Taxes: Crash Course Economics #31

Summary

In this Crash Course Economics video, Adriene Hill explores the history and purpose of taxes, from ancient civilizations to modern times. She explains how taxes fund government services, redistribute wealth, and influence behavior. Hill also discusses different types of taxes, including progressive, regressive, and proportional, and their economic implications. The video highlights the importance of understanding tax systems and their impact on society, using historical examples like the American Revolution and India's Salt March to illustrate the power of tax policy.

Takeaways

• 📚 Taxes have been a part of human society for thousands of years, with evidence of them in ancient Mesopotamia, Egypt, and biblical texts.
• 💼 Taxes are essential for funding government services that promote the well-being of society, such as public safety, national defense, and education.
• 🌳 Taxes can be used to protect the environment and implement economic policies that encourage growth.
• 💰 Taxes can help redistribute wealth in society, with methods including progressive income tax and government subsidies.
• 🚫 Governments use 'sin taxes' on products like cigarettes and alcohol to discourage unhealthy consumption and reduce environmental impact through carbon taxes.
• 🛒 Indirect taxes like Value Added Taxes (VAT) and sales taxes are paid by consumers and collected by businesses, potentially leading to market inefficiencies.
• 🔄 Regressive taxes, such as sales taxes on essential items, disproportionately affect lower-income individuals compared to high-income earners.
• 🔝 Progressive taxes shift the tax burden towards those with higher incomes, exemplified by the U.S. income tax system with its marginal tax brackets.
• 📉 Proportional taxes, like a flat tax, require the same percentage of income from all taxpayers, but critics argue they can be less fair than they appear.
• 🏛 Historically, poor tax choices by governments have led to rebellions, such as the American Revolution and India's Salt March.
• 🌐 The implications of tax policy are far-reaching and can affect economic decisions, international attention, and even lead to civil disobedience movements.

Q & A

What is the historical context of taxation mentioned in the script?

The script mentions that taxation has been a part of human society for a very long time, with evidence of taxes in ancient Mesopotamia in the form of livestock and labor, ancient Egyptian texts and tomb scenes, and in the Bible. It also refers to a quote by U.S. Supreme Court Justice Oliver Wendell Holmes in 1927, emphasizing the role of taxes in civilized society.

What are the primary goals of taxation according to the script?

The script states that the primary goals of taxation are to raise money for government services, promote the well-being of society as defined by the government, afford services that markets might not pay for on their own, protect the environment, implement fiscal and monetary policies for economic growth, and redistribute wealth from those who have more to those who have less.

How does the script describe the use of taxes to redistribute wealth?

The script explains that taxes can redistribute wealth through various means, such as an income tax system where high earners are taxed at a higher rate than low earners, government subsidies and vouchers like food stamps and housing programs, and luxury taxes on expensive items.

What is the purpose of 'sin taxes' as mentioned in the script?

Sin taxes, as described in the script, are levied on products considered unhealthy or harmful, such as cigarettes and alcohol, with the intention of reducing their consumption and discouraging people from using such products.

How does the script differentiate between direct and indirect taxes?

Direct taxes are those paid directly by a person or organization to the government, such as property and income taxes. Indirect taxes, on the other hand, are collected by a seller or producer of goods but are paid by consumers, with examples given as Value Added Taxes and sales taxes.

What economic term is used to describe the outcome that economists most dread according to the script?

The script refers to 'inefficiency' as the Voldemort of economic outcomes, which is something economists most dread, especially in the context of indirect taxes distorting market prices.

What are the three types of taxes characterized by economists in the script?

The script mentions regressive, progressive, and proportional taxes. Regressive taxes take a higher toll on lower-income individuals, progressive taxes shift the burden to those with more income, and proportional taxes require the same percentage of income from all taxpayers regardless of their income level.

How does the script explain the concept of marginal income tax brackets in the United States?

The script explains that marginal income tax brackets represent the highest possible income tax rate one could pay, and that taxpayers do not pay the bracket rate on their entire income. Instead, their income is divided into chunks corresponding to each tax rate, and they pay the associated rate on each chunk.

What historical tax rebellion is mentioned in the script, and what was its outcome?

The script mentions the American Revolution as a historical tax rebellion. The outcome was the establishment of a free America with taxes and representation, highlighting the phrase 'No taxation without representation' and the Boston Tea Party as key events leading to the revolution.

How did the script describe the Salt March in India as a tax rebellion?

