Taxation and Budget Ch. 25

Major United States Taxes Personal income: Tax on an individual’s yearly income. Granted by the 16th amendment April 15th is income tax day. Corporate income: Tax on a corporation’s profit. Social Insurance: Social security tax. (FICA). Excise: Special tax on alcohol, tobacco, and gasoline. Estate: Tax on the assets of the deceased. Inheritance: Tax paid on anything person inherits. Gift: Tax paid on the value of an expensive gift received. Sales: Tax paid on all purchases made by people who work. Property: Tax on the value of property. Can include buildings, stocks, bonds, cars.

Example of a Paycheck

Taxation Revenue: Money the government receives. Expenditures: Money the government spends. 60 to 80 percent of state and local government revenue comes from taxation. Intergovernmental Revenue: Money received from other governments. Example: States receive a big chunk of money from the Federal Government. Local governments then can get some of that money from the state. Nearly 100 percent of federal government revenue comes from taxes.

NC 2005

What happens when the real GDP goes up? The economy expands Unemployment rises Prices are inflated The economy suffers a recession

Taxation Problems The government sometimes abuses its power to tax which leads to revolts. Stamp Act (1765): British tax on virtually all goods. Tea Act (1773): British tax on tea. Led to the Boston Tea Party. British taxes lead to the American Revolution where the United States became a free country after defeating England.

United States Taxation Problems Shay’s Rebellion (1786): Heavy state taxes in Massachusetts put many farmers in debt. Daniel Shay led a group of 1,200 farmers in a revolt. The revolt was put down. Tariff of 1828: High tariff on imports. Hurt the southern states because of lack of industries. Secession was openly discussed in South Carolina. Tariff: Tax on imports. Secession: Separate from the nation.

The Glass-Steagall Banking Act established which federal institution? The Federal Deposit Insurance Corporation The Bank of the District of Columbia The Federal Reserve The 2nd Bank of the US

Warm - up 1. What is a revenue? 2. List and explain 3 major types of U.S. taxes. 3. How did the Stamp Act of 1765 and the Tea Act of 1773 lead to the American Revolution? 4. What was granted by the 16th amendment? 5. What are intergovernmental revenues?

Taxation Powers The first government of the United States was the Articles of Confederation. The national government could not tax under the Articles. Under the Constitution, the government is given a limited power to tax to keep it from abusing its power.

Limits on Taxation The Constitution gives the government the power to tax. All appropriations bills (tax bills) are introduced in the House of Representatives. Appropriations bills are laws that allow spending for a particular activity All national taxes are the same throughout the country. The 14th amendment says all groups must be taxed equally.

Tax Classifications Progressive tax: Based on income. Higher taxes on those with higher incomes. Those who make less than a certain minimum pay no taxes. Regressive tax: People pay the same amount with no consideration of income. Effects people with lower incomes because it’s a larger percentage of their total income. Proportional tax: Takes the same percentage of all incomes.

Which type of tax classification could have the greatest impact on those with higher incomes? Why? Which type classification could have the greatest impact on those with lower incomes? Why?

Income Tax Tax on income 16th amendment (1913): Gave the government the power to collect income tax. Personal income and corporate income are the two types.

Tax Burden on Income Levels

2010 Income Tax Brackets

Which of the following is essential to the success of a free enterprise system? Minimal government interference Minimal legal ground rules Minimal private ownership Minimal competition between businesses

Tax Return The deadline is April 15th. All taxpayers fill out a tax return form and send it to the Internal Revenue Service (IRS). An exemption is a portion of income that is not taxed. Deductions are for medical expenses and charitable contributions. They are not taxed. Everything else is taxable income.

The forklifts that are used to load semis would be classified under which of the following 4 “factors of production”? Natural resources Labor Capital entrepreneurs

Sales Tax Tax paid at the time of purchase. The revenue is sent to state and local governments. Many state governments exclude necessary items from the sales tax. North Carolina is the 1st Friday in August

Paying Income Tax Employers withhold funds from checks to pay the state and national government. Because of this, taxpayers do not pay as much at the end of the year. Some taxpayers receive a refund.

Income tax is a Progressive Tax People with higher incomes pay a higher percentage in taxes. There are tax percentage rates of 10%, 15%, 25%, 28%, 33%, and 35%. The belief is that people with less money need more for necessities.

Property Tax The property is examined to asses the value. Local governments set the tax rate. Property taxes have increased steadily over the years.

