Chapter 14 Taxes and Government Spending

Section 1: What are Taxes? Tax: required payment to a local, state, or national government What is tax money used for? –National defense, highways, education, law enforcement, helping people in need, etc.

Taxes and the Constitution The Constitution gave the government the power to tax and created limits on this power. –The government can not bring in money that goes to individual interest –Federal taxes must be the same in every state –Limits on what type of taxes can be imposed by the government (churches, exports)

Tax Bases Tax base: income, property, good, or service that is subject to a tax –Could be: Earning – Individual income tax Dollar value of a good/service – sales tax Value of a property – property tax Value of a company’s profits – corporate income tax

Tax Structures Proportional Taxes: tax for which the percentage of income paid in taxes remains the same for all income levels –Example: Tax percentage is 6% Corporate ExecutiveNurse Salary: $350,000Salary: $50,0006% paid in taxes $21,000 paid in taxes$3,000 paid in taxes

Tax Structures Progressive Taxes: A tax for which the percentage of income paid in taxes increases as income increases –Example: Federal Income Tax –Example: You are taxed at a rate of 15% on the first $25,000 of your taxable income You are taxed at a rate of 25% on your taxable income above $25,000 but below $75,000 You are taxed at a rate of 30% on your taxable income above $75,000 If your taxable income is $100,000, then you would pay: 15% of $25,000 = $3,750 25% of $50,000 = $12,500 30% of $25,000 = $7,500 TOTAL TAX:$23,750

Tax Structures Regressive Taxes: a tax for which the percentage of income paid in taxes decreases as income decreases Example: Sales Tax –Sales tax remains constant, however, higher income households spend a lower proportion of their incomes on taxable goods and services

Characteristics of a Good Tax Simplicity: tax laws should be simple and easily understood Efficiency: The government should be able to collect taxes without spending too much time or money. Certainty: It should be clear when a tax is due, how much money is due, and how the tax should be paid Equity: The tax system should be fair (what is fair?)

Who bears the tax burden? Tax your money back video clip

Section 2 – Federal Taxes What are the sources of tax revenue? –Individual and corporate income taxes –Social insurance taxes –Excise taxes –Estate and gift taxes –Taxes on imports

Individual Income Taxes Makes up approximately 45% of the Federal Government’s revenue “Pay-As-You-Earn”: The government takes a percentage out of your paycheck, so you don’t have to pay one lump sum at the end of the year Do this by Tax Withholding: taking tax payments out of an employee’s pay before he or she receives it.

Individual Income Tax At the end of the year, employers give their employees a report showing how much income has already been withheld. The employee then completes a tax return –Tax Return: form used to file income taxes Taxable income: total income minus exemptions and deductions

Corporate Income Taxes Corporations must pay federal income tax on their taxable income Corporate taxes make up less than 10% of federal revenues Difficult to calculate because businesses can take many deductions

Additional Taxes The government withholds money for taxes authorized under FICA –FICA: taxes that fund social security and Medicare Most of the FICA taxes go towards Social Security Medicare Taxes: national health program that helps pay for health care for people over the age of 65. Unemployment: Unemployment tax is paid by employers. It is financed by both state and federal unemployment taxes

Additional Taxes Excise Tax: general revenue tax on the sale or manufacture of a good (alcohol, gas, cigarettes) Estate Tax: tax on the estate, or total value of the money and property, of a person who has died Gift Tax: a tax on money or property that one living person gives to another Import Tax (tariff): tax on imported goods Taxes can be used to influence behavior (movie industry in Michigan, tax on tanning).

Section 3 – Federal Spending Mandatory spending: spending on programs that are required by law (social security, Medicare) Discretionary Spending: spending which allows government planners to make choices (education) In the past years mandatory spending has increased and discretionary spending has decreased

Mandatory Spending Entitlement: Social welfare program that people are “entitled to” if they meet certain eligibility requirements –Social Security –Medicare –Medicaid Future Plans: It is expected that in the future the amount of spending on entitlement funds will increase dramatically

Discretionary Spending Defense Spending: This accounts for about half of the government’s discretionary spending Other examples: –Education –Training –Scientific research –Student loans –Law enforcement –Environmental cleanup –Technology –National Parks and Monuments

Section 4 – State and Local Taxes and Spending State Budgets –Operating Budget: budget for day to day expenses –Capital Budget: budget for major investments and expenditures Balancing the Budget –The governor prepares the budget with the help of a budget agency –Most states require a balanced budget

Where are State Taxes Spent? Spending policies differ among the states. Some common areas include: –Education –Public Safety –Highways and Transportation –Public Welfare –Arts and Recreation –Administration

State Tax Revenue Where does the state get the money from? –Sales and individual income taxes are the largest source of revenue –Sales Tax –State Income Tax –Corporate Income Tax Limits on taxation: the government places limits on what states can tax on. (imports, military bases, religious groups)