Lecture_Note_Set_6_Excise_Taxes - Chapter 6 Excise Taxes...

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Chapter 6 Excise Taxes and Competitive Markets Preparation. In this note you will encounter the following ideas. Federal taxation. Income taxation. Payroll tax. Excise taxes. Tax incidence. Tax revenue. Use the index of your textbook to familiarize yourself with these ideas before you come to class. Motivation. Taxes in the United States take many forms. First the taxing authori- ties are many and various. Besides the Federal Government, most state governments levy taxes. Within each state many local governments also levy taxes. Second, the types of taxes are also many and various. In addition to taxes on wages, salaries and other sources of personal income there are taxes levied when people buy or sell things ( e.g. houses or cars), taxes on the estates of deceased people, taxes on imported com- modities and so on. The overall American taxation system is therefore very complex. The purpose of this note is not to describe the entire US taxation system. Instead it provides a few basic facts about the major taxes levied in the US and some details on how excise taxes affect competitive markets. 117
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118 CHAPTER 6. EXCISE TAXES Federal Taxation and Expenditure. It will not be surprising to learn that the Federal Government’s largest source of tax revenue is the income tax. This currently provides the Government with about 42% of its total tax revenue. Almost as large is the payroll tax, which provides about another 36% of the total federal tax revenue. All other types of tax provide the Federal Government with much smaller amounts of revenue. Even the corporate tax, which is levied on the profits of firms, accounts for only about 10% of the total federal tax revenue. Excise taxes other than the payroll tax add about another 5% and tariffs (taxes imposed on imported commodities) account for another 3% of the total federal tax revenue. An EXCISE TAX is a tax that is levied on the trade of a commodity. Perhaps the best-known examples are sales taxes. Since all of the federally imposed excise taxes combined contribute almost as much to federal tax revenue as does federal income taxation, the effects of excise taxes are well worth some serious study. As already mentioned the payroll tax gathers an enormous amount of revenue. It is an excise tax because it is levied upon the buying and selling of labor (labor is a commodity). The tax was introduced as part of the New Deal implemented during the presidency of Franklin Roosevelt in the 1930’s. This was a time of great economic distress. The US was in the grip of the Great Depression. Unemployment rates were very high and for those who were working wage rates were low. The payroll tax was intended to provide funds from those lucky enough still to have jobs for assistance to those who did not. The law mandates that half of the tax be paid by workers and half by employers. However we will see that this is not what actually happens. Over time the payroll tax has evolved into just another revenue gathering device for the
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Lecture_Note_Set_6_Excise_Taxes - Chapter 6 Excise Taxes...

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