The script describes the Salt March in India as a peaceful civil disobedience led by Mohandas Gandhi against the British monopoly on salt and the associated tax. Gandhi's actions, along with thousands of others, brought international attention to India's struggle for independence.

What advice does the script give to those considering supporting a tax code reform?

The script advises people to take the time to really read into what a tax code reform might mean for the economy and to ensure they are comfortable with all the implications before supporting any plan for tax reform.

Outlines

00:00

📚 Introduction to Taxes and Their Historical Significance

The video script begins with Adriene Hill introducing the topic of taxes, exploring their purpose and the historical context of taxation. It mentions that taxes have been a part of human society since ancient times, with examples from Mesopotamia and Egypt. The script also references biblical mentions of taxes and tax collectors, highlighting their necessity and negative connotations. The main goals of taxation are outlined, including funding government services, promoting societal well-being, and redistributing wealth. The script also touches on the use of taxes to influence behavior, such as sin taxes on cigarettes and alcohol, and environmental taxes like carbon taxes.

05:00

💼 Understanding Different Types of Taxes and Their Impact

This paragraph delves into the different types of taxes, starting with direct taxes like property and income taxes, which are paid directly to the government. It contrasts these with indirect taxes, such as value-added taxes and sales taxes, which are collected by businesses and ultimately paid by consumers. The script discusses the economic effects of these taxes, including the potential for market distortion and inefficiency. It also categorizes taxes as regressive, progressive, and proportional, explaining how each type affects taxpayers differently based on their income levels. The paragraph provides examples of how progressive taxes, like the U.S. income tax system, work, and how tax credits, exemptions, and deductions can reduce tax burdens.

10:02

🏛 Historical Tax Rebellions and the Importance of Tax Policy

The final paragraph of the script discusses the significant impact that tax policies can have on society, highlighting two historical examples of tax rebellions. The first is the American Revolution, which was sparked in part by British tax policies and led to the establishment of an independent United States with its own tax system. The second example is the Salt March in India, where Mahatma Gandhi led a non-violent protest against British salt taxes, drawing international attention to India's struggle for independence. The script concludes by emphasizing the importance of understanding tax policies and their implications on the economy and society, and by encouraging viewers to support the show on Patreon to keep it free for everyone.

Keywords

💡Taxes

Taxes are mandatory financial charges imposed by a government on a person or entity to fund various public expenditures and services. In the video, taxes are discussed as a historical and essential part of civilized society, with examples ranging from ancient civilizations to modern times, illustrating their role in funding government services and influencing economic behavior.

💡Tax Brackets

Tax brackets are ranges of income that are subject to different income tax rates. The video explains that in the U.S., individuals are taxed at a rate that corresponds to the bracket in which their income falls, emphasizing that the system is progressive, meaning those with higher incomes pay a higher percentage of their income in taxes.

💡Redistribution of Wealth

Redistribution of wealth refers to the process by which a government takes income or property from those who have more and gives it to those who have less, often through taxation and welfare programs. The script mentions this concept as one of the goals of taxation, aiming to create a more equitable society.

💡Sin Taxes

Sin taxes are levied on goods or services considered harmful or immoral, such as cigarettes and alcohol. The video describes these taxes as a means to discourage consumption of unhealthy products and to generate revenue for the government.

💡Carbon Tax

A carbon tax is a fee imposed on the burning of carbon-based fuels, intended to reduce greenhouse gas emissions. The script provides examples from different countries, like British Columbia and Chile, to illustrate how carbon taxes can vary in implementation and impact.

💡Direct Taxes

Direct taxes are levied directly on an individual or organization and cannot be passed on to others. The video mentions property taxes and income taxes as examples, highlighting that these taxes are borne by the entity that pays them, without intermediaries.

💡Indirect Taxes

Indirect taxes are collected by an intermediary, such as a retailer, on behalf of the government, but are ultimately paid by the consumer. The script contrasts indirect taxes like value-added taxes and sales taxes with direct taxes, noting that they affect all consumers regardless of income.

💡Regressive Taxes

Regressive taxes are taxes that take a larger percentage of income from people with lower incomes compared to those with higher incomes. The video uses sales taxes on essential items as an example, explaining that these taxes can disproportionately burden lower-income individuals.

💡Progressive Taxes

Progressive taxes are taxes where the tax rate increases as the taxable amount increases. The script explains that in the U.S., income tax is progressive, meaning that as one's income rises, so does the percentage of their income that is taxed.

