The main types of taxes used to fund the public sector include income taxes, payroll taxes, property taxes, sales taxes, and excise taxes. While other taxes exist, these five types of taxes are the most prominent and generate the majority of revenue used to fund the public sector.
The Federal Government raises the majority of its revenue from the combination of income taxes, payroll taxes, and excise taxes. These taxes raised approximately 94.1% of federal tax revenue in 2013 (Miller, 2016, p. 134). Corporate income taxes generate additional cost to the producer which must be passed on to the consumer in order to generate profits. Individual income taxes reduce the amount of capital the consumer has to spend. Payroll taxes are shared equally by both the producer, in this case the employer, and the consumer; however, the real cost is passed on to the consumer in the form of reduced wages (Miller, 2016, p. 135). Finally, excise taxes are levied on the product and must be paid by the producer. Ultimately, the consumer is affected by the higher price and ends up paying a portion of this tax.
State and Local Governments raise their tax revenue, which accounted for 47.4% of total revenue, from sales taxes, property taxes, and income taxes (Miller, 2016, p. 134). Sales taxes affect mainly the consumer. The additional cost is not passed on to the producer. Property taxes are assessed on the value of property owned. The consumer bears the burden of these taxes, and as a result, there are residual effects on producers due to a lower demand for high value items. The impact of income taxes is the same for the producer and consumer as discussed in the preceding paragraph.
The government finds numerous ways to fund governmental operations through taxing at a federal, state and local level. There are many types of taxes excised at each level of government. The most well- known tax is arguably the federal income tax, although most states also collect income tax. Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming do not collect state income tax (Kahn, 2015) In the United States the income tax is progressive, meaning that as the taxpayer earns more money the tax rate raises. In effect, those who make the least money pay the lowest taxes proportionally whereas those earning the most pay the largest amount proportionally. Regressive and proportional taxes are other types of income taxes. A regressive tax has those making the least money paying the highest proportionally and the highest earning paying the least. A proportional tax, also called a flat tax, has all taxpayers paying the same proportion of their income.
The federal government also collects Social Security, or FICA tax, medicare tax, capital gains taxes, and corporate taxes. The tax burden of some of these are spilt between the employee and the employer. (Miller, 2016 p 119) It also institutes pollution taxes, or effluent fees as an incentive to prevent pollution by companies. (Miller, 2016 p. 109)
Other than income taxes the government collects sales taxes. These taxes are typically paid to state and local governments. They are paid most times an item or service is purchased, with some exceptions based on locality.
Local and state governments may also collect property taxes, gasoline taxes, luxury item taxes, hotel occupancy taxes, utility taxes and vice taxes.
The large number of taxes affects both producers and consumers. Producers are able to pay their employees less due to their responsibility to pay taxes for those employees. If a producer is taxed at a higher rate because the government deems their product to be a vice or due to the manufacturing process of their product being environmentally unfriendly that producer will likely limit production. The producer must take taxes into consideration when determining how much product they will supply.
Consumers are also affected by nearly all of the above named taxes, as well as several that I may have missed. Ultimately the individual consumer is responsible for all taxes. The producer can be expected to pass along their tax burden to the end user. Taxes play an important role in deciding how and where consumers spend their money. This is noticeable in localities where there are differences in tax rates within close proximity. As an example, my hometown of St. Louis, Missouri is adjacent to several counties in Illinois. Missouri has lower gasoline and tobacco taxes. As a result, many people purchase gas and tobacco in Missouri rather that Illinois.
3. Taxes play an important role in government’s manipulation of fiscal policy. When the government seeks to expand production and GDP it will implement an expansionary fiscal policy wherein it either increases government spending or decreases taxes. When the government seeks to slow economic growth it will implement a contractionary policy by either reducing government spending or increasing taxes.
Do you think a reduction of taxes by the government actually helps to increase spending and production in the economy or do you think it only increases savings?
4. The government has various sources of tax that it can utilize to fund the public projects. The first one is the revenue collected from businesses in the form of business registration every year. Each business is supposed to pay annual registration to the government hence acts as a source of revenue. The other tax is the capital gain tax that refers to the tax obtained from the sale of an investment such as stocks, bonds, and property. The government collects revenue to finance public projects (Salanié, 2011). The other one is the income tax that is levied on employment income of the citizens. The other tax is the corporate tax that is levied on the profits of a corporation. Another one is dividend tax levied on the dividends paid to company’s shareholders. These taxes act as the source of income to the government to facilitate public projects. The taxes, however, have an impact on both the producers and consumers in an economy (Salanié, 2011). The cost of producing goods and services becomes high for the producers. In return, the prices commodities shoot up making it harder for the consumers to satisfy their utility. The taxes affect the low-income earners where earnings are also taxed hence they are left with little for expenditure at their disposal.