Government Revenue and Spending

Government Revenue Revenue—government income from tax and non-tax sources Tax Bases Individual income tax—on income from all sources Corporate income tax—on corporation’s profits Sales tax—on value of product; a percentage of sale price Property tax—on value of assets, generally real estate; part of rent Growing, shrinking tax base means changes in amount of taxable wealth

Tax Bases and Structures Tax Structures Proportional tax—flat tax—all taxpayers pay same percentage of income Progressive tax—higher income earners pay higher percentage of income (ability to pay) most closely linked to ability-to-pay principle Regressive tax—lower income earners pay higher percentage of income examples: sales tax, property tax

Impact of Taxes on the Economy Resource Allocation Tax on a good or service increases cost of production Productivity and Growth When taxes on interest and dividends high, people save less impacts amount of money available to producers to invest in businesses Some economists think high taxes reduce incentives to work Others think high taxes promote underground economy Economic Behavior Tax incentive—use of taxes to influence economic behavior Tax credits, rebates encourage behavior good for society, economy Sin taxes imposed on unhealthful, damaging products, activities

Individual Income Tax Paying Your Taxes Federal government gets about $2.5 trillion in revenue yearly Taxes important sources of revenue largest source is individual income tax second largest source is social insurance taxes Paying Your Taxes Withholding—payroll tax taken before worker gets paycheck Internal Revenue Service (IRS) collects money, administers tax system Taxable income—taxable portion; exemptions, deductions reduce it Tax returns—forms used to report income, taxes owed to government if too much withheld, taxpayer gets refund; if not enough, taxpayer pays rest

Types of Spending Mandatory Spending Entitlements—social welfare programs with specific requirements Social Security restrictions: former worker, age, extra income limit Medicare provides hospital, other medical insurance; means tested Medicaid is federal-state insurance program for low- income people Other programs’ funding based on number of people eligible

Types of Spending cont. Discretionary Spending Defense includes salaries, weapons, military bases, homeland security Interstate highway system and other transportation Natural resources, environment; includes: parks, pollution clean up Education; science, space, technology; other research Justice administration includes enforcement agencies, federal courts

The Federal Budget and Spending Federal budget—plan for spending federal revenue Fiscal year—12-month period for which expenditures are planned Congressional Budget Office helps develop appropriations guidelines appropriations are specific amounts set aside for specific purposes

State Revenues Sales and Excise Taxes Almost all states have sales tax on most goods, services Income Tax and Other Revenue Sources estate, property taxes; user, business registration, license fees

Should Online Sales Be Taxed? Background In 1992, the Supreme Court upheld a law making Internet retailers exempt from collecting most sales taxes because rules varied widely among states. Today, tax collection is simpler, and Internet purchases are commonplace. Most states have made tax on Internet sales voluntary, with poor results. What’s the Issue? Should there be sales tax on Internet purchases?

Should Online Sales Be Taxed? {continued} Thinking Economically Summarize the arguments for and against an Internet sales tax as presented in the documents. Who is most likely to benefit from Internet sales tax revenue? Explain your answer, using information from the documents. How has government responded to e-commerce—the selling of goods and services online? Use information from the documents in your answer.