💡Proportional Taxes

Proportional taxes require all taxpayers to pay the same percentage of their income, regardless of the amount earned. The video mentions a flat tax as an example, where everyone pays a fixed percentage of their income, suggesting that it feels fair but may not be as simple or equitable as it seems.

💡Tax Policy

Tax policy refers to the government's decisions and regulations regarding taxation. The script discusses the implications of tax policy on the economy and society, including historical examples like the American Revolution and the Salt March in India, which were sparked by tax issues.

Highlights

Taxes have been a part of human society for as long as there have been records, from ancient Mesopotamia to Egypt and the Bible.

Taxes serve to fund government services and promote societal well-being as defined by the government in power.

Taxation can be used to redistribute wealth from the rich to the poor through various mechanisms, such as income tax and government subsidies.

Sin taxes are imposed on products deemed harmful to health, like cigarettes and alcohol, to discourage their consumption.

Carbon taxes are implemented in some regions to charge for the emission of greenhouse gases, aiming to reduce pollution.

Economists differentiate between direct and indirect taxes, with direct taxes being paid directly to the government and indirect taxes collected by intermediaries.

Regressive taxes disproportionately affect lower-income individuals, as they are a flat rate applied to all, regardless of income.

Progressive taxes shift the tax burden to higher-income earners, with the U.S. income tax system being an example of this.

The U.S. uses marginal income tax brackets to determine tax rates, which means different portions of income are taxed at different rates.

Tax credits, exemptions, and deductions in the U.S. significantly reduce the amount of tax individuals owe, making the system more equitable.

Proportional taxes, such as a flat tax, require the same percentage of income from all taxpayers, regardless of their earnings.

Flat taxes may seem fair due to their simplicity, but critics argue they can shift the tax burden away from the wealthy and onto lower and middle classes.

Tax policy has serious implications and can lead to rebellion, as seen in historical events like the American Revolution and India's Salt March.

The Stamp Act and other British tax policies on the American colonies led to increased frustration and eventually the American Revolution.

Gandhi's Salt March in India was a form of peaceful civil disobedience against British tax laws, drawing international attention to India's struggle for independence.

Throughout history, some individuals have avoided taxes by changing their lifestyles or careers, such as becoming monks to escape taxation.

Discussions about the size and role of government are important for taxpayers and beneficiaries of government services, as they impact the necessity and provision of certain services.

Despite the general dislike for paying taxes, people appreciate the benefits and protections they provide, such as public safety and education.

Transcripts

Hi I’m Adriene Hill, this is Crash Course Economics, and today we’re going to talk about taxes.

We’re going to talk about why we have taxes, what they do for us,

and why you should go ahead and take that raise that’s going to bump you into the next tax bracket.

Also rebellions. And the British Empire’s bad judgement when it came to taxing colonies.

[Theme Music]

While your struggles with taxes and the tax code may seem particularly unpleasant to you today,

people have been paying, and complaining, about taxes for a long time.

Way longer than any of us have been alive. Or our parents. Or our grandparents.

Ancient Mesopotamians paid taxes in the form of livestock and labor.

There are ancient Egyptians texts and tomb scenes showing evidence of taxes, tax collectors, and even tax shelters.

Taxation and tax collectors also show up in Bible – over and over.

Taxes appear in scripture as a necessity, like: “Render therefore unto Caesar the things which are Caesar’s”

And tax collectors are in there as sinners, right up with prostitutes.

More recently, in 1927, U.S. Supreme Court Justice Oliver Wendell Holmes wrote:

“Taxes are what we pay for civilized society.”

Maybe it’s time we forgive tax collectors too…

So we’ve had taxes pretty much as long as we’ve had records of organized society.

But why? What are the goals of taxation?

At the most basic level, taxes raise money for government services.

Taxes are used to promote the well-being of society – at least well-being as defined by the government in power.

They help us afford services markets might not pay for on their own.

Things like public safety and national defense and education.

Taxes can be used to protect the environment.

They can help a country implement fiscal and monetary policies, meant to push along economic growth.

Taxes can be used as a way to redistribute wealth in a society –

from people who have more to people who have less.

This can happen in a couple of ways – some more direct than others.

An income tax system that taxes high income earners at a higher rate than low income earners is one example.

And we’ll come back to that.

