econometric question

Please answer the following questions after reading Lectures 3, 4 and 5: 1. Please list, describe and explain each one of the five major types of taxes as discussed in Lectures 3,4, and 5: What is the FIT? What is the FICA tax? What is the State Income tax? What is the sales tax? What are the various types of "special taxes and fees" that a family may pay? 2. How does each type of tax contribute to the U.S. economy? 3.. Please rank each type of tax from #1, 'contributes the most' to our economy, to #5, 'contributes the least' to our economy, and please defend your ranking system. 4. What are three harmful effects of the combined tax on the typical U.S. worker's next $1,000 pay raise? 5. What would you do to make the current system of taxation more fair? Why? Please discuss at least one SPECIFIC proposal that would improve the current tax system, in your opinion.TAXES! When it comes to how the American household is taxed, every family is different. We will start with a model suggesting that the average U.S. household earns a gross income (before taxes) of about $61,000 (before March 2020). In Santa Clara County, the estimates for median gross income vary from about $103,000 to $107,000 (before March 2020). Clearly, every family in America makes either more than $61,000 or less than $61,000. We will look at various families---and their income levels--- when we discuss the Consumption Function a little later in the course. This hypothetical family will be subject to various federal, state, and local taxes, some of which they may be aware of, others, perhaps not. It will make a huge difference if this household earns a wage. We are going to create a model where this typical family will pay about $21,000 in taxes over the course of the year---about 34% of their overall income. One economist estimated that "tax freedom day" may fall on April 9 or April 10-the average family, in theory, works all of Jan, Feb, March and ten days in to April----just to pay all of their taxes for the calendar year. There is this old joke: if the American household had to write a check for $21,000 at the end of the year, to pay all their taxes, half of them COULD NOT, and the other half WOULD NOT! If this family had to pay monthly payments of about $1700 a month to pay their taxes, this would be THE SINGLE LARGEST CHECK THEY WOULD WRITE THAT MONTH (we must remember that the average rent in the U.S. is about $1400 or $1500 per month) IT IS MORE COMPLICATED THAN THIS, but we will present the major taxes that the American household pays as "THE FIVE MAJOR TAXES": The 5 major taxes that this family will pay include: #1. THE FEDERAL INCOME TAX (FIT). Before March 2020, roughly 40% of all Americans did not pay this tax owing to the fact that they were low income, or raising children, or both. The FIT is perhaps the most 'famous' or 'high profile" tax, as it is modified every few years, especially when a new president is elected. In fact, in 2018, Trump and the Republicans in Congress were able to change the brackets in the FIT, lowering them, particularly for the richest 1% of all Americans, effective for tax year 2019. The FIT is called a "PROGRESSIVE' tax-the tax rate rises as income rises. This concept may be compared to a "flat" tax---let's say that the FITwas a flat tax. In order to bring in roughly the same amount of money, a flat tax may be set at about 8% or 9%---this would mean that poor families would pay a lot MORE in FIT, and rich families would pay a lot LESS in FIT. Most Americans would view this as unfair---if they thought about it. One may say that the idea of a progressive tax is a manifestation of popular will. We vote for our representatives, and they vote for this tax. The problem with a "progressive" tax is that we have to learn the VARIOUS TAX RATES, but we also have to learn AT WHAT LEVEL OF INCOME EACH RATE APPLES, OR 'KICKS IN" .. after the $12,000 standard deduction is applied, a single taxpayer will pay: a 10% tax on dollars 0 to $9,700, then a 12% tax on dollars $9,700 to $40,000 or so, then a BIG JUMP: a 22% tax on dollars $40,000 to $84,000 or so, then a 24% tax on dollars $84,000 to $161,000 or so, then a 32% tax on dollars $161,000 to $204,000 then a 35% tax on dollars $204,000 to $510,000, then a 37% tax on everything over $510,000. The top bracket used to be 37%---long ago, it was 50%. Long LONG ago, it was 70% and even 90% during World War 2. Please remember, this is the TOP BRACKET. A typical worker in our area earning $60,000 will have her income taxed at various rates as she moves through the brackets. The OVERALL TAX -.. FIT --- on her $60,000 might be about 7 or 8%, but THE TAX ON ANY PAY RAISE may be 22%, as the "raise money"-the incremental GAIN in income, will travel entirely in the 22% bracket. More on this later. For married couples, the qualifying income for each bracket is double, with a few exceptions. Many families can get tax credits, or breaks, for raising children--- but the children 'age out" and the parents no longer carn that tax break. Given that many of us started working at age 15, and, let's say I die at age 75, I will be filing a tax return for 60 long years. The 'child credit" may be good for about 20 years--- less than half of my life as a taxpayer. I do not believe that most Americans are aware that the FIT is progressive-my sister didn't. Why would they? YOU know it, as there is a question on it later..... thirty years ago, most people would "do their own taxes". Most of the time, we now pay strangers to perform this stressful task: we may hire a CPA or an enrolled agent, or we may use a popular software program like Turbotax, which allows us to plug in numbers, and answer some questions, and the program 'spits out" the amount of tax that we owe. We need not be cognizant of the progressive nature of the tax. Indeed, I compiled the tax rates above by consulting the www.irs. govwebsite. The information is available, but the awareness level may not be great. Most Americans view this topic as both boring and depressing. Yet it is so very important! Next up we have #2. THE FICA TAX, also known as the 'social security tax', also known as the 'payroll" tax. It can be "REGRESSIVE " in nature, as it takes 15.3% of a person's wages... up to a point. The FICA tax is a tax on WAGES ONLY, THUS MAKING THE WAGE BY FAR THE MOST HEAVILY TAXED TYPE OF INCOME IN AMERICA. The FICA tax (social security and medicare) APPEARS to come in at 7.65%, yet it is really a 15.3% tax on a worker's wage, starting at $0 up to about $137,500. Then, incredibly, at an income level of roughly $137,500 the TAX RATE DROPS TO (the medicare portion only) 2.9%!!! IT IS A REGRESSIVE TAX! The tax rate DROPS as income rises- for those relatively few individual workers who earn over $137,500 in wages at their jobs.... A highly paid worker who earns $143,000 in wages will see her NET pay rise right about December 10 as she "moves" from the 15.3% bracket to the 2.9% bracket--for the last few weeks of the year! Then, on Jan 1, the tax rate goes back up to 15.3%! Incredible! And very difficult to justify in terms of fairness. We will look later at a proposal to keep the 15.3% rate at all income levels. The employer, in theory, "matches" the employee's contribution of 7.65% with "another" 7.65%. In reality, it is more accurate to say that the employee pays "both parts" of the tax. Studies show that 8 out of 10 workers pay more in FICA taxes than they pay in FIT. Please remember, a worker making $60,000 in wages in America will pay about 8% of that $60,000 in FIT---maybe about $4,800 or so, depending on other factors------but she will pay the full 15.3% of that $60,000----about $9,000---in FICA taxes, ONCE YOU COUNT 'THE EMPLOYER'S CONTRIBUTION'. This worker ENDS UP in the 22% FIT bracket, but most of her income is 'traveling through' brackets of 0% and 10% and 12%. This is why the FICA tax is sometimes called "the silent killer"- --the FIT is much more high profile. #3: THE STATE INCOME TAX (SIT) The state of California imposes an income tax on its residents, which, like the FIT, is "PROgressive": after the *standard deduction" of about $4,400 for a single person (double for a married couple) the SIT imposes a tax of 1% on dollars 0 to about $9,000, 2% on $9,000 to about $21,000, 4% on dollars $21,000 to about $33,000, 6% on $33,000 to about $46,000, 8% on $46,000 to about $58,000,9.3% -- that's right --- 9.3%-- on dollars $58,000 to $295,000 - an incredibly WIDE BRACKET--- 10.3% on $295K to $355K, 