Taxes+including+ad+valorem+taxes+and+excise+taxes


 * Taxes including ad valorem taxes and excise taxes**

Definition: A tax is a financial charge or other levy imposed on an individual or a legal entity by a state or the functional equivalent of a state.

Purposes: Taxation has four main purposes or effects: Revenue, Redistribution, Re-pricing, and Representation

The main purpose is revenue: taxes raise the revenue and with this the government can drive human development by providing health, education and social security systems as well as the basis for a successful economy through regulation, administration and investments in infrastructure.

A second is redistribution. Normally, this means transferring wealth from the richer sections of society to poorer sections, and this function is widely accepted in most democracies, although the extent to which this should happen is always controversial.

A third key goal is that of re-pricing - that is, of using taxes and subsidies as appropriate to ensure that all social costs and benefits of production or consumption of a particular good are reflected in the market price. The most obvious examples are taxing tobacco to limit damage to health, or gas to limit environmental costs.

A fourth, consequential effect of taxation in its historical setting has been representation. The American revolutionary slogan "no taxation without representation" implied this: rulers’ tax citizens and citizens demand accountability from their rulers as the other part of this bargain. Several studies have shown that direct taxation (such as income taxes) generates the greatest degree of accountability and better governance, while indirect taxation tends to have smaller effects.

Tax Rates: Taxes are most often levied as a percentage, called the tax rate. An important distinction when talking about tax rates is to distinguish between the marginal rate and the effective (average) rate. The effective rate is the total tax paid divided by the total amount the tax is paid on, while the marginal rate is the rate paid on the next dollar of income earned.

For example, if income is taxed on a formula of 5% from US$0 up to $50,000, 10% from $50,000 to $100,000, and 15% over $100,000, a taxpayer with income of $175,000 would pay a total of $18,750 in taxes.

Tax calculation ((0.05*50,000) + (0.10*50,000) + (0.15*75,000)) = 18,750 The "effective rate" would be 10.7% (0.107*100) (18,750/175,000) = 0.107

The "marginal rate" would be 15%.

There are multiple types of taxes, some examples include:


 * Environmental Affecting Taxes
 * Capital Gains Taxes
 * Consumption Tax
 * Corporation Tax
 * Income Tax
 * Sales Tax
 * Excise Tax
 * Property Tax

In this wikispace only Ad Valorem and Excise Taxes will be discussed in detail.


 * Ad Valorem**

An ad-valorem tax (Latin: by value) is a tax based on the value of real estate or personal property. An ad-valorem tax is typically imposed at the time of a transaction (a sales tax or value-added tax (VAT)), but it may be imposed on an annual basis (real or personal property tax) or in connection with another significant event (inheritance tax or tariffs). A related concept is the fixed-rate tax, in which the tax base is the quantity of something, regardless of its price. For example, in the United Kingdom, a tax on the sale of alcoholic drinks is calculated on the quantity of alcohol in the drink, rather than its price. Ad-valorem duties are important to those importing goods into the United States of America because the amount of duty owed is often based on the value of the imported commodity. Ad-valorem taxes (mainly real property tax and sales taxes) are a major source of revenues for state and municipal governments, especially in jurisdictions that do not employ a personal income tax.

"Ad-valorem" is used frequently to refer to property values by county tax assessors. In many states, the central appraisal district sends certified values to the county tax assessor, who determines the final tax rate to be imposed on the property. Other states use a state tax commission, which notifies the appropriate taxing authorities of the assessed value of property within their billing jurisdiction. Ad valorem tax relates to a tax with a rate given as a proportion of the price. An example would be the state of Indiana having a 6% sales tax on the purchase of food. Virtually all state and local taxes on restaurant meals and clothing are ad valorem.


 * Excise Tax**

Definition: Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product. There are also excise taxes on activities, such as on wagering or on highway usage by trucks.

The graph below shows supply and demand diagrams for a competitive market with constant marginal costs. With constant marginal costs, the supply curve will be a horizontal line. Before any tax is imposed, q1 is the quantity sold and P1 is the price. A per unit excise tax imposes a wedge between the price that the sellers see and the price that the buyers see. In the graph the existence of this wedge is indicated by shifting up the supply curve to "Supply with Tax." The "Supply" line shows how sellers react to the prices they see, and the "Supply-with-Tax" line shows how the sellers react to the prices that the buyers see.



As a result of the tax, the equilibrium quantity is q2. Buyers pay a price of P2, but sellers receive only a price of P1. The amount of revenue that the government collects is the tax (P2-P1) times q2, or the wavy rectangle.

This figure illustrates two important results. First, consumers completely bear this particular tax because the price rises by the full amount of the tax. This is true regardless of who actually writes the check that is sent to the government. Therefore, an excise tax has the effect of decreasing the supply of a good.

Second, the tax causes a welfare loss or economic inefficiency because it prevents some exchanges that could benefit both buyers and sellers. There are several ways to show this cost. One is to use the concept of consumers' surplus. The loss of value to consumers is the loss of consumers' surplus, the area a-c-d-b. The tax revenue, or area a-c-b-e, represents that part of lost value government captures. The triangle c-d-e is a loss to the consumers but it is not a gain to anyone else.

Multiple Choice Questions:


 * 1) A major reason that state-run lotteries have become very popular as sources of government revenue is that:

A. They are a more progressive way to raise revenue than the state income tax. B. They encourage behavior that corrects market failure. C. The gambling industry has used its political muscle to push state lotteries through state legislatures. D. Because people voluntarily buy lottery tickets, they are an easy way to raise revenue.

//Answer D – Because people are choosing to buy these tickets it is a much easier way to collect revenue than raising taxes//

2. If income is taxed on a formula of 3% from US$0 up to $50,000, 8% from $50,000 to $100,000, and 12% over $100,000, a taxpayer with income of $275,000 would pay a total of _ in taxes.

A. $13,000 B. $65,000 C. $55,000 D. $62,500

//Answer: D - Tax calculation// //((0.03*50,000) + (0.8*50,000) + (0.12*175,000)) = $62,500//

3. Using the information from the previous question, what is the Effective Rate? A. 21.4% B. 25.3% C. 22.7% D. 18.9%

//Answer: C - The "effective rate" would be 22.7%:// //(62,500/275,000) = 0.227//

4. An excise tax has the effect of ___ the supply of a good? A. No Increasing B. Decreasing C. change D. Shifting

//Answer B – An excise tax shifts the supply curve up by the amount of the tax, therefore at any given price producers are willing to sell less of the product after the tax than before.//

5. How will an ad valorem tax shift the supply curve? A. Shift Right B. Shift Left C. Rotate Clockwise D. Rotate Counterclockwise

//Answer D – The ad valorem tax will cause the price required to produce a good to go up by the amount of the sales tax at any output level, therefore the price of the good will go up exponentially causing the curve to rotate counterclockwise.//

References: http://www.investopedia.com/terms/a/advaloremtax.asp http://en.wikipedia.org/wiki/Taxes http://www.irs.gov/businesses/small/article/0,,id=99517,00.html Augustus, J. R. (2006). Weight-based Vs. Ad Valorem Tax//. Convenience Store News,// pp. 84-85. Barron, J. M., Blanchard, K. H., Umbeck, J. R., & Kasper, H. (2004). An Economic Analysis of a Change in an Excise Tax. //Journal of Economic Education, 35//(2), 184-196. Redpath, I. J., Redpath, E. M., & Ryan, K. (2007). Sales and Use Taxation in E-Commerce: Where We Are and What Needs to be Done. //Information Systems Management, 24//(3), 239-245.