1. In this chapter, look for the answers to these questions:
In this chapter, look for the answers to these questions:
What are the largest sources of tax revenue in the U.S.?
What are the efficiency costs of taxes?
How can we evaluate the equity of a tax system?
CHAPTER 8 THE DESIGN OF THE TAX SYSTEM

2. “In this world nothing is certain but death and taxes. ”
“In this world nothing is certain but death and taxes.” Benjamin Franklin 20 40 60 80
100
1789
Taxes paid in Ben Franklin’s time accounted for 5 percent of the average American’s income. 2

3. “In this world nothing is certain but death and taxes. ”
“In this world nothing is certain but death and taxes.” Benjamin Franklin 20 40 60 80
100
1789
Today
Today, taxes account for up to a third of the average American’s income. 2

4. Government Revenue as a Percentage of GDP

5. Receipts of the Federal Government...
Individual Income Tax, 48%
Social Insurance
Tax, 34%
Corporate Tax,
10%
Excise Tax, 4%
Other, 4% 9

6. Federal Government Spending: 1999
Category
Amount
(billions)
Amount per
Person
Percent of
Spending
Social security
$ 393
$1,445
23%
National defense
277
1,018 16
Net interest
243
893 14
Income security
227
837 13
Medicare
205
754 12
Health
143
526 8
Other
239
879
Total
$1,727
$6,350
100% 11

7. Federal Government Spending: 1999...
Social Security,
23%
Defense, 16%
Net Interest, 13%
Income security,
14%
Medicare, 12%
Health, 8%
Other, 14%, 13

8. Total Government Tax Revenue as a Percentage of GDP
Table 1

9. U.S. Tax Revenue (% of GDP)
As a percentage of GDP, tax revenue has more than doubled since 1940.
Source: Economic Report of the President, 2005.
CHAPTER 8 THE DESIGN OF THE TAX SYSTEM

10. Central Govt Revenue (% of GDP)
France
39%
United Kingdom 34
Germany 29
Brazil 20
United States 19
Canada 18
Russia 17
Pakistan 15
Indonesia
Mexico 13
India 10
Tax revenue (relative to GDP) varies across countries. For the group included in this table, the U.S. is roughly in the middle. Europe is generally higher, while lower-income countries are generally lower.
source: same as textbook
CHAPTER 8 THE DESIGN OF THE TAX SYSTEM

11. Individual and Corporate Income Taxes
Based on this graph, what effect would an economic downturn, with lower corporate and individual earnings, have on government receipts? Explain.

12. Social Security, Medicare, and Unemployment Taxes
In addition to withholding money for income taxes, employers withhold money for taxes authorized under the Federal Insurance Contributions Act, or FICA. FICA taxes fund two large government social-insurance programs, Social Security and Medicare. Employees and employers share FICA payments.

13. Social Security, Medicare, and Unemployment Taxes
Social Security Taxes
Medicare Taxes
Unemployment Taxes

14. Social Security, Medicare, and Unemployment Taxes
The gap between what Medicare takes in and what it spends has been widening.
What are two possible solutions to the problem presented by this graph?

15. Other National Taxes Excise Taxes Estate Taxes Gift Taxes Tariffs
Taxes That Affect Behavior

16. Other National Taxes
How does this graph support the assertion that tariffs today are mainly intended to protect American farms and businesses from foreign competition?

17. Quiz: Individual and Corporate Income Taxes
What is a person’s taxable income?
A. the income subject to the highest tax rate
B. the income subject to the lowest tax rate
C. gross income minus exemptions and deductions
D. all the money a person earns in a given year

18. Quiz: Social Security, Medicare, and Unemployment Taxes
Which idea or concept underlies Social Security, Medicare, and unemployment taxes?
A. establishing a proportional taxation system
B. ensuring that people do not have to save for their retirement
C. correcting inequities in the individual income tax
D. supporting people who have limited ability to support themselves through work

19. Quiz: Other National Taxes
Why do we have tariffs today?
A. to protect American farmers and industries from foreign competitors
B. to discourage people from buying harmful products
C. to keep people from avoiding estate taxes by giving away money before they die
D. to encourage energy conservation and other worthwhile activities

20. Mandatory and Discretionary Spending
What is the largest spending category in the budget represented here?

21. Government Entitlements
Social Security
Medicare
Medicaid
Other Mandatory Spending Programs

22. Government Entitlements
As the nation gets older, the top of the population pyramid gets larger.
Compared to 1980, how will the ratio of workers to Social Security recipients have changed by 2035?

23. Spending on Discretionary Programs
Defense Spending
Other Discretionary Spending
Federal Aid to State and Local Governments

24. Spending on Discretionary Programs
About what percentage of discretionary spending went to defense in the budget year shown?

25. Quiz: Mandatory and Discretionary Spending
The portion of the budget about which lawmakers today make year-to-year spending decisions is approximately
A. two thirds of the budget.
B. all of the budget.
C. one third of the budget.
D. one half of the budget.

26. Quiz: Government Entitlements
What key issue challenges the largest entitlement programs in the United States?
A. an aging population
B. skyrocketing rates of taxation
C. a shrinking number of beneficiaries
D. lack of public support for aiding retirees

27. Quiz: Spending on Discretionary Programs
About how much of the federal government’s discretionary spending currently goes toward defense?
A. about one eighth
B. about one fourth
C. about half
D. about three fourths