11.3% on $355K to $591K, and 12.3% on income over $591,000. As you can see, the state legislature and the governor gave a lot of thought to each bracket-in theory. Thus, a woman earning $60,000 in our state may pay about 3 or 4% OVERALL SIT on her income, perhaps about $2,400 or so for the year, yet she may end up in the 8% SIT bracket. WE MUST BE DONE, RIGHT? I work all day, stagger to my car in the parking lot, these three thugs are waiting for me ---FIT, FICA, and SIT ---- and they 'relieve me' of over 20% of my paycheck so far.... And I start my car, and my car won't start, and I need a new car---well.. new TO ME---- and I step on a used car lot, negotiate a price of $10,000 for a four year old car, and I write a check for $10,000.... And the nice man tells me "NO--- sir, you forget the sales tax... and license (DMV fees) so... MAJOR TAX #4: THE SALES TAX: the sales tax on this car will be a bit over $900---it varies a bit from town to town, but the sales tax will come in at about 9.5%. This tax is a tax we ACTUALLY GET TO VOTE ON.. sometimes.... That is, whether to raise it ..(never to lower it) This tax applies to many products that we may buy at the mall (in the old days), or ON LINE-Amazon fought for years with our state over the collection of this tax. Restaurant meals are taxed, but not most grocery store food. In our state, the sales tax does not apply to services. SOME states impose a sales tax on services, some have no sales tax at all. Why have a sales tax? California enjoys the largest system of higher education in the nation-the community college system, which has over 100 colleges, the CSU system and the UC system. Also, sales taxes help fund our vast K through 12 system. 40 million people need a lot of services: roads, the criminal justice system, police, firefighters, emergency medical care (Valley Med Center is a BIG part of our county budget) and MANY other products and services. TAX #5: SPECIAL TAXES AND FEES! AS IF TAXES #1 THROUGH #4 WEREN'T ENOUGH..... our politicians have carved out EXTRA SPECIAL TAXES AND FEES on certain items: gasoline, alcohol, tobacco---in fact, we have a special government agency devoted entirely to regulating the production, distribution, and sale of tobacco, alcohol, and firearms---they are called the ATF: tobacco, alcohol, and firearms (and explosives)-they mean what they say, I suppose! The department of ATF was created owing to the fact, in part,that the tax on these items varies from state to state, thus, these items can and do get 'smuggled' across state lines... the taxes and fees on a $18 bottle of gin or vodka may be up to 40% of the retail price-one of the highest taxes, if not THE highest tax, on a product that you or I may buy at a store. We raised the tax on a pack of cigarette by $2 per pack in our state several months ago, from about $.76 a pack to about $2.76 a pack. A high tax is imposed also on vaping products, and pot, though MUCH of the sales and purchases of these products is conducted on 'the black market'---extralegally---and thus, no sales tax is collected on THOSE transactions... The tax on a gallon of gasoline-both federal and state---approaches a dollar per gallon. So---.- visualize some old guy driving his 1977 Cadillac (9 miles per gallon) down the road, smoking and drinking alcohol while cruising.... WE DON'T LIKE HIM! WE ARE GOING TO TAX HIM HEAVILY ON HIS GAS GUZZLING CAR, HIS CIGAR, HIS BOOZE! Some of these taxes are called "sin" taxes-the idea being that this person will get sick sooner, and consume medical care resources more than you and I... 50... let's TAX HIM! We do not make alcohol illegal-we tried that 100 years ago Prohibition failed ---yet we tax it very heavily... beer and wine are also highly taxed, though not as much as 86 proof alcohol, which is odd..... There are fees placed on car registration ever year. A rich person buying a $70,000 car- model year 2020 --- will pay well over $1,000 per year just to register his car. You or I may pay $200 or $300 or $400 each year to register our 4 or 5 or 6 year old car, which we may have paid $25,000 for, new..... Years ago, we had a special election to toss out Gray Davis from the governor's office, partly because he presided over a tripling of the yearly automobile