Ch. 14: Taxes and Government Spending

Section 1: What Are Taxes? “Nothing in life is certain but death and taxes.” - Benjamin Franklin

Taxes/Revenue A tax is a required payment to the local, state, or national government. Income raised by the government from taxes is called revenue.

Taxes and the Constitution The Constitution grants that Congress may tax: “To lay and collect taxes, duties, imposts and excises, to pay the debts, and provide for the common defense and general welfare of the United States.”

Types of Collection: Income Tax Individual income tax: tax on a person’s annual earnings.

Types of Collection: Sales Tax Sales tax is a tax on the dollar value of a good or service being purchased.

Types of Collection: Property Tax Property tax is a tax on the value of a property.

Types of Collection: Corporate Income Tax Corporate income tax is a tax on the earnings of corporations.

Types of Collection: Capital Gains Long-Term Capital Gains Taxes are paid on earnings from investments held for more than 1 year (less than 1 year is taxed as income tax).

Tax Structures: Proportional Tax A proportional tax is when the tax rate percentage is the same for all income levels. JoeTony Income$150,000$50,000 Tax percent rate10% Tax payment$15,000$5,000

Tax Structures: Progressive Tax A progressive tax is when the tax percentage rate increases as income increases. JoeTony Income$150,000$50,000 Tax percent rate25%10% Tax payment$37,500$5,000

Tax Structures: Regressive Tax A regressive tax is when the tax percentage rate decreases as income increases. Does this ever happen? Examples?

Tax Structures: Regressive Tax A regressive tax is when the tax percentage rate decreases as income increases. Does this ever happen? Examples? JoeTony Income$150,000$50,000 Cost of new car$10,000 Sales tax percent6% Sales tax$600 Tax as % of income.006%.012%

Tax Web Types of Collection: Income Tax Sales Tax Property Tax Capital Gains Tax Estate (Inheritance) Tax Recipient: Federal Social Security State Local Spent On:

Section 2: Federal Taxes The Federal Government is the branch that receives the most taxes.

Tax Withholding Employers withhold money from employees paychecks throughout the year and send it to the government. Estimated amount of taxes owed.

Tax Return At the end of the year, the amount withheld might have been too much or too little. Tax payers must file a tax form which either returns or pays money.

Personal Exemptions Tax exemptions are amounts of money that you don’t need to pay taxes on. Examples: – Charitable donations – Interest on loan – Business expenses/investment – Medical expenses

Gross Income vs. Taxable Income Gross income is the total amount of money earned. Taxable income is after tax deductions have been taken out. – Taxable Income = Gross Income – Deductions

Practice Problem: You make $30,000/year, your spouse makes $40,000 You gave $5,000 away this year You paid $4,000 in interest for loans Your tax rate is 15% – How much do you end up with?

Tax Incentives The tax system incentivizes certain behavior You pay less if you… – Marry – Have children – Donate money – Invest in a home You pay more if you… – Purchase a second (vacation) property – Smoke or gamble – Live lavishly

Section 3: Federal Spending The Federal Budget goes primarily to the Military, Medicare/Medicaid, and Social Security.

Federal Spending Graph

Mandatory vs. Discretionary Spending Mandatory Spending: Spending required by current legislation – Social Security, Medicare/Medicaid Discretionary Spending: Spending that is optional (not required) – Military, Transportation, Agriculture

Discretionary “Other” Spending Dept. of Education Dept. of Agriculture Dept. of Energy Corps of Engineers Dept. of Labor Dept. of Health Services Dept. of Energy EPA

Debt/Deficit Spending outpaces Revenue

Section 4: State and Local Spending State and Local governments spend money on infrastructure (roads) and education.

State Budgets State revenue comes from… – State income tax – Sales tax – Excise tax (Sin tax) State money is spent on… – Education – Roads/infrastructure – Public welfare

Pennsylvania State Budget

Local Budgets Local budgets receive most of their money through… – Property taxes Local government spends most of their money on… – Education (Local area school district)

Local Budgets/Education If funding for schools is local, what effect does that have on public school systems?

Tax Web Types of Collection: Income Tax Sales Tax Property Tax Capital Gains Tax Estate (Inheritance) Tax Recipient: Federal Social Security State Local Spent On: Social Security Medicare/Medicaid Education Military/National Defense Roads/Infrastructure