Chapter 14 Taxes

14.1 Tax Bases and Structures Tax base is the income, property, good or service that is subject to a tax. Comes from individual income taxes, sales taxes, property taxes and corporate taxes A proportional tax is a flat tax. Meaning everyone pays the same rate. Ex: someone who earns $350,000 a year will pay 6% ($21,000) Someone who earns $50,000 a year will also pay 6% ($3,000)

Progressive taxes – the percentage someone pays in taxes will increase as income increases People with very small incomes may not pay anything This is the federal government method of collecting taxes Regressive taxes – the percentage of someone’s income pays will decrease as income increases Ex: sales tax Even though a sales tax appears to be proportional it isn’t because someone at the lower end of income earning will spend a greater portion of their income on items that have a sales tax than someone wealthier

Characteristics of a Good Tax 1. Simplicity Tax laws should be easy to understand Forms should be easy to fill out on one’s own 2. Efficiency Govt officials should be able to collect taxes without taking too much time or money Taxpayers should be able to pay taxes without giving up too much time

3. Certainty Deadlines are clear How much money is due is also clear 4. Equity No one should bear too much or too little

Determining fairness People disagree on what is a fair tax Economists have two ideas on what a fair tax is 1. A person should pay taxes based on the level of benefits he or she expects to receive. This is known as the benefits-received principle Ex: If you drive a car, you should pay a gas tax to maintain the roads s 2. People should pay taxes according to their ability to pay This known as the ability-to-pay principle This is a progressive income tax

14. 2 Federal taxes In 2004 the fed took in $1.88 trillion in taxes This came down to $6,300 per person The US government gains tax monies from six sources 1. Individual income taxes Largest source of tax money 45% of tax money collected We pay as we go Employer withholds contributions and we pay the remaining amount we owe by April 15

Employers withhold what they estimate you will owe depending on your salary and going tax rate If they take out too much, then you will earn a refund A person will be taxed on their taxable income which is their gross income minus their exemptions Personal exemptions are set amounts you subtract from your gross income Deductions include mortgage, donations to charity, business expenses, some medical expenses, state and local govt tax payments and number of children

In the US there are six tax brackets and a person will be placed in a particular bracket based on their total income Anywhere from 10 to 35% 2. Corporate taxes Makes up about 10% of government’s income Corporations have tons of exemptions Progressive rates – anywhere from 15 to 35% of income

3. Social Security, Medicare and Unemployment taxes Found under FICA on paystub Stands for Federal Insurance Contributions Act Withheld from paycheck Social Security originally only covered elderly then it was updated to help the disabled and survivors of family members of wage earner

Other forms of taxes Excise : money from revenue of certain products Ex: gasoline, alcohol, tobacco…… Estate : a tax on the inheritance someone earns from a loved one passing Taken out before money is given out In 2005, if you earned less that $1.5 million then there was no estate tax levied Sometimes called the death tax Progressive rate

Gift: a tax on money or property someone gives you before they die Meant to discourage people from avoiding estate taxes There are limits now on what amount of gifts you can give before the reciepent will need to pay income taxes on said gift Today it is $11,000 max a year from any one person

Import : also know as tariffs Today tariffs are meant to promote American businesses from foreign competitors Some times it back fires though If we place tariffs on imports then other trading nations might do the same to our exports.

Tax incentives – the govt gives tax breaks for doing things they want Buy a home– get a tax break Buy a fuel efficient car – get a tax break Place solar panels on your home – get a tax break Rip up your grass and plant low water varietals – get a tax break m

14.3 Federal spending The fed govt spends close to $2 trillion annually Only about 25% of the budget is discretionary, the rest is mandatory spending Entitlement programs take up the largest portion of the budget Ex: Social Security, Medicaid, Medicare etc. Many programs are means tested Medicaid is a federal and a state run program More money will be needed for entitlement programs since the baby boomers are retiring

Discretionary spending Defense – 20% of budget Education, scientific research, student loans, technology, national parks, environmental cleanup, housing, etc. makes up the rest of the budget and it isn’t very much The feds assist the states and local governments with funding as well. This is done by funding grant programs Grants are given for education, highway construction, mass transit, employment training, and dozens of other programs

14.4 State and local taxes/spending States have two budgets: operating and capital budgets The operating pays for the day to day expenses of the state and the capital budget covers major construction and investments the state needs to make The capital budget is largely funded through bond money State governments have to balance their budget each yar The bulk of any state government’s spending goes to funding education K-12 and their state’s university system On average each state spends $7,920 on each student to educate them

Highways and transportation expenses are largely state projects The state also needs to invest in hospitals, inspect water supplies and test for pollution. These are three amongst many public welfare expenses. The state will spend money on musuems, state parks and beaches to add to a resident’s quality of life Salaries of government officials and clerks also need to be paid for

Tax revenue States cannot tax imports or exports They can’t tax goods that travel from one state to another Nonprofit organizations are all tax exempt as well Most states collect sales tax, in addition to income tax Some categories are exempt: Food, clothing and some states prescription meds Most states tax “sing” products and tax gasoline

Individuals contribute about 17% of any given state’s revenue Corporate taxes vary state to state Low corporate taxes, a well educated work force and good public services make one state more business favorable than another States also tax property

Local govts Local governments look after…. Public schools Law enforcement Libraries Airports Parks Public transportation Record keeping (births, marriages, deaths, property transactions, etc) Food assistance Etc. See figure 14.8 on page 379

Property taxes pay for local street repairs and construction They fund schools in the area Based on the assessed value of your home (done by a county assessor) The more your home is valued at when you purchase it, the more taxes you will pay Many cities earn revenue from their visitors Ex: hotel taxes, taxi taxes, rental car tax, etc.