chapter 14, section 1objectives 1.identify the sources of the government’s authority to tax....

Chapter 14, Section 1

ObjectivesObjectives1. Identify the sources of the government’s

authority to tax.2. Describe types of tax bases and tax structures.3. List the characteristics of a good tax.4. Identify who bears the burden of a tax.


Key TermsKey Terms• tax: a required payment to a local, state, or

national government• revenue: the income received by a government

from taxes and other nontax sources• progressive tax: a tax for which the percentage

of income paid in taxes increases as income increases

• proportional tax: a tax for which the percentage of income paid in taxes remains the same at all income levels

• regressive tax: a tax for which the percentage of income paid in taxes decreases as income increases


Key Terms, cont.Key Terms, cont.• tax base: the income, property, good, or

service that is subject to a tax• individual income tax: a tax based on a

person’s earnings• corporate income tax: a tax based on a

company’s profits• property tax: a tax based on real estate

and other property• sales tax: a tax based on goods or

services that are sold• incidence of tax: the final burden of a

tax


IntroductionIntroduction• What are the features of a tax system?

o Fairnesso Simplicityo Efficiencyo Certaintyo Balance between tax revenue and tax rates


Government’s Authority to TaxGovernment’s Authority to Tax• The Constitution allows the Federal Govt. to tax.

o Taxation is necessary for government operation

o Power to tax is the first power given to the Federal Govt.


Limits on the Limits on the GovernmentGovernment

• There are limitso A tax must be “for the common defense and general welfare.”

o cannot bring in money that goes to individual interests.

o Federal taxes must be the same in every state.

o The government cannot tax exports, only imports.


Progressive Progressive TaxesTaxes

• Economists describe taxes based on their structure and according to the tax base.

• % paid increases as income increases.


Other TaxesOther Taxes• Proportional Tax

o Flat Taxo Everyone pays the same %.

• Regressive Taxo % paid decreases as income goes up

o Sales tax = regressive• Higher income earners spend less % of

income on sales taxes


Tax BasesTax Bases• Different taxes have different tax bases.

o The individuals income tax is based on a person’s earnings.

o The corporate income tax is based on a company’s profits.

o The property tax is based on real estate and other property.

o The sales tax is based on goods and services that are sold.


Elasticities of Demand and Tax Elasticities of Demand and Tax

Effects Effects • Taxes affect more than just the people who pay

them. • Producers often pass on a portion of tax to

consumers.o Generally, the more inelastic the demand, the more

easily the seller can shift the tax to consumers.


Characteristics of a Characteristics of a Good TaxGood Tax

• What is a good tax?

o Simplicity—tax law should be easy to understand

o Efficiency—the tax should be able to be collected without spending too much time or money

o Certainty—it should be clear when the tax is due, how much is due, and how to pay the tax

o Equity—the tax system should ensure that no one bears too much or too little of the tax


Determining Determining FairnessFairness

• How do you measure fairness?o 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.

o The gasoline tax is an example of the benefits-received principle.


Determining Fairness, Determining Fairness, cont.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.


ObjectivesObjectives1. Describe the process of paying individual

income taxes.2. Identify the basic characteristics of corporate

income taxes.3. Explain the purpose of Social Security,

Medicare, and unemployment taxes.4. Identify other types of taxes.


Key TermsKey Terms• withholding: taking tax payments out of an

employee’s pay before he or she receives it• tax return: a form used to file income taxes• taxable income: the earnings on which tax

must be paid; total income minus exemptions and deductions

• personal exemption: a set amount that taxpayers may subtract from their gross income for themselves, their spouse, and any dependents

• tax deduction: a variable amount that taxpayers may subtract from their gross income


Key Terms, cont.Key Terms, cont.• tax credit: a variable amount that taxpayers

may subtract from the total amount of their income tax

• estate tax: a tax on the total value of the money and property of a person who has died

• gift tax: a tax on the money or property that one living person gives to another

• tariff: a tax on imported goods• tax incentive: the use of taxation to

discourage or encourage certain types of behavior


IntroductionIntroduction• What taxes does the federal government collect?

o Individual income taxeso Corporate income taxeso Social Security, Medicare, and unemployment taxeso Excise taxes and tariffso Estate and gift taxes


Individual Income Individual Income

TaxesTaxes• Government’s

main source of income

o What is the difference between individual income taxes and corporate in %


““Pay-As-You-Earn” Pay-As-You-Earn” TaxationTaxation

• The amount of federal income tax a person owes is determined on an annual basis.

o You pay your income taxes out of each paycheck.

o One yearly lump sum would result in failure to pay

• Helps the government keep income flowing and the tax payer able to pay their taxes


Tax BracketsTax 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.


