Class Notes November 9 & 10 © EMC Publishing, LLC

Taxes

Three Major Federal Taxes The government collects three major federal taxes: personal income tax, corporate income tax, and Social Security tax. Personal income tax is a tax people pay on their income. Personal income tax is paid to both the federal government and most state governments. Corporate income tax is a tax corporations pay on their profits. Corporate income tax is also paid to both the federal government and most state governments. Social Security tax is a tax paid to the federal government on income generated from employment. Half the tax is placed on employers, the other half on employees Note that the payment of a tax is different than the placement.

Three Other Taxes Sales tax is applied to the purchase of many goods. Sales tax is collected by states, not by the federal government. Sales taxes vary among states. Excise taxes are placed on the purchase of certain goods, such as tobacco and gasoline. The federal government, as well as many states, collects excise taxes. Property owners, such as homeowners, pay a property tax on the value of their property. This is a major revenue source for state and local governments.

Types of Income Taxes

Proportional, Progressive, and Regressive Income Taxes Income taxes can be proportional, progressive, or regressive. Proportional income tax, everyone pays at the same rate, whatever their income level. A flat tax is the same as a proportional tax. Progressive income tax, people pay higher rates as their incomes rise. Progressive income tax structures are usually capped at some rate. The United States has a progressive income tax structure. In 2013, the tax rates were 10, 15, 25, 28, 33, 35, and 39.6 percent. Regressive income tax is a tax rate that decreases as income levels rise. © EMC Publishing, LLC

Who Pays What Percentage of Federal Income Taxes? Some polls show that most people think wealthy Americans do not pay their fair share of taxes. We need to consider several issues when we talk about the share of taxes paid by different income groups. What do we mean by “wealthy Americans”? What do we mean by “fair share” of taxes? What do wealthy Americans pay in taxes compared with what they earn? © EMC Publishing, LLC

How Does the Federal Government Spend Money? In 2013, the federal government spent about $3,754.2 billion. The following areas account for about 74 percent of that amount: Social security (21.8 percent) National defense (17.9 percent) Income security (14.5 percent) Medicare (13.7 percent) Net interest on the national debt (6.08 percent) The national debt is the sum total of what the federal government owes its creditors. © EMC Publishing, LLC

Mandatory Spending It is budgeted automatically, based on laws that have already been passed Social Security, Medicare, and Medicaid

Discretionary Spending is the money that is debated every year by Congress as it sets the federal budget

The Budget Process The president of the United States prepares the budget. The budget recommends to Congress how much should be spent for such things as national defense and income security programs. The Congressional Budget Office advises the members of the committees and subcommittees that review the president’s budget. Estimates are used to determine tax revenues. In the end, many details of the president’s budget are changed to reflect compromise between the president and Congress. © EMC Publishing, LLC

The Budget Process (cont.) When the president submits the budget to Congress, the public gets a chance to hear about the budget proposal. The American people can write to or call their congresspersons and express their preferences on the president’s budget. Congress must pass a budget by the beginning of the fiscal year (October 1st). Once Congress passes the budget, the details of spending outlined in the budget become law for that fiscal year. The fiscal year for the federal government begins on October 1 and runs through September 30. © EMC Publishing, LLC

Budget Vocabulary and Activity You will work with a partner and use the handout to complete the activity The activity should be done on a blank piece of paper and will be turned in

Budgets: Balanced and in Deficit A budget deficit is a situation in which federal government expenditures are greater than federal government tax revenues. A budget surplus occurs when federal government expenditures are less than federal government revenues. A balanced budget is a situation in which federal government expenditures are equal to federal government tax revenues © EMC Publishing, LLC

Discretionary Budget Activity You will now work individually to complete YOUR BUDGET PLAN, a 2010 National Discretionary Budget Activity Your letter should be on the back of your handout Be sure to ask questions if you have them. This assignment is due next class.