ch 14 presentation
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TAXES & GOVERNMENT SPENDINGChapter 14
Section 1
What Are Taxes?
Government’s Authority to Tax We authorize the federal government,
through the Constitution and our elected representatives in Congress, to raise money in the form of taxes. Taxation is the primary way that the
government collects money. Taxes give the government the money it
needs to operate. The first power granted to Congress is the
power to tax, which is the basis of all federal laws.
Limits on the Government There are also limits on the
government’s power to tax. The purpose of a tax must be “for the
common defense and general welfare.” A tax cannot bring in money that goes to
individual interests. Federal taxes must be the same in every
state. The government cannot tax exports, only
imports.
Progressive Taxation Economists describe taxes based on
their structure and according to the tax base.
A progressive tax is a tax for which the percentage of income paid in taxes increases as income increases.
Other Types of Taxation A proportional tax is a tax for which the
percentage of income paid in taxes remains the same at all income levels.
A regressive tax is a tax for which the percentage of income paid in taxes decreases as income increases. A sales tax is regressive because higher
income households spend a lower proportion of their incomes on taxable goods and services.
Tax Bases Different taxes have different tax bases.
The individual income tax is based on a person’s earnings.
The corporate income tax is based on a company’s profits.
The property tax is based on real estate and other property.
The sales tax is based on goods and services that are sold.
Elasticities of Demand and Tax Effects
Taxes affect more than just the people who pay them.
Producers often pass on a portion of tax to consumers. Generally, the more inelastic the demand, the more
easily the seller can shift the tax to consumers.
Characteristics of a Good Tax Simplicity—tax law should be easy to
understand Efficiency—the tax should be able to be
collected without spending too much time or money
Certainty—it should be clear when the tax is due, how much is due, and how to pay the tax
Equity—the tax system should ensure that no one bears too much or too little of the tax
Determining Fairness Economists have proposed two different ideas
about how to measure the fairness of a tax. The benefits-received
principle holds that a person should pay taxes based on the level of benefits he or she expects to receive from the government.
The gasoline tax is an example of the benefits-received principle.
Determining Fairness, cont. The ability-to-pay principle holds that
people should pay taxes according to their ability to pay.
Good taxes generate enough, but not too much, revenue. Citizens needs are met, but not to such an extensive degree that the tax discourages production.
Section 2
Federal Taxes
Types of Federal Taxes Individual income taxes Corporate income taxes Social Security, Medicare, and
unemployment taxes Excise taxes and tariffs Estate and gift taxes
Individual Income Taxes The government’s
main source of revenue comes from the federal tax on individuals’ taxable income. What percentage
of federal revenues do not come from individual and corporate income taxes?
“Pay-As-You-Earn” Taxation The amount of federal income tax a
person owes is determined on an annual basis. To lessen the burden that one large yearly
tax would place on an individual and to make it possible for the government to meet its regular expenses, federal income tax is collected in a “pay-as-you-earn” system. This means that individuals usually pay most of
their income tax throughout the year as they earn income.
Tax Brackets The federal income tax is a progressive tax,
which rises with the amount of taxable income. Your range of income puts you in a specific tax
bracket. If you are single, at what rate would you pay taxes
on income over $29,500 and less than $71,950?
Withholdings and Tax Returns Employers help collect taxes by
withholding money from your paycheck based on an estimate of how much you will owe in federal income tax for that year.
After the calendar year ends, employers give their employees a report of how much income tax has already been paid. Employees then fill out a tax return to send
to the federal government.
Tax Returns, cont. On your tax
return, you figure out how much of your income is taxable. Taxable income is a
person’s total income minus exemptions and deductions.
Tax returns are due to the Internal Revenue Service by April 15.
Corporate Income Taxes Like individual income taxes, corporate
income taxes are progressive.
Determining corporate income taxes can be more difficult than determining an individual’s because businesses can take many deductions. Companies often deduct the cost of employee’s
health insurance as well as many other costs of doing business.
Social Security and Medicare Employees also withhold money to help
fund Social Security, Medicare, and unemployment insurance under the Federal Insurance Coalition Act (FICA). Most of the FICA taxes you pay go to Social
Security benefits for retired people, surviving members of wage earners, and disabled people.
The Medicare tax helps pay for health insurance for people over 65.
Unemployment The unemployment tax pays for
“unemployment compensation” that people can receive when they are laid off.
Other Types of Taxes Excise taxes—a general revenue tax on
the sale or manufacture of a good or service such as gasoline, cigarettes, and other items
Estate taxes—a tax on the total value of the money and property of a person who has died As of 2008, if the total value of an estate is
$2 million or less, there is no federal estate tax.
Other Types of Taxes, cont. Gift taxes—a tax on the money or
property that one living person gives to another The goal of the gift tax is to stop people
from avoiding the estate tax by giving away property before they died.
Import taxes—Tariffs, or import taxes, are taxes placed on imported goods.
