CHAPTER 22 TAXES AND GOV’T SPENDING

Federal Gov’t We authorize the federal government, through the Constitution and our elected representatives in Congress, to raise money in the form of taxes.

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 –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

Progressive Taxes 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. Example Income Taxes

Proportional A proportional tax is a tax for which the percentage of income paid in taxes remains the same at all income levels. Also called a Flat Tax

Regressive 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 individuals 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

Impact on Taxes 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

Individual Income Taxes The government’s main source of revenue comes from the federal tax on individual’s taxable income. 39 Percent of Gov’t Revenue

“Pay-As-You-Earn” Taxation This means that individuals usually pay most of their income tax throughout the year as they earn income.

Taxes 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 DAY – 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 Taxes 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 Employees also withhold money to help fund Social Security, Medicare, and unemployment insurance under the Federal Insurance Coalition Act (FICA). Medicare The Medicare tax helps pay for health insurance for people over 65.

Unemployment Tax The unemployment tax pays for “unemployment compensation” that people can receive when they are laid off. Your Employer pays this tax

Other 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.

Mandatory Vs. 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

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.

Entitlement Programs A) Most of the mandatory spending items are for entitlement programs, which fund social welfare programs. B) Social Security is a huge portion of federal spending. –About 50 million Americans receive monthly benefits from the Social Security Administration.

Entitlement Programs –Food stamps and child nutrition programs –Retirement benefits and insurance for federal workers –Veterans’ pensions –Unemployment insurance

Discretionary Spending Defense spending accounts for about half of the government’s discretionary spending. –Education and training –Scientific research –Student loans –Law enforcement –Environmental cleanup –Disaster relief

State Spending 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.