Chapter 14 Government Revenue & Spending

Sec 1. How Taxes Work

Government Revenue Street lighting, highways, law enforcement, & the court system Government also provides aid for people in need

Where does the money come from to pay for such goods and services? Government Revenue Where does the money come from to pay for such goods and services?

Government Revenue Borrowing & lotteries Rights to tax are set in the U.S. Constitution and in state constitutions

Principles of Taxation Benefits taxpayers receive from taxes Their ability to pay

Question 1 Can you explain why a worker earns $264 but receives a paycheck for less than $264?

Question 2 What happens to the amount earned not received by the employee? Meaning where did the $30.84 that the employee go to?

Benefits-Received Principle Financing of road construction & maintenance through gasoline Difficult for governments to asses exactly how much different taxpayers benefit from services like national defense, national parks, local police, fire protection, and public education

Ability-to-Pay Principle People with higher incomes will pay more than people of lower incomes The level of benefits is not a consideration

Ability-to-Pay Principle Questions to Consider Should everyone pay the same percentage of income? Should those with higher incomes pay a higher percentage of their income in taxes?

Criteria for Taxation Equity, Simplicity, & Efficiency

Equity Example Some believe Requires people in similar situations pay a similar amount of taxes Example Everyone pays the same price for tax Some believe Equity requires that people with higher incomes pay more than people with lower incomes

Simplicity Should be NO confusion bout the time the tax is due and the amount to be paid Sales tax meets the criterion of simplicity

Efficiency Taxpayers’ view Tax efficiency can be judged by the amount of effort and expense it takes to pay the tax Individual income tax best meets the criterion efficiency

Tax Base & Structures Tax base, each type of wealth is subject to taxes Individual income, corporate income, sales, and property

Individual Income Tax Wages, interests, dividends, and tips All taxes are ultimately paid from Income, but using income as a tax base means that the amount of tax is directly linked to a person’s earnings

Corporate Income Tax From savings & investment in the form of interests & dividends

Sales Tax Generally imposed on a wide range of goods or services Percentage of the posted price of the good or service Included in the final price the buyer pays The seller then passes the tax revenue collected from customers on to the government that has imposed the tax

Property Tax Generally real estate Pay on the values of their buildings and the land Property tax is generally included in rent charges Can be imposed on other assets like automobiles

If overall personal income rises, the individual income tax base grows If there are fewer homes or businesses in a certain locality or if the value declines, the property tax base shrinks

Tax Structures The way in which taxes are imposed on the different tax bases gives rise to three different tax structures These tax structures are distinguished from one another

Proportional Tax Example Flat tax, rate of the tax is the same for all taxpayers Example All taxpayers in a given state might be charged a flat 15% tax on the income No matter a person’s income is

Progressive Tax United States Income increases so does your tax rate Federal income tax = progressive tax Tax rate increases as income increases

Taxable income of $40,000 Page 413 Income Bracket Marginal Tax Rate $0-10,000 10 % $10,000-$30,000 15% $30,000-$50,000 25%

Income in each bracket Tax Bracket $ 10,000 10% $ 20,000 15% $10,000 25%

Income in Bracket X Marginal Tax Rate = Marginal Tax $ 10,000 10 % $1,000 $ 20,000 15% $3,000 $10,000 25% $2,500 Total Tax $6,500

Regressive Tax Income paid in taxes decreases as income increases Sales tax

Incidence of a Tax

Resource Allocation

Productivity & Growth

Economic Behavior

Section 2 Federal Taxes

Individual Income Tax The federal government takes in around $2.5 trillion in revenue each year Individual income tax , Social insurance taxes, Corporate income taxes, Estate taxes, Gift taxes, Excise taxes, & Customs taxes Largest source of taxes = individual income tax Government uses income tax 16 Amendment to the US Constitution in 1913

Withholding

Taxable Income

Tax Return

Indexing

Federal Insurance Contribution Act

Social Secuity

Medicare

Unemployment Taxes

Corporate Income Taxes

Estate Tax

Gift Tax

Excise Tax

Customs Duty

User Fee