Taxes that Affect Behavior The government
sometimes uses taxes to encourage good behavior, which is known as a tax incentive. Tax credits are often
used as an incentive. For example, people
who use solar power receive an income tax credit.
Section 3
Federal Spending
Federal Spending There are two types of government
spending.
Mandatory spending is money that Congress is required by existing law to spend on certain programs or to use for interest payments on the national debt.
Discretionary spending is spending about which lawmakers are free to make choices.
Federal Spending, cont. The federal
government spends the funds it collects from taxes and other sources on a variety of programs. Which are the
three largest categories of expenditures in the federal budget?
Entitlement Programs Most of the mandatory spending items are for
entitlement programs, which fund social welfare programs.
The federal government guarantees assistance for all people who quality for such programs.
Entitlements are a largely unchanging part of government spending. Congress can only change the eligibility
requirements or reduce benefits if there is a change in the law.
Social Security Social Security is a huge portion of federal spending.
About 50 million Americans receive monthly benefits from the Social Security Administration.
The future of Social Security is uncertain. As the millions of baby
boomers—people born after World War II—start to retire, the ratio of existing workers, who pay for Social Security, to retirees will fall.
Medicare and Medicaid About 42 million people receive Medicare benefits.
It pays for hospital care and for the costs of physicians and medical services.
Medicare costs have been rising as a result of expensive technology and people living longer. It faces the same problem as Social Security.
Medicaid benefits help low-income families pay for their medical expenses The federal government
shares the cost of Medicaid with state governments.
Other Mandatory Programs Other means-tested entitlements benefit
people and families whose incomes fall below a certain level. These entitlements include: Food stamps and child nutrition programs Retirement benefits and insurance for federal
workers Veterans’ pensions Unemployment insurance
In recent years, there has been a debate over governmentally funded universal healthcare.
Discretionary Spending Defense spending accounts
for about half of the government’s discretionary spending.
The Department of Defense uses this money to pay salaries of enlisted men and women as well as its civilian employees.
This money also buys weapons, missiles, ships, tanks, airplanes, and equipment.
Discretionary Spending, cont. The remaining discretionary funds go to
pay for the following: Education and training Scientific research Student loans Law enforcement Environmental cleanup Disaster relief
Federal Aid Federal taxes are sometimes used to help state
and local governments. State and federal governments share the cost of
Medicaid, unemployment insurance, education, lower-income housing, highway construction, and dozens of other programs.
States also rely on federal aid for disaster relief.
Section 4
State & Local Taxes & Spending
Local Governments How do local governments manage their
money? Local governments manage their money in
accordance with priorities set by elected local government officials.
Local governments create budgets and collect taxes just like the federal government.
State Budgets Governments plan their spending by creating a
budget. The federal government has one budget while
state governments have two budgets. An operating budget is a budget for day-to-day
spending needs. A capital budget is spending on major
investments. Unlike the federal government, 49 states require
balanced budgets—budgets in which revenues are equal to spending.
Where are State Taxes Spent? Education
Every state spends taxpayer money to support at least one public state university.
They also provide financial help to local governments for public elementary and secondary schools.
Public Safety State police enforce traffic laws and help motorists in
an emergency. State governments build and run corrections systems.
Public Welfare State funds support hospitals and clinics and
unemployment benefits.
Where are State Taxes Spent? Highway and Transportation
State crews resurface roads and repair bridges. States pay some of the cost of facilities like
waterways and airports. Arts and Recreation
States fund parks, nature reserves, museums, and art and music programs.
Administration State governments spend money to keep the
government running. Revenues pay for state workers’ salaries.
State Revenue & Spending, 2004-2005
State Tax Revenue States receive most of their revenue
through taxes. Sales tax on goods and services is the main
source of state revenue. Some goods, like food and clothing, are tax
exempt in certain states. Even states without a sales tax impose excise
taxes that apply to specific products and activities.
Many states also collect an individual income tax, which is paid in addition to the federal income tax. Some states tax at a flat rate while other have
progressive rates.
State Tax Revenue, cont. Corporate income tax—Most states
collect income taxes from corporations that do business in the state. These taxes make up a small amount of state
tax revenues. Other state taxes include:
Licensing fees on certain businesses Transfer taxes on stock certificates Inheritance taxes Property taxes, including real property and
personal property
Local Government Local governments, including towns,
cities, countries, and school districts, carry major responsibilities in the public school systems, law enforcement, and fire protection. They also manage public facilities, parks,
and recreation facilities. They monitor public health, public
transportation, elections, record keeping, and social services.
Local Revenue & Spending, 2007
Local Government Taxes Local governments
levy property taxes, sales taxes, excise taxes, and income taxes.
Many local taxes affect visitors and are designed to raise revenue from nonresidents. Wall-to-wall traffic
jams, for example, are prompting a few cities to consider a congestion tax.