In your notes: Page 416-417

• Graph our orenz curve

• A problem?

• Compare to page 418

Short Quiz

1. Which country has a more equal distribution of wealth?

2. Why might that matter?3. Why might that not matter?

A small group exercise• The small country of Travistan has 10 citizens. The citizens and their earned

incomes are listed below:• Citizen       Earned Income• Zak $ 2,000• Erika $10,000• Bill $ 1,500• Juan $ 15,000• Harry $ 16, 000• Jose $ 9,000• Emily $ 30,000• Kai $ 12,000• Robert $ 8,000• Kathleen $ 20,000

1. Draw the Lorenz Curve for this country.

A small group exercise• The small country of Travistan has 10 citizens. The citizens and their earned

incomes are listed below:• Citizen       Earned Income• Zak $ 2,000• Erika $10,000• Bill $ 1,500• Juan $ 15,000• Harry $ 16,000• Jose $ 9,000• Emily $ 30,000• Kai $ 12,000• Robert $ 8,000• Kathleen $ 20,000

• Think of 5 ways we could reduce the inequality of this country• (improve economic mobility)

Taxation“In this world nothing can be said to be certain, except

death and taxes.”

Benjamin Franklin

In reality…• US Federal Tax Rates: (only 3 % of Americans make over $250,000)

• Add 10 -15 % more depending on which state you work in

World Tax Rates

    United Kingdom

21-28%0-40 %

17.5%

Ireland 12.5 %20-41%

21 %

Mexico 29%3-29 %

15 %

Sweden 28 %0-59 %

25 %

Slovakia 19 %19 % 19 %

Hong Kong 15 %0-15 %

0 %

United Arab Emirates

0 %0 % 0 %

Country CorporateTax rate

Income Tax

SalesTax

Net Income

• Gross income: How much you earn• Net income: how much you keep

• Net income = gross income - gross income*tax rate• For example: Mr. Klein made $37,500 last year.• Net income = $37,500 - $37,500(.25)• Net income = $37,500 - $9,375 = $28,125

What are “Good Taxes”?• According to Adam Smith:• Simple to understand• Avoid negative incentives• Avoid loopholes

• IRS manual – 70,000 pages – (4 X size of the Bible)

• Economist reading from 2010

Income Tax in USA

• IRS – tax collection agency in USA• Taxes are deducted throughout year• Every citizen must file every year by:• If you paid more during the year then you

need to: you get a refund• If you paid less during the year then you need

to: pay the difference

Taxes: For Example

• For example: Mr. Klein made $37,500 last year.

• Net income = $37,500 - $37,500(.25)• Net income = $37,500 - $9,375 =

$28,125

• If Mr. Klein paid $10,375 in 2010, what happens after he files?

• Why is a BIG refund not such a great idea?

Tax on a household income% of changes based on income

Ability to pay principle“tax the rich more!”

The more you make, the higher your tax %

For example: Tax $12/hour labor or accountant $55,000/year

Why common in USA & EUIncentive?

What should happen to the Lorenz curve?

Progressive Income Tax

IncomeTax Rate

$0-$15,000 0%

$15,001-$20,000 10%

$20,000-$30,000 15%

$30,000-$50,000 25%

$50,000-$100,000 33%

$100,001 + 38%

Proportional Income Tax• Tax on a household

income• % of stays the same• “flat tax”• For example: 5% tax,

$25,000/year or $100,000/year

• Why rare in USA?• Incentive?

But wait, the government isn’t done yet!

• Other taxes

Property tax• Tax on something you own• Usually expensive like your

house or boat• For example: $100,000

home– 5% property tax rate

• 100,000 X .05 = $5,000 property tax

• Incentive?8.01 % ave Pima Co rate

Regressive Tax• Smaller % taken the higher your

income• Sales tax• For example: 5% tax, $25,000/year

w/$10,000 consumption pays: 10,000 X .05 = $500, or 2% of total income

• $50,000/year w/$15,000 consumption pays: 15,000 X .05 = $750, or 1.5% of total income

• Incentive?• Why don’t poor burn down Phoenix

capital building?

Regressive taxes

Regressive taxes

Regressive taxes

Capital Gains Tax• Tax on real estate, stock sales or

dividends, or collectables.

• Why not only for the rich?

Gift tax• Tax on gifts or rewards• Games shows, gambling,

lottery• Rate depends on gift• 35-60 %• Is this a bad incentive?

Tucson painter Ted DeGrazia

Estate tax• Tax on inheritance• Sometimes called

“death tax”• In US today,

$2,000,000 and up• 55% rate

• Is this a bad incentive?

If you are curious…• US estate taxes over the years• GW Bush worked to repeal in

2001• Came back in 2011 when law

expires• Barack Obama supports estate

tax

Tax Freedom Day!

Day when the average person has earned enough to pay taxes