Tariffs Designed to raise revenue and protect American businesses. Products are made cheaper in other countries and brought to America. When America charges a tariff, the other country charges a tariff on American goods. Tariffs have caused many problems in U.S. history.

Non-Tax Revenue The government will sell and rent land. The government will charge tolls for the use of roads and canals. The government will charge fees for driving, hunting, fishing, and getting married. Charge fines (traffic). Government run lotteries to provide revenue, but they are controversial.

In 1-2 paragraphs, explain which tax classification you feel is the most fair? Give at least 3 reasons why.

Exit Ticket If the federal government needed to increase their revenue, which kind of tax (ex. Sales, excise, estate, income…..) do you think it should increase? Why?

Budget Budget: Plan for managing and spending money. Governments create budgets to help them make decisions because of limited resources. Two parts: Revenue and Expenditures. (look on page 679) Runs on a fiscal year: October 1-September 30. The Office of Management and Budget (OMB) asks each federal department to estimate the amount of money they will need. The OMB estimates the government’s revenue. The completed budget is about 1000 pages long.

Budget (cont.) Mandatory spending – spending that does not need annual approval; has to be paid regardless Ex. Social Security, interest payments on the national debt Discretionary spending – spending that must be authorized each year. Ex. Space exploration, national defense, agriculture.

Changes in Personal Budgets

Federal Revenue 2007

2006 Government Expenditures

Revenue vs. Expenditures

Which form of tax revenue accounts for the highest percentage of federal income? Estate taxes Excise tax Income tax Payroll tax

Passing the Budget The President sends the budget to Congress. Appropriations bills must be passed by the House of Representatives Congress frequently changes the budget. The budget is always filled with compromises. State budgets follow the same process as the national budget. (look on page 683) Budgets change from year to year because of different political philosophies.

Budget Deficits Deficits occur when expenditures exceed revenue. The U.S. budget had a deficit from 1968-1996. Look on page 690 Governments are expected to do more without raising taxes. This forces them to borrow money.

Expenditures on Elementary and Secondary Education

What conclusion can be reached in why the Federal Reserve Board would lower interest rates? The economy is booming and spending needs to decrease The FED is encouraging the national government to borrow money from private banks The FED is attempting to loosen the money supply to encourage more borrowing by individuals Businesses are experiencing record losses in sales

Borrowing Money The government borrows money to make up for a deficit. Most borrowing comes from the sale of government bonds. The government pays off the bonds as they come due. China owns a great amount of the US bonds. Estimated $900 billion.

Percentage of Foreign Holder of US Bonds

National Debt The total amount the government owes on the money it has borrowed. Goes up with each deficit and accumulated interest. Interest: Fee paid for the use of money. 1996: Interest was $345 billion. They borrow to pay off the interest.

National Debt in the Future

Why would a person put money into a Certificate of Deposit (CD) instead of a regular savings account? Money is more easily accessible with CD’s Savings accounts do not accumulate interest A person receives greater tax benefits with CD’s CD’s accumulate higher interest compared to savings accounts

Balancing the Budget Balanced Budget: Expenditures do not exceed revenue. In 1995, Republicans introduced the Balanced Budget Amendment. It called for a balanced budget by 2002. It did not pass. Many state constitutions require balanced budgets with no borrowing. Rely on the emergency funds to pay off debts when state economy is struggling

Automatic Stabilizers Programs to automatically stimulate the economy as soon as they are needed Unemployment insurance Income tax

Activity - Part 1 Part of the government’s budget process involves planning projects that are dependent on taxpayer money. In groups of 3-4, create a proposal for a class trip to Washington D.C. You will create a poster to represent your planned trip. Posters should have labels describing the trip and images that represent the trip highlights. How many days? You should have 1-2 events for each day we are in DC.

Activity - Part 2 In order for governments to budget wisely they must keep track of expenditures. Part of that is to determine the cost of proposed programs. Each group will research and create a chart outlining trip expenses. Charts should include costs of – transportation, attraction ticket prices, meals, housing, and any other expenses. Brainstorm possible unexpected costs or changes of plans.

Activity – Part 3 Overestimated income and unforeseen expenses can spoil the most carefully drawn budget. Using your expense chart – you will each deal with a deficit in revenues. Brainstorm a plan for dealing with the deficit.

International Trade and Its Benefits Ch. 26 Section 1 International Trade and Its Benefits

Why Nations Trade In 2005, about 10% of all the goods produced in the U.S. were exported, or sold to other countries. A larger amount of goods were imported, or purchased from abroad Importing goods gives Americans products they might not otherwise be able to enjoy.