Government subsidies and vouchers – like food stamps and housing programs also shift wealth.

So do luxury taxes – basically an additional tax bill on expensive items like jet planes, expensive furs…

and that really annoying diamond ring space on the Monopoly board.

Governments can also use taxes to TRY to change people’s behavior.

Sin taxes on not-good-for-you products like cigarettes and alcohol are meant to reduce

consumption of unhealthy products.

Gasoline taxes are meant to encourage people to drive less.

France passed soda taxes, to try to get people to drink fewer sugary drinks.

Denmark passed, and then got rid of, a “fat tax” on foods that were relatively high in saturated fat.

A handful of governments, including those in British Columbia, Ireland, & Chile have instituted “carbon taxes.”

These carbon taxes basically charge businesses and sometimes households for the amount of

polluting greenhouse gases they use or create.

These carbon taxes take different forms around the world.

Residents of British Columbia, for example, pay an extra 6.67 cents per liter of gas as a carbon tax.

(For those of us in the US, Myanmar, and Liberia who don’t use the metric system, that’s about $0.25/gallon.)

In Chile, power plant operators pay $5 for every metric ton of carbon dioxide that they release into the air.

When economists talk about taxes, they sometimes divide them into direct taxes and indirect taxes.

Direct taxes are paid directly by a person or organization to the government body that imposed the taxes.

These include property taxes and income taxes – where there’s no intermediary – and

I can’t pass off the tax burden to someone else.

Value Added Taxes & sales taxes aren’t exactly the same thing, but they're both good examples of indirect tax.

They’re collected by a store or seller or producer of goods, but are actually paid by consumers.

They’re taxes that ALL consumers have to pay, regardless of how much money they make.

A pair of socks at the mall down the street is going to cost me exactly the same as when

a billionaire buys that pair of socks at the same store.

Some economists say indirect taxes distort market prices, and lead to one of the things

most dreaded by economists, the Voldemort of economic outcomes: inefficiency.

Economists also characterize taxes as regressive, progressive and proportional.

Let’s start with regressive taxes. Regressive taxes are typically applied across the board –

and, on their face, they might seem equitable, because everyone pays the same amount.

But regressive taxes take a higher toll on people with lower-income than high-income earners.

Sales taxes, especially on essential items, are considered regressive.

That’s why some places exempt food and prescription drug purchases from sales taxes.

Some economists argue that fees for things like hunting licenses, toll roads, and driver’s

licenses are also regressive. Why?

Well, imagine two drivers go to the department of motor vehicles to get a new license.

One makes $200,000 a year, the other makes $20,000.

Both will pay exactly the same amount for their driver’s license.

The license fee is a much bigger hit for the lower-income driver.

And that’s why regressive tax takes a disproportionate toll on people with lower incomes.

On the other end of the taxing spectrum, there are progressive taxes.

Progressive taxes are more or less the opposite of regressive taxes –

in that they shift the burden of taxation to people who make more money, and away from those who make less.

In the United States, our income tax is a progressive tax, meaning individual’s pay

more in taxes as they make more income.

But before you start worrying about whether making an extra $100 this year is going to

bump you into a higher tax bracket –

it’s worth understanding how the progressive income tax in the United States works.

When the IRS calculates how much you owe in taxes, it uses marginal income tax brackets –

based on the amount of taxable income you earned in a year.

These marginal tax rates represent the highest possible income tax rate you could pay.

Right now, there are seven tax brackets.

But no matter which tax bracket you find yourself in – you're not gonna pay that rate for your entire income.

Instead, your taxable income gets divided up into chunks that correspond to each tax rate –

and you pay the associated rate on each of those chunks.

For example, say you made $37,450 as a single filer last year.

That would put you in the 15% tax bracket. But, you’d still pay the lower 10% rate on the first $9,225 you made.

So if you took the extra $100 and made $37,550 – you’d be bumped up to the 25% tax bracket.

But again, you’d only pay 25% on that extra $100. Your effective tax rate would be lower.

The other thing you’ve gotta keep in mind with U.S. income taxes is there are a huge

number of tax credits, tax exemptions and tax deductions that reduce the amount people owe.

So your tax bill will never be as painful as that 25% tax bracket might make you think.

Many other countries around the world have their own progressive income tax systems.

But it turns out it’s difficult to measure just how progressive any country’s total

tax system is, especially compared to another country.

