1. Taxes and Spending
Chapter 14

2. What are Taxes?
Chapter 14, Section 1

3. What are Taxes?
Taxes are required to pay for local, state, and federal programs
The income received from taxes is known as revenue
The government has the power to tax under the Constitution
Certain powers to the state and local
Certain powers to federal
All must be for the common defense and general welfare of the country

4. Tax Base
The tax base is the income that is subject to tax. Made up of:
Income tax
Sales tax
Property tax
Corporate income tax

5. Tax Structure Proportional Tax…% of income…flat tax
Progressive Tax…% increases with income…income tax
Regressive Tax…places a higher burden on those with less income…sales tax
Usually on goods and services

6. What Makes a Good Tax
Simplicity…laws are simple and easy to understand
Efficiency…collect taxes without spending too much time or money
Certainty…know what is due and when
Equity…fair so there is not a heavier burden
Fairness
Benefit received approach
Those receiving the benefits pay the tax (gas)
Ability to pay principle
People pay according to their ability to

7. Bearing the Burden Who actually pays?
The producer can easily shift the burden of the tax to the consumer
Easier to shift it if there is inelastic demand!
The final burden is known as the incidence of a tax

8. Federal Taxes
Chapter 14, Section 2

9. Federal Taxes Individual Income Taxes 48% of federal revenue
Withheld from income
File a tax return to balance what you owe
Exemptions and deductions...reduce your taxable income
Tax brackets...determine % you will pay
Income tax is a progressive tax

10. Federal Taxes Corporate Income Tax
11% of revenue
FICA...social security, Medicare, unemployment
33%
Other Taxes
Excise...taxes on certain goods (gas, tobacco)
Estate Taxes...tax on the estate of someone who has died
Gift Taxes...taxes on gifts above $10,000
Import Taxes...tariffs...tax on imports
Tax incentives...used to encourage or discourage behavior

11. Review
1. Taking taxes out of an employee’s wages before he or she receives them is called
(a) tax return.
(b) social security.
(c) FICA.
(d) withholding.
2. How is the federal income tax a progressive tax?
(a) The higher the income a person has, the higher the percentage that person pays as tax.
(b) A person with a higher income pays more money in taxes, although the percentage he or she pays as tax is less.
(c) Two married people who file their taxes together will pay more taxes than a single person will.
(d) Children pay no taxes, regardless of whether they earn a large income.

12. Federal Spending
Chapter 14, Section 3

13. Federal Spending
The government uses tax revenue to fund the operations of the country
Mandatory vs. Discretionary spending
Mandatory...programs that need to be funded by law (interest on national debt and entitlement programs)
Entitlement programs are those that people are entitled to and meet the requirements of...social security, Medicare etc...
Discretionary spending...programs that can be adjusted
Defense, education, environment etc...

14. Federal Spending
Much of the revenue collected by the federal government through taxation is also distributed to state and local governments

16. Review
1. All of the following are examples of mandatory spending except
(a) defense spending.
(b) Medicare.
(c) Social Security.
(d) Medicaid.
2. An entitlement program is
(a) a program to provide benefits paid to everyone.
(b) a program to provide benefits paid to government employees only.
(c) a program to provide benefits to people who meet certain requirements.
(d) a program to provide benefits to illegal aliens.

17. State and Local Taxes and Spending
Chapter 14, Section 4

18. State Taxation
Like the federal government, state governments collect taxes to pay for their operating costs
States have strict tax laws and are required to balance the budget
Operating budget...pays for operation of state
Capital budget...pays for upgrades and investments

19. Spending State Taxes Education Law enforcement Transportation
Public welfare
Recreation

20. Sources of Income for States
Sales Tax
State income taxes
Business Taxes
Fees and licenses

21. Local Government
Like the state government, local governments need to tax to cover operating costs
Schools
Fire
Law
Transportation
Elections
Recreation

22. Local Government Revenue
Property Taxes...major source
Other local taxes (sales tax, bed taxes, rental taxes etc...)

23. Review 1. For most state governments, the main source of revenue is a
(a) room tax.
(b) property tax.
(c) general excise tax.
(d) statewide sales tax.
2. The main source of revenue for local governments is
(a) a property tax.
(b) an excise tax.
(c) a sales tax.
(d) an income tax.