1. What Are Taxes? Chapter 14

3. Funding Government Programs Citizens of the United States authorize the government, through the Constitution and elected officials, to raise money through taxes. Taxation is the primary way that the government collects money. Without revenue, or income from taxes, government would not be able to provide goods and services.

5. Taxes and the Constitution The Power to Tax Article 1, Section 8, Clause 1 of the Constitution grants Congress the power to tax. The Sixteenth Amendment gives Congress the power to levy an income tax. Limits on the Power to Tax The power to tax is also limited through the Constitution: 1. The purpose of the tax must be for “the common defense and general welfare.” 2. Federal taxes must be the same in every state. 3. The government may not tax exports.

6. A tax base is the income, property, good, or service that is subject to a tax. Tax Bases and Tax Structures Proportional Taxes ◦A proportional tax is a tax for which the percentage of income paid in taxes remains the same for all income levels. Progressive Taxes ◦A progressive tax is a tax for which the percent of income paid in taxes increases as income increases. Regressive Taxes ◦A regressive tax is a tax for which the percentage of income paid in taxes decreases as income increases.

7. Characteristics of a Good Tax A good tax has the following characteristics: ◦Simplicity  Tax laws should be simple and easily understood. ◦Efficiency  Government administrators should be able to collect taxes without spending too much time or money. ◦Certainty  It should be clear to the taxpayer when the tax is due, how much is due, and how it should be paid. ◦Equity  The tax system should be fair, so that no one bears too much or too little of the tax burden.

8. Who Bears the Burden of a Tax? To fully evaluate the fairness of a tax, it is important to think about who bears the burden of the tax. The incidence of a tax is the final burden of the tax. If demand is inelastic, a tax will increase the price of a good and consumers will bear a large burden of the tax. If demand is elastic, the opposite is true.

10. Federal Taxes

11. Individual Income Taxes “Pay-as-You-Earn” Taxation ◦Federal income taxes are collected throughout the course of the year as individuals earn income. Tax Withholding ◦Withholding is the process by which employers take tax payments out of an employee’s pay before he or she receives it. Tax Brackets ◦The federal income tax is a progressive tax. Each bracket is applied to a different range of income.

12. HOURS AND EARNINGS HoursEarnings TAXES AND DEDUCTIONS DescriptionAmount 20200.00 FICA Federal State City Total Taxes 15.20 10.25 5.10 1.00 31.55 TOTAL Taxable Wages 200.00 Less Taxes 31.55 Net Pay 168.45 Exemptions are set amounts that you subtract from your gross income for yourself, your spouse, and any dependents. Deductions are variable amounts that you can subtract from your gross income. Filing a Tax Return A tax return is a form on which you declare your income to the government and determine your taxable income. Taxable income is a person’s total (or gross) income minus exemptions and deductions.

13. Individual Income Tax Write a description of what will happen to the percentage paid and total amount of dollars paid in individual income tax when taxable income increases? Why will this happen? (think about what type of tax?)

14. Figuring Income Tax Find how much tax one owes on the different amount of taxable income 1. $15,000 2. $42,000 3. $110,000 4. $164,563 5. $432,990 6. If my gross income was $84,000 but I had $28,000 in write offs or deductions 7. If my gross income was $92,000 and I had $14,000 in deductions and a $500 tax credit. 8. President Obama’s taxable income of $469,000 9. Kobe’s $19.8 million of taxable income

15. 1040 Form http://www.irs.gov/pub/irs- pdf/f1040.pdf?portlet=103

17. 2010 tax table answers 1. $1,831.25 2. $6,681.25 3. $24,509.25 4. $39,786.89 5. $129,190.25 6. $10,181.25 7. $15,181.25 8. $141,793.75 9. $6,907,643.80

18. Corporate Income Taxes Like an individual, a corporation must pay a federal tax on its taxable income. Corporate income taxes are progressive — as a company’s profits increase so does the amount paid in taxes.

