Taxes and Government 5.3

HOW DOES IT WORK?  Government receives funds from taxes and borrowing (i.e. bonds issued)  LARGEST part of funds comes from income tax, the rest from Social Security and Medicare, corporate tax, and other various taxes and fees.

SOURCES OF REVENUE: Social Security  taxed at a rate of 6.2%  collected based on gross income up to a certain amount

SOURCES OF REVENUE: Medicare  taxed 1.45% on gross income

SOURCES OF REVENUE: Employer’s Contribution  Your employer matches what you contribute to Social Security and Medicare.  For every dollar you earn, 15.3 cents of it must be paid to these programs.  Half of that 15.3 comes from you, the other half from your employer

Classifying Taxes Taxes can be separated in 3 ways: 1) by principles2) the share of income they take3) their method of payment

Principles of Taxation  benefit principle says those who use the good/service should pay for it.  Example? Toll roads.  ability-to-pay principle says those with more income should pay more.  Example? Federal taxes, which range from 10-35% of your income depending on how much you make.

Taxes and Income  progressive tax means your income is taxed at a higher rate the more you make  regressive tax takes a smaller share of higher incomes. (i.e. depending on your income, the same purchase may be a smaller percentage of your overall income)  proportional tax means everybody pays the same percentage on their income

How Taxes Are Collected  Direct taxes are paid directly to the government.  Example? Income or property tax.  Indirect taxes are included in the cost of a good/service.  Example? A portion of rent money is used to pay property taxes.  Pay-As-You-Earn taxes are paid when you make the money.  Example? The withholdings you see when you look at your paystub.

Types of Taxes There are 7 types of taxes we will cover: income, sales, property, excise, estate/gift, business/license, customs/tariffs

Income Tax  Paid to both federal and state government, sometimes even cities.  Withheld from your paycheck.  Information on W-4 tells employer how much to withhold, which means YOU are ultimately responsible for the accuracy of what is owed.  Typically state and local rates are much lower than federal tax rates.

Sales Tax  These are added to the price of a good/service when you purchase it.  Some items are exempt from this.  Funds are divided by state and local governments.

Property Tax  Taxed on the value of real property.  Estimated by government workers, tax is a percentage of that value.  Includes land, structure or other property.  Taxes used by local government and school districts.  Often added in to your mortgage payment.

Excise Tax  Collected on sale of a specific good/service.  Included in the price of the item.  Goods include things like: tobacco, alcohol, gas, firearms, oil and air travel

Estate and Gift Tax  Paid on property received through someone else’s estate (usually inherited upon someone’s death).  Estate tax only paid if higher than a certain amount.  Gift taxes must be paid by the person making the monetary gift.  Gift tax only applies to total amounts larger than $12,000 per year. (in 2008)

Business and License Tax  Usually covers a certification and test.  Example? License to teach or practice medicine.

Customs Duties and Tariffs  Helps control flow of products imported to the U.S.  Results in items from overseas being sold at higher prices.