Taxes and the Federal budget “Taxes are what we pay for a civilized society” Oliver Wendell Holmes, Jr.

Early Taxes Cooking oil, foreigners, slaves (Ancient Egypt) Sales, inheritance, imports, exports (Ancient Rome) Beards, beehives, boots, souls (Russia, 1702) Bachelors (England, 1695; Missouri, 1820)

Basis for Taxes in United States The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States… Article I, Section 8, Clause 1 The Congress shall have power to lay and collect taxes on incomes, from whatever source derived… Amendment XVI Article I, Section 8 gives Congress the power to "lay and collect taxes, duties, imports, and excises."  The Constitution allows Congress to tax in order to "provide for the common defense and general welfare." The Court has flip-flopped on the issue of whether Congress has the constitutional power to tax in order to accomplish regulatory goals that would otherwise be outside of the scope of its enumerated powers.  In Bailey vs Drexel Furniture (1922), the Court invalidated a 10% tax on the annual profits of employers who knowingly employ child labor.  The tax, imposed after an earlier attempt to block the interstate transportation and sale of products produced by child labor was struck down in Hammer, was seen by the Court as an unconstitutional attempt to make an end-run around its earlier decision.  In 1925, in Linder v United States, the Court reversed the conviction of a doctor who had given three cocaine tablets to a patient to relieve an addiction.  The conviction, based on a law that imposed a $3 tax on doctors who prescribed cocaine, rested on the theory that the law limited the prescription of cocaine to the treatment of diseases, not addictions, and that the defendant had given cocaine tablets to an addict.  The Court concluded that the law could survive only as a revenue measure, and that the Taxing Power gave Congress no authority to regulate directly the practice of medicine--that is, to tell doctors who had paid the required tax what they can or cannot do for their patients. The Court reversed its ban on taxes serving primarily regulatory (rather than revenue-producing) goals in Steward Machine (1937), which upheld a tax on employers designed to encourage states to enact unemployment compensation schemes.  In Kahriger (1953), the Court upheld a law requiring bookies to register and pay on tax on all wagers--even though the tax had the regulatory goal of wiping out bookmaking operations and could not be expected to produce significant revenue. In perhaps the most significant taxing power case ever decided, the Court ruled in National Federation of Independent Business v Sebelius (2012) that the so-called "individual mandate" (generally considered a requirement that individuals purchase health insurance) contained in the Affordable Care Act could be sustained as a tax, even though the requirement was outside of Congress's power to regulate commerce.  Writing for five members of the Court, Chief Justice Roberts held that even though proponents of the Act consistently said a penalty, not a tax, would apply to individuals who failed to purchase insurance, it still operated as a tax and that a functional analysis should control.  The Court noted that failure to purchase insurance required a payment to the IRS, that no criminal penalties attached to failure to purchase insurance, and that the cost of the tax would, in most cases, be less than the cost of buying insurance.  In sum, the law did not make it unlawful to purchase insurance, allowing individuals a choice of paying a tax instead.  Roberts also reaffirmed that the Congress may seek to achieve regulatory goals through its taxing power that it might not be able to achieve under its other Article I powers.  Justices Kennedy, Alito, Scalia, and Thomas dissented, arguing that the taxing power could not sustain the mandate.

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 Economic Behavior Tax incentive: use of taxes to influence economic behavior Tax credits: rebates encourage behavior good for society or economy Sin taxes: imposed on unhealthful, damaging products, activities

Marginal Tax Rate The amount of tax paid on an additional dollar of income. The marginal tax rate for an individual will increase as income rises. While many believe this is the most equitable method of taxation, many others believe this discourages business investment by removing the incentive to work harder.

Individual income tax The federal income tax is the largest source of revenue for the federal government.

Individual income tax Paying Your Taxes Withholding—payroll tax taken before worker gets paycheck Internal Revenue Service (IRS) collects money, administers tax system Taxable income—everything other than exemptions, deductions Tax returns—forms used to report income, taxes owed to government

Government Spending

Mandatory Spending Statutorily required Entitlement programs (Medicare, Medicaid, Social Security) Other federal programs (e.g. SNAP) Civilian and military retirement benefits; veterans’ disability benefits Interest on the national debt Unemployment insurance Supplemental Nutrition Assistance Program

Discretionary Spending Annually appropriated programs Defense Homeland security Environmental protection Scientific research Education Etc.

Where each tax dollar goes

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 Congress approves the budget and send it to the President for approval

State and local spending Money from sales, excise, income and property taxes Money used for schools, public safety, public welfare, water, sewage, trash, snow removal, road repair, etc.