie and Alice meet again on a Friday afternoon for lunch. They each figure out how they will be impacted by this tax structure. Person Gross Annual Income Income Spent on Necessities Tax Rate Tax Burden (Multiply income spent on necessities by the tax rate) Bella $20,000 $17,000 20% or 0.2 $17,000 X 0.2 =$3400 Rosalie $50,000 $20,000 % of Income Paid in Taxes (**see instructions below) 17% Alice $90,000 $25,000 **To find the % of income paid in taxes: Divide the total tax burden by gross annual income and multiply by 100. Based on the data above, the state tax would be what type of tax structure (proportional, regressive, progressive)? How do you know? Evaluate this tax structure. Is it fair? What are the pros and cons of this tax as you see it? Do some research to find some examples of taxes that fit this description:
Case Study Scenario 3: The state of Georgia decides to enact a graduated income tax that will change as incomes change. The proposed tax brackets are as follows: Income Level Tax Rate How it Works: Up to $20,000 10% or 0.1 All people pay 10% of their income up to $20,000 $20,001 to $75,000 75,001 or Greater 15% or For each dollar between $20,001 and $75,000, you pay 15% in 0.15 taxes 20% or 0.2 For each dollar exceeding $75,000, you pay 20% in taxes. Bella, Rosalie, and Alice meet again and discuss how this new tax structure will affect them. Person Gross Show tax burden on Show tax burden on Show tax Total Tax Annual income taxed at income taxed at 15% burden on Burden Income 10% income taxed at 20% Bella $20,000 $20,000 X 0.1 = 0 No income 0- No income $2,000 $2,000 between $20,001 in excess of and $75,000 $75,000 Rosalie $50,000 $20,000 X 0.1 = $50,000-$20,000 = 0 No income $6500 $2,000 $30,000 X.15 = in excess of $4500 $75,000 Alice $90,000 Based on this example, what type of tax structure would this be? How do you know? Is this tax fair? What are the pros/cons of it?
Summarizing the Effects of Different Types of Taxes Based on the previous scenarios, compare how Bella, Rosalie, and Alice would be affected under each tax proposal. Tax Structure Bella Rosalie Alice (low-income) (middle-income) (high-income) Scenario 1: 15% Proportional income tax $3000 Scenario 2: 20% sales tax $3400 (17% of income) Scenario 3: Graduated income tax $2000 Which tax structure would each individual prefer? Now, figure out which tax structure would lead to the highest tax revenue: Person Scenario 1 Scenario 2 Scenario 3 Bella $3000 Rosalie $7500 Alice $13,500 Total Tax Revenue $24,000 Which tax would be most beneficial in terms of government revenue?
In the space below, explain the three different types of taxes. Which tax scenario would you be more likely to support? Explain with at least three supporting details.