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 (primary way the gov’t collects $$)  The government has the power to tax under the Constitution Certain powers to the state and local governments Certain powers to federal gov’t (same in all states)  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.  Government must decide what the base will be and how to structure. Includes: Income tax Sales tax Property tax Corporate income tax

Tax Structure  Proportional Tax…% of income…flat tax regardless of income  Progressive Tax…% increases with income…income tax goes up w/income  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 – taxpayers can keep records of tax  Efficiency…collect taxes without spending too much time or money – people pay taxes fast  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 (progressive)

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! (gas – people pay most of taxes) If elastic demand – seller will pay more The final burden is known as the incidence of a tax – examined by policy makers when new taxes are created

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 (dependents, spouse, etc) Tax brackets...determine % you will pay Income tax is a progressive tax

Federal Taxes  Corporate Income Tax (these are progressive) 11% of revenue  FICA...social security, Medicare, unemployment 33% (shared by employee and employer)  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...raise prices on imports  Tax incentives...used to encourage or discourage behavior (tax on cigarettes)

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) this spending has grown recently  Entitlement programs are those that people are entitled to and meet the requirements of  social security, Medicare, welfare, etc... Discretionary spending...programs that can be adjusted (divided into several categories)  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 Certain amount of $$ divided for each state  Example: state and federal gov’t share costs of highway construction

Administration of Justice Health Medicare Income security Social Security Veteran’s benefits Other Net interest Defense Science, space and technology Energy, natural resources, and environment Agriculture Transportation Education Note: Because of rounding, totals may be less or greater than 100%. Source: Statistical Abstract of the United States 2% 1% 2.5% 2% 0.7% 1% 15% 16% 3% 8% 12% 14% 23% Federal Spending

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 (equal) the budget Operating budget...pays for operation of state (employees, supplies, day to day) Capital budget...pays for upgrades and investments (new bridges, roads, etc.)

Spending State Taxes  Education  public school districts, state and community colleges (2 or 4 yr)  Law enforcement  State police, corrections facilities  Transportation  highways, airports  Public welfare  hospitals, clinics, unemployment  Recreation  parks, museums, etc.

Sources of Income for States  Sales Tax  all but a few of the 50 states have sales tax  State income taxes  some are progressive, some are % of fed. taxes, some are paid in addition to fed. taxes  Business Taxes  Fees and licenses

Local Government  Like the state government, local governments (towns/villages) need to tax to cover operating costs Schools Fire  local fire protection Law  local police Transportation  buses, trains, etc. Elections  school board elections Recreation  parks, swimming pools

Local Government Revenue  Property Taxes...major source This is a main source of funding for public school operations Assessors will determine worth of property  Other local taxes Sales tax Bed taxes  hotel usage tax Rental taxes  tax to rent local equipment (ex: dumpsters)

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.