It’s not as easy as looking at countries with the highest marginal tax rates and deciding

they have more progressive tax policy – because so many other taxes and tax breaks come into play.

In the U.S. some economists argue, the progressiveness of our income tax code offsets the regressiveness

of many other taxes we pay.

If progressiveness and regressiveness are even words.

So we’ve covered regressive and progressive taxes.

The third type of taxes are proportional taxes.

Proportional taxes require the same percentage of income for all taxpayers, regardless of how much they make.

A flat tax is an example of a proportional tax.

You’ll hear politicians touting flat taxes –

in part because they’re relatively simple compared to the U.S.’s current, incredibly-elaborate tax code.

And because they kind of FEEL fair. Imagine a flat tax of 10%.

The woman making $200,000 ends up sending $20,000 to the government,

while the guy making $20,000 sends only $2000. They both feel a 10% pinch.

Economists who oppose the flat tax say that feelings have no place in the tax code.

They argue a flat tax isn’t as simple OR as fair as it seems.

For one, they say that getting rid of all the tax deductions and exemptions and credits

we mentioned earlier could change a whole lot of the economic decision making that happens –

from saving for retirement in tax protected accounts to to home ownership and donating to charities.

All those activities are encouraged by the tax code we have now.

Like we mentioned before, there are economists who argue that the progressive income tax

in the U.S. offsets some of our other, more regressive taxes.

They say a flat tax would shift the total tax burden away from the wealthy to the lower

and middle classes, actually making our broader tax policy regressive.

All of this is complicated. Even if it sounds simple.

Before you buy into anyone’s plan to reform the tax code, take the time to really read

into what it might mean to the economy.

And make sure you're comfortable with all the implications.

Speaking of implications of tax policy: They can be incredibly serious. And fascinating.

A poor tax choice by a government can and has resulted in rebellion. Let’s go to the Thought Bubble.

One tax rebellion you’ve probably heard of is the American Revolution.

After the Seven Years War ended in 1763, Great Britain had a huge debt to pay off.

It needed to raise revenue from somewhere, and looked toward the colonists in America.

In 1764, the British Parliament started taxing molasses sales.

In 1765, they enacted the Stamp Act, which added taxes to paper and legal documents.

Colonists grew more and more frustrated with British officials, both with tax policies and other interventions.

Anyway, you know how it goes. “No taxation without representation.” Boston Tea Party. A big war.

The French get involved. And we end up with a free America. With taxes AND representation.

Except in Washington, DC!

More recently, in India, there was another super interesting tax rebellion – called the Salt March.

In 1930 India, the British were in charge, and they had laws in place at the time that

outlawed Indians from collecting or selling salt.

Instead they had to buy it from a British monopoly, which collected an 8.2% salt tax.

Mohandas Gandhi decided to defy the Salt Act – by walking 240 miles to the coast of the

Arabian sea – to gather tax-free salt.

Along his route, more and more Indians joined him in the peaceful civil disobedience.

He got to the beach, picked up a piece of salt, and broke the law.

Thousands of others followed his lead – making and selling non-British salt – in a non-violent resistance.

The Salt March was extensively covered in newsreels and newspapers, and it brought international

attention to the largely non-violent Indian struggle for Independence.

All that because of taxes. Thanks Thought Bubble.

Of course, there are other ways to get around paying taxes you don’t want to pay – other

than fighting or starting a mass-civil disobedience movement.

Based on historical documents, we know people have been running away from paying taxes for years.

Some literally picking up and leaving their homes.

Other people have discovered career paths that get them out of tax bills.

Historians think that some European men became monks during the Middle Ages to avoid being taxed.

There’s proof that some Chinese men joined Buddhist monasteries to get out of paying taxes.

There is plenty of room for disagreement over how big government should be –

and what it should and shouldn’t be doing.

All those discussions matter to you as a taxpayer, and as someone who benefits from taxation and government services.

But, as we’ve said time and time again – there are some services the market just won’t provide.

Some protections it won’t guarantee. No one likes paying taxes. But we do like what they do for us.

Thanks for watching, we’ll see you next week.

Thanks for watching Crash Course Economics.

It's made with the help of all these nice people who also think salt taxes are incredibly regressive.

You can help keep Crash Course free for everyone forever by supporting the show at Patreon.

Patreon is a voluntary subscription service where you help make the show with your monthly

non-tax-deductable contribution.

And get rewards! Thanks for watching. And don't forget: the next tax bracket's not that scary.