registration fees. WE SEE THESE FEES, AS WE HAVE TO WRITE A SPECIAL CHECK FOR THEM. IMAGINE IF WE ALL HAD TO WRITE A CHECK FOR $21,000 (or more) each year to pay all of our taxes! Would there be a taxpayer's revolt? Possibly..... I wouldn't want to find out....Most people pay these automobile registration fees so that the cops do not stop them on the road for expired tags (in normal times). The largest 'special tax is the property tax, which was given a lot of attention around April 10 as many homeowners asked for an extension-more time to pay their taxes-owing to the recession and the pandemic this year. The interesting thing about this tax is that TWO FAMILIES LIVING IN IDENTICAL HOMES, NEXT TO ONE ANOTHER, MAY PAY RADICALLYDIFFERENT PROPERTY TAXES! Let's say I am a little old man living in a house in San Jose. I moved in in 1980. A young couple moves in next door, in Feb 2020. Both housed were built in 1950. Neither has had any major work done to it. The young couple paid $900,000 for their house in Feb, 2020. The yearly property tax they must pay will be about $9,000 a year, every year, forever---actually, a bit more than 1% of the assessed value. I'll play the role of the little old man. I bought my house in 1980 for about $140,000. My property tax may only rise about 2% per year, thanks to Prop 13, which passed a few years before 1980---homeowners in our state were fed up with yearly hikes in their property tax. So I start out paying about $1,400 a year in property tax, in our state, and it doubles in about 36 years. My property tax is a little over $2800 a year -less than half-less than ONE THIRD of my new neighbors! THEY WILL BE UPSET-if they knew. It is a matter of public record, but ... this stuff is pretty dry.... Well, the young man in the $900,000 house FINDS OUT...and storms over to MY house and complains about the differential....LITTLE OLD MAN, WHY DO YOU PAY SO LITTLE IN YEARLY PROPERTY TAX????" And I ask him "do you want to trade?"... and he asks "trade houses? Well..... Okay..." and I reply "no--- trade bodies. You can be me, and I'll be you. I am 74 years old. I'll be dead in ten years. Want to trade??" and he runs away, because I'm nuts.... But the point is, an old person DOES NOT WANT TO HEAR about any of this. Let's say I hang on for 25 more years, finally die in 2045.... And a new couple buys MY house for $1.7 million in 2045.. . and they must pay a bit over $17,000 per year, every year, in property tax.... and they seethe at the old farts next door to THEM! Moral of the story: everyone dies. Sooner or later. Everyone dies. Then that house will sell, and it will be reappraised---reevaluated, if you will---for purposes of taxation. Is this fair? You have to form your own opinion on the matter. There is another issue: do TENANTS pay the property tax on the property - homes, condos, apartments -- they rent from their LANDLORDS? Landlords rent housing units to tenants FOR A PROFIT. Let's create a model where a tenant pays $2,800 per month to rent an apartment unit from a landlord. Economic theory suggests that the landlord will cover all of her costs, plus a "normal" profit, by charging the tenant a price of $2,800 per month. Otherwise, she would not enter into *the landlord business' in the first place. Imagine the landlord receives herthat our state's tax revenue swings wildly from year to year, depending on the stock market. Our state stands to bring in MUCH LESS REVENUE in 2020 as compared to 2019 owing to MANY factors, including the huge drop in wage income this year, but also due to the fact that households will not be reporting any--or hardly any--- capital gain income for tax year 2020. As of April 2020, the stock market is "down for the year". Who knows? Maybe it will "bounce back" in the last quarter of the year! Sales taxes and special taxes apply to capital gain income IF the family members go out and SPEND THE MONEY. Inheritance income is not taxed FIT or SIT on the first $24 million or so for a couple, and there is no FIT on the first 12 million or so for an individual. There is no SIT on inheritance income, and the FIT rate of 40% kicks in after the first 12 million or so on the individual and the first 24 million or so on the couple. Thus, well over 95% of all