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For an economy to grow and expand, there must be an increase in savings.

To put it quite simply, to create capital (money), people must be willing to save and invest instead of spending their incomes.

This concept applies to both individual people, businesses and large governments at all levels.

To understand the concept of the creation of capital, one must also examine the factors of production and what each produces that can be measured in dollars.

The factors of production are the beginning of the process that makes up the gross national product (GNP).

An examination of the factors of production will make it easier to understand the circular flow and the GNP.

One measurement of a national economic system is the Gross National Product.

This is usually referred to as GNP.

The GNP is the total dollar value of all goods and services produced in a country in a given period of time (usually a year).

The Net National Product is the Gross National Product minus capital consumption (depreciation).

A reminder that depreciation is the reduction in the value of capital goods because of the wear and tear on them in production of other goods.

NNP is the National Net Product.

The NNP is calculated by deducting specific items from the GNP, including the factors of production.

All of these items are a part of the circular flow of goods and services.

Look at these factors of production and what they produce:

Land - produces money in the form of rent

Labor - produces wages as earned from income

Capital - produces interest earned from investment and/or savings

Management - produces profit

Government - produces taxes

(which become income to the government)

Taxes are the main source of income for the national and state governments.

In evaluating a tax for fairness according to the ability-to-pay principle, economists have frequently used one particular standard: that taxes should be judged on the relation the tax rate has to the tax base.

A tax rate is the percentage that is taxed. The tax base is the subject on which the tax is levied.

Taxes can fit into three general categories.

Taxes may be regressive, progressive, and proportional.

If the tax rate increases as the tax base increases, the tax is progressive. If the tax rate decreases as the tax base increases the tax is regressive.

Let us look at some examples of these types of taxes.

A progressive tax is a tax in which the rate of payment increases as the tax base increases.

A progressive tax takes a larger proportion of income from high-income people than from low-income people.

As the income increases (or progresses), the amount of income tax also increases.

Inheritance taxes and excise taxes on luxury goods are other examples of progressive taxes.

An excise tax is a tax placed on a good or a service at the time of sale. The higher the cost of the good or service, the higher the tax will be on the sale.

An inheritance tax is placed on those people or heirs who are receiving shares of an estate. The inheritance is figured on the worth of the estate.

There is also an estate tax, which is a tax on the entire worth of the estate.

A proportional tax is one in which the rate of tax does not change with a change in the tax base.

A proportional tax charges the same percentage regardless of other factors.

Sales tax and gasoline tax are proportional taxes.

A regressive tax charges a lower percentage from individuals as their income increases.

A regressive tax is one that takes a smaller percentage of income from high-income people than from low-income people.

The state sales taxes are examples of a regressive tax. Sales taxes are regressive because high-income people pay a smaller percentage of their income on goods and services subject to these taxes.

Because of this, attempts have been made to make the sales taxes more progressive. A number of states do not collect sales taxes on food and medicine.

Federal income tax is levied by the federal government.

It is based on a percentage of individual income.

There are exemptions and deductions, but it still takes a great deal from an individual paycheck.

Tax dollars provide many services which individuals could not purchase if they had to provide the same service themselves.

Our tax dollars provide protection, transportation, communication, and other vital services that would be impossible for an individual to afford.

State income tax is tax levied on income and paid to the government of your state. Some states do not have an income tax.

The state provides services, just as the federal government does.

Let us review some other types of taxes.

Excise tax is paid for goods such as cigarettes, alcohol, and automobiles.

Personal property tax is levied against property that an individual owns.

If the individual dies, his or her estate is taxed.

If an individual gives property, real or personal, to a beneficiary, the beneficiary must pay an inheritance tax.

Property owners must pay ad valorem tax. An ad valorem tax is figured at a percent of the value on an invoice or statement. In other words, this is the value that the assessor places on your property or personal possessions.

This tax is used to support schools.

Sales tax is a percentage of economic goods purchased which goes to the city or state government.

Corporations are also taxed and provide a large amount of income to governments.

Gasoline is also taxed.

During certain periods of time like war or when gas supplies are low, the price goes up and may carry a heavier tax.

An individual may receive a tax rebate from the government after filing their federal income tax return.

Money paid out by a government agency is called a disbursement.

Summary

This concludes our discussion of Creating Capital.

Take some time to talk to some adults about all of the taxes they have to pay.