Why Nations Trade (cont.) Trade is one way that nations solve the problem of scarcity Nations trade for goods/services because they do not have them or are unable to make them cheaply. We buy bananas from Central America because we do not have the soil or climate to grow them; Commercial aircraft are sold to other countries because they do not have the factories or skilled workers.

Comparative Advantage Comparative Advantage is the ability of a country to produce a good at a lower opportunity cost than another country can. The U.S. could manufacture electronics but other countries can make them at a lower cost, so we buy them from other countries that make them Comparative Advantage leads nations to specialize

Comparative Advantage (cont.) Specialization allows countries to use their scarce resources to produce items better than any other country When a country produces more than their people can actually use, they sell the extra amount abroad. Countries can have a comparative advantage in particular resources such as Saudi Arabia (oil deposits), or the U.S. (skilled workers, advanced technology)

Comparative Advantage (cont.) International trade does accomplish two things: 1. Creates jobs 2. Creates new markets

Barriers to International Trade Foreign countries with a comparative advantage can sell their product more cheaply than companies making the product in their own country. As a consumer you would likely buy the cheaper product Workers who make the product domestically may lose their jobs when sales drop When this happens, government may step in to impose trade barriers to protect domestic workers and industry

Barriers to International Trade (cont.) Two most common trade barriers are tariffs and quotas A tariff is a tax on an imported good; 20% tariff means an additional 20% to the final price of a foreign good. The goal is to make the price of an imported good higher than the price of the same good produced domestically As a result, consumers would be more likely to buy the domestic product.

Barriers to International Trade (cont.) However, when people want the foreign product so badly that higher prices have little effect on demand, countries have to set quotas. Quotas set limits on the amount of foreign goods allowed into a country (imported) During the 1980’s, Japanese cars were so popular that American autoworker jobs were threatened. President Ronald Reagan placed quotas on Japanese- made automobiles

Trade Agreements In general, trade barriers cost more than the benefits gained Most countries try to achieve free trade with other nations Most countries try to convince other countries to not pass laws that block or limit trade A trend the world has been seeing lately is the formation of free trade zones among key trading partners

Trade Agreements (cont.) The European Union (EU) is an organization of independent European nations, which formed a huge market Goods, services, and even workers flow freely among these nations because the EU has no trade barriers Since 2002, these countries have been linked even closer due to the adoption of a common currency, the euro.

Trade Agreements (cont.) In the 1990’s, the U.S., Canada, and Mexico signed their own free trade agreement: North American Free Trade Agreement (NAFTA). Elimination of all trade barriers among these countries. Since its implementation, trade among the three countries has grown twice as fast as the separate economies themselves have grown

Trade Agreements (cont.) Opponents of NAFTA claimed that American workers would lose their jobs because U.S. plants would move to Mexico (cheaper labor, less regulation, environmental and workers’ rights laws ignored) Supporters of NAFTA argue that increased trade would stimulate growth and put more low cost products on the market.

Financing Trade Different nations use different currencies as a medium of exchange: U.S. = dollar Mexico = peso Japan = yen To buy something in Mexico, an American would have to exchange your dollars for pesos by using the exchange rate, or the price of one nation’s currency in terms of another country’s currency

Financing Trade (cont.) Most nation’s use an adjustable exchange rate system which allows supply and demand to set the price of various currencies; currency prices change each day Exchange rates have an important effect on a nation’s balance of trade. Balance of Trade is the difference between the value of a nations exports and its imports.

Financing Trade (cont.) If a nation’s currency depreciates, or becomes weak, the nation will likely export more goods because its products will become cheaper for other nations to buy. If a nation’s currency appreciates, or becomes stronger, exports will decline

Positive vs. Negative Balance of Trade When a countries value of exports exceeds the value of imports, the country has a positive balance of trade or trade surplus. A country is selling more than it is actually buying When a countries value of imports exceeds the value of exports, the country has a negative balance of trade or trade deficit. A country is buying more than it is actually selling

Do you know their meanings? Scarcity Export Tariff Comparative advantage Exchange rate Balance of trade Free trade Trade barriers Mandatory spending Fiscal year Appropriations bill Intergovernmental Revenue Property tax Automatic stabilizer Surplus Revenue Social security Debt Quota Entitlement program Excise tax Income tax 14th amendment Progressive tax Balanced budget