Withholdings and Tax ReturnsWithholdings and Tax Returns

• Employers withhold money based upon an estimated amount owed (filled out in a W4)

• After the calendar year ends, employers give their employees a report of how much income tax has already been paid. (W2)

o Employees then fill out a tax return to send to the federal government.


Corporate Income Corporate Income TaxesTaxes

• Like individual income taxes, corporate income taxes are progressive.

• Determining corporate income taxes is more complex

• .o Companies often deduct the cost of

employee’s health insurance as well as many other costs of doing business.


Social Security and Social Security and MedicareMedicare

• Employees also withhold money to help fund Social Security, Medicare, and unemployment insurance under the Federal Insurance Coalition Act (FICA).

o Most of the FICA taxes you pay go to Social Security benefits for retired people, surviving members of wage earners, and disabled people.

o The Medicare tax helps pay for health insurance for people over 65.


UnemploymentUnemployment• The unemployment tax pays for

“unemployment compensation” that people can receive when they are laid off.


Other Types of TaxesOther 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

• Import taxes—Tariffs, or import taxes, are taxes placed on imported goods.

• Estate taxes—a tax on the total value of the money and property of a person who has diedo As of 2008, if the total value of an estate is $2 million or less, there is

no federal estate tax.


Taxes That Affect Taxes That Affect

BehaviorBehavior• These taxes

change how people make choices

.o Tax credits are often

used as an incentive• Solar Panels• Hybrid Cars• Energy Efficient

appliances


ObjectivesObjectives1. Distinguish between mandatory and

discretionary spending.2. Describe the major entitlement programs.3. Identify categories of discretionary spending.4. Explain the impact of federal aid to state and

local governments.


Key TermsKey Terms• mandatory spending: spending that Congress

is required by existing law to do• discretionary spending: spending about which

Congress is free to make choices• entitlement: social welfare program that people

are “entitled to” benefit from if they meet certain eligibility requirements


IntroductionIntroduction• How does the federal government spend its

income?o Federal spending is divided up into mandatory and discretionary

spending.• Mandatory spending pays for Social Security, Medicare, Medicaid,

and other entitlements.• Discretionary spending pays for everything else, including defense,

education, law enforcement, environmental cleanup, and disaster aid.


Federal SpendingFederal Spending

• There are two types of government spending.

• Mandatory Spending – Required spending by the govt. by lawo Social Securityo Medicare

• Discretionary Spending – Government has choices on how to spendo Defenseo Education o Environmental Protection


Federal Spending, Federal Spending,

cont.cont.

• Taxes are spent on programs intended to keep Americans safe and secure.


Entitlement ProgramsEntitlement 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.o Congress can only change the eligibility requirements

or reduce benefits if there is a change in the law.


Social SecuritySocial Security• Social Security is a huge portion of federal

spending.o 50 million Americans receive benefits

• Uncertainty in the Futureo Upside down ration of payers and takers.o Baby Boomers


Medicare and Medicare and MedicaidMedicaid

• About 42 million people receive Medicare benefits. It pays foro Hospital care o Costs of physicians o Medical services.

• Medicaid – Helps low income families pay medical bills

o The federal government shares the cost of Medicaid with state governments.


Other Mandatory ProgramsOther Mandatory Programs

• Include the following:o Food stamps and child nutrition programso Retirement benefits and insurance for federal

workerso Veterans’ pensionso Unemployment insurance

• In recent years, there has been a debate over governmentally funded universal healthcare.


Discretionary Discretionary SpendingSpending

o Defense spending = about 50% of the government’s discretionary spending.

o The Department of Defense uses this money to pay salaries of enlisted men and women as well as its civilian employees.

o Buys weapons, missiles, ships, tanks, airplanes, and equipment.


Discretionary Discretionary Spending, cont.Spending, cont.

• The remaining discretionary funds go to pay for the following:o Education and trainingo Scientific researcho Student loanso Law enforcemento Environmental cleanupo Disaster relief


Federal AidFederal Aid• Federal taxes are sometimes used to help state

and local governments.o Medicareo Educationo Unemployment o Road Worko Disaster relief.

chapter 14, section 1objectives 1.identify the sources of the government’s authority to tax....

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