19. FICA Taxes Federal Insurance Contributions Act Social Security Taxes ◦Most of the FICA taxes you pay go to Social Security, or Old- Age, Survivors, and Disability Insurance (OASDI) Medicare Taxes ◦Medicare is a national health insurance program that helps pay for health care for people over 65 and for people with certain disabilities. Unemployment Taxes ◦Unemployment taxes are collected by both federal and state governments. Workers can collect “unemployment compensation” if they are laid off through no fault of their own and if they are actively looking for work.

20. Social Security and Medicare taxes Social Security taxes 2010 Employee/employer (each) 6.2% on earnings up to $106,800 Medicare taxes 2010 Employee/employer (each)1.45% on all earnings1.45% on all earnings

21. Other Types of Taxes Excise Taxes ◦tax on the sale or production of a good. Federal excise taxes range from gasoline to telephone services. Estate Taxes ◦tax on the estate, or total value of the money and property, of a person who has died. Estate taxes are paid before inheritors receive their share. Gift Taxes ◦tax on the money or property that one living person gives to another. Import Taxes ◦tariffs.

22. Taxes Assignment The Federal, State, and local governments need an enormous amount of money to provide the services they do. Governments tap many sources, but taxes on income, sales, and property are the single most important way by which they raise revenue. 1. Why are taxes collected? 2. How does the government use taxes? 3. What are the positive effects of taxes on the individual and the economy? 4. What are the negative effects of taxes on the individual and the economy? 5. Create a chart like… ◦TAX Who is taxed? Pros Cons ◦Individual Income ◦Sales ◦Property ◦Corporate Income ◦User Fees ◦6. Which method of raising tax revenues is preferable among your group, if you must be taxed? ◦7. Which tax do you think fulfills the 4 criteria for effective taxes the best? Why? Which one fulfills the 4 criteria the least? Why?

23. Tax Dinner Questions 1. Who represented the government in the story? 2. What “type of tax” is illustrated at the dinner? How do you know? 3. Who benefits the most by the tax break? Why? 4. Why would the government want to give a tax break? 5. What effect did the tax break have? 6. Why might it be beneficial to offer the wealthy reasonable tax breaks? 7. Do you think it was a good idea to change the tax code? Why or why not? 8. How were the “Criteria for good taxes” represented in this tax? 9. How can you reform the tax code to make it more simple or fair? 10. What programs could potentially be eliminated if the rich moved to Europe or the Caribbean?

24. Federal Spending

25. Mandatory and Discretionary Spending Spending Categories Mandatory spending refers to money that lawmakers are required by law to spend on certain programs or to use for interest payments on the national debt. Discretionary spending is spending about which government planners can make choices.

26. Entitlements Social Security ◦Social Security is the largest category of government spending. Medicare ◦Medicare pays for certain health benefits for people over 65 or people who have certain disabilities and diseases. Medicaid ◦Medicaid benefits low-income families, some people with disabilities, and elderly people in nursing homes. Medicaid costs are shared by the federal and state governments. An entitlement program is a social welfare program that people are “entitled” to if they meet certain eligibility requirements.

27. Discretionary Spending Defense Spending Spending on defense accounts for about half of the federal government’s discretionary spending. Defense spending pays military personnel salaries, buys military equipment, and covers operating costs of military bases. Other Discretionary Spending Some other discretionary spending categories include: ◦Education ◦Environmental cleanup ◦National parks and monuments ◦Farm subsidies ◦Foreign aid

28. Federal Spending Answer the questions for each of the spending categories  Social security  Medicare  Medicaid  Food stamps  Supplemental security income  Child nutrition  Defense  Student loans  Who benefits from the program?  What benefits does the program offer?  Why do you think the program was initiated?  Is the program an entitlement or discretionary?

29. State and Local Taxes and Spending Objective: Students will be able to identify where state and local taxes are spent; and major sources of revenue for state and local governments Language Objective: In a discussion with a partner, students will predict why two parks are maintained differently.

