Taxes and Spending

Chapter 14

What are Taxes?

Chapter 14, Section 1

What are Taxes?

Taxes are required to pay for local, state, and federal programs

The income received from taxes is known as revenue

The government has the power to tax under the Constitution Certain powers to the state and local Certain powers to federal

All must be for the common defense and general welfare of the country

Tax Base

The tax base is the income that is subject to tax. Made up of: Income tax Sales tax Property tax Corporate income tax

Tax Structure

Proportional Tax…% of income…flat tax Progressive Tax…% increases with

income…income tax Regressive Tax…places a higher burden

on those with less income…sales tax Usually on goods and services

What Makes a Good Tax

Simplicity…laws are simple and easy to understand

Efficiency…collect taxes without spending too much time or money

Certainty…know what is due and when Equity…fair so there is not a heavier burden Fairness

Benefit received approach Those receiving the benefits pay the tax (gas)

Ability to pay principle People pay according to their ability to

Bearing the Burden

Who actually pays? The producer can easily shift the burden

of the tax to the consumer Easier to shift it if there is inelastic

demand! The final burden is known as the incidence

of a tax

Federal Taxes

Chapter 14, Section 2

Federal Taxes

Individual Income Taxes 48% of federal revenue Withheld from income File a tax return to balance what you owe Exemptions and deductions...reduce your

taxable income Tax brackets...determine % you will pay Income tax is a progressive tax

Federal Taxes

Corporate Income Tax 11% of revenue

FICA...social security, Medicare, unemployment 33%

Other Taxes Excise...taxes on certain goods (gas, tobacco) Estate Taxes...tax on the estate of someone who

has died Gift Taxes...taxes on gifts above $10,000 Import Taxes...tariffs...tax on imports

Tax incentives...used to encourage or discourage behavior

Review

1. Taking taxes out of an employee’s wages before he or she receives them is called(a) tax return.(b) social security.(c) FICA.(d) withholding.

2. How is the federal income tax a progressive tax?(a) The higher the income a person has, the higher the percentage

that person pays as tax.(b) A person with a higher income pays more money in taxes,

although the percentage he or she pays as tax is less.(c) Two married people who file their taxes together will pay more

taxes than a single person will.(d) Children pay no taxes, regardless of whether they earn a large

income.

Federal Spending

Chapter 14, Section 3

Federal Spending

The government uses tax revenue to fund the operations of the country

Mandatory vs. Discretionary spending Mandatory...programs that need to be funded by

law (interest on national debt and entitlement programs)

Entitlement programs are those that people are entitled to and meet the requirements of...social security, Medicare etc...

Discretionary spending...programs that can be adjusted

Defense, education, environment etc...

Federal Spending

Much of the revenue collected by the federal government through taxation is also distributed to state and local governments

Review

1. All of the following are examples of mandatory spending except(a) defense spending.(b) Medicare.(c) Social Security.(d) Medicaid.

2. An entitlement program is(a) a program to provide benefits paid to everyone.(b) a program to provide benefits paid to government

employees only.(c) a program to provide benefits to people who meet

certain requirements.(d) a program to provide benefits to illegal aliens.

State and Local Taxes and Spending

Chapter 14, Section 4

State Taxation

Like the federal government, state governments collect taxes to pay for their operating costs

States have strict tax laws and are required to balance the budget Operating budget...pays for operation of

state Capital budget...pays for upgrades and

investments

Spending State Taxes

Education Law enforcement Transportation Public welfare Recreation

Sources of Income for States

Sales Tax State income taxes Business Taxes Fees and licenses

Local Government

Like the state government, local governments need to tax to cover operating costs Schools Fire Law Transportation Elections Recreation

Local Government Revenue

Property Taxes...major source Other local taxes (sales tax, bed taxes,

rental taxes etc...)

Review

1. For most state governments, the main source of revenue is a (a) room tax.(b) property tax.(c) general excise tax.(d) statewide sales tax.

2. The main source of revenue for local governments is (a) a property tax.(b) an excise tax.(c) a sales tax.(d) an income tax.