families do not owe any FIT or SIT on money that they inherit. Sales and special taxes will apply to inherited money IF the person goes out and SPENDS some of that money on a car, meal at a restaurant, or most online purchases. Again, the FICA tax applies to wages only, and thus do not apply to inheritance income. "Private sector pensions and various government (G) payments" vary, in terms of which taxes apply, and I can give you some highlights: a pension from Ford Motor Company will usually be taxed A, C, D and E, just like a state, or federal, or city, or county worker's pension benefits. The social security benefit check, averaging about $1500 a month, will be taxed "more lightly": if I make under about $30,000 per year TOTAL, then that $1500 a month benefit will have no FIT or SIT taken out (there is no FICA tax on this benefit). Obviously, the federal and state governments decided "oh-this person is old, and low income-let's not tax them FIT or SIT on THAT $1500" -which is interesting. If I make between about $30,000 and about $50,000, then ONLY ONE HALF of that $1500 a month will be taxed FIT and SIT---which is also interesting. Please remember, this person is most likely old, and retired-no longer earning a wage income. $40,000 a year is not a lot of money to live on --- in San Jose or in North Carolina ---but what if this older, retired person is living in a house in San Jose THAT IS PAID OFF? Recall that little old man who bought his house in 1980? He paid it off in 2010, if he had a normal 30 year mortgage. He may be making only $40,000 in yearly income, yet, he often has assets in excess of $1 million. Would you call him avarious governmental entities----often four times a year---to pay these taxes. In theory, she would be MUCH MORE AWARE of these taxes that you and I (well, we are aware of them NOW, obviously-we are studying them!). So, in theory, she "sees" about $547 'after taxes' --- about $10 a week. DON'T SPEND IT ALL IN ONE PLACE! She may not even notice it, but in theory, she may 'celebrate her big raise (that was a joke) by increasing her spending levels. EVEN IF SHE DOES NOT, inflation of 3% (historical average) will "eat away" at this pay raise. Over the course of a year, the $3,000 she spends every month on the "basket" of products and services in Jan 2019 will rise to cost about $3,090 by Jan 2020 for "the same" basket of products and services-----So----THE PAY RAISE IS NOT EVEN A PAY RAISE---over the course of a year. Please note that this pay raise is less than 2%---if it is the only raise she gets this year. Yet, BEFORE INFLATION HAS HAD A CHANCE TO EAT AWAY AT THE RAISE, it is a true pay raise. What will she do with the extra money? If she goes out and buys "extra" products and services, quite often they will be online purchases, restaurant meals (takeout is counted), consumer electronics--- things that are subject to the sales tax. Let's say she spends an 'extra" $400 on these items. The sales tax incidence will be almost 10% of this $400 in extra spending, or about $40. Now, this last one is depressing: over the course of the next 12 months, 'special taxes and fees' are bound to go up---with or without her pay raise. Gas taxes may rise-they have, in fact. DMV fees may rise-they have, in fact. Our state has raised BOTH in the past several months. Over the next 12 months, this person will pay more in property taxes. If she owns a condo, the property tax may rise from $3,000 last year to $3,060 next year. If she pays rent to a landlord, it is QUITE LIKELY her landlord will raise her rent at some point in any 12 month time period. Not always, but usually, especially if she lives in a popular metro are like Seattle or Austin or the Bay Area (in normal times). This rise in special taxes and fees is not causally linked to her pay raise---they do not happen OWING TO her pay raise- -but they happen over the same 12 month period. It is appropriate to "take" the rise in these taxes and fees "out" of her pay raise. If we do that, then we end up with OVER ONE HALF OF HER $1,000 PAY RAISE GOING OUT IN TAXES and fees. Now, if she is a part-time worker, she may be in the 12% FIT bracket and maybe the 6% SIT bracket, then it may not be so bad-maybe "only" 40% or so of her pay raise is taxed