30. State Budgets Operating Budgets operating budget ◦A state’s operating budget pays for day-to-day expenses. These include salaries, supplies, and maintenance of state facilities. Capital Budgets capital budget ◦A state’s capital budget pays for major capital, or investment, spending. Balanced budgets ◦Some states have laws requiring balanced budgets. These laws, however, only apply to a state’s operating budget. ◦http://www.latimes.com/news/local/budget/http://www.latimes.com/news/local/budget/

31. Where Are State Taxes Spent? Education ◦State education budgets help finance public state universities and provide some aid to local governments for elementary, middle, and high schools. Public Safety ◦State governments operate state police systems, as well as correctional facilities within a state. Highways and Transportation ◦Building and maintaining highways is another state expense. States also pay some of the costs of waterways and airports. Public Welfare ◦State funds support some public hospitals and clinics. States also help pay for and administer federal benefits programs. Arts and Recreation ◦State parks and some museums and historical sites are funded by state revenues. http://parks.ca.gov/parkindex/http://parks.ca.gov/parkindex/ Administration ◦Like the federal government, state governments spend money just to keep running.

32. State Tax Revenues Limits to State Taxation ◦Because trade and commerce are considered national enterprises, states cannot tax imports or exports. They also cannot tax goods sent between states. Sales Taxes ◦Sales taxes are the main source of revenue for many states. Other State Taxes ◦Different states have various other means to collect revenue, such as state income taxes, excise taxes, corporate income taxes, business taxes, and property taxes. ◦http://www.kiplinger.com/tools/retiree_map/in dex.html?map=1#anchorhttp://www.kiplinger.com/tools/retiree_map/in dex.html?map=1#anchor

33. Local Government Spending and Revenues The Jobs of Local Government The following is a brief list of the many functions that local governments carry out or assist in: ◦Public school systems ◦Law enforcement ◦Fire protection ◦Public transportation ◦Public facilities, such as libraries and hospitals ◦Parks and recreational facilities Local Government Revenues Property taxes are the main source of local revenue. These taxes are paid by people who own homes, apartments, buildings, or land. Local governments sometimes collect excise, sales, and income taxes as well.

34. Two Parks Two parks are located in Winton, California. They lie directly across the street from each other. One park, called Winton City Park is filled with green grass, new equipment, clean restrooms, and a ranger on duty everyday. The other park, called Winton State Park, is filled with weeds, graffiti, and broken equipment. DISCUSS AND SHARE YOUR RESPONSE WITH A PARTNER 1. What level of government pays for each park? 2. Why would it be likely that the parks are vastly different in maintenance, yet lie right next to each other?

35. Identify what level of government most likely pays for each good or service? 1. Michigan St. University 2. Ventura County Hospital 3. Will Rogers State Beach 4. Everglades National Park 5. Long Beach Police Department 6. Oak Knoll City Park 7. Cerritos Public Library 8. Minnesota State Troopers 9. CalWORKS welfare program 10. Victorville Federal Corrections Complex 11. California Institute for Men at Chino 12. ADoT (Arizona Dept of Transportation)

36. Sales Tax 1. In Orange County, I went to the mall and purchased $495 worth of clothes at Nordstrom. How much did I pay in sales tax at 8.75 %? 2. In Orange County, I bought a $19,000 car. How much did I pay in sales tax at 8.75%? 3. In Laguna Beach, I went to a boutique and bought $180 worth of goods. How much did I pay in sales tax if Laguna Beach has an additional.5% sales tax for the city? How much extra in sales tax b/c I bought in Laguna Beach? 4. In Los Angeles county, sales tax increased to 9.75%, a.5% increase to pay for transportation. If I spent $24,000 on furniture and a hot tub, How much will I pay in sales tax? 5. In Los Angeles county, I purchased a $1500 television, How much did I pay in sales tax?

37. Property Tax Tax on Property is 1% of the assessed value at the time of purchase, and the assessed value can increase only 2% a year. 1. How much would one owe on a home assessed at $500,000? 2. How much would one owe on a home assessed at $700,000? 3. How much would be owed if the assessed value of a $500,000 home increased at the 2% over a year? 4. What would be the difference in amount owed for a home bought 20 years ago at $200,000, and the same home sold now for $600,000?