1. Economics: Principles in Action
C H A P T E R 14 Taxes and Government Spending

2. Question! Agree or Disagree:
Taxes are necessary for a country to thrive.
EXPLAIN!
Question!

4. Choose one of the following and describe its meaning with a partner:
“Taxes are what we pay for civilized society.”
-Oliver Wendell Holmes, U.S. Supreme Court Justice
“The power to tax is the power to destroy.”
John Marshall, U.S. Supreme Court Justice
“The power of taxing people and their property is essential to the very essence of government.”
James Madison, U.S. President
S E C T I O N 1 What Are Taxes?

5. Discuss: No taxation without representation!
Why were the colonist protesting against taxes imposed on them by British Parliament?
Why did the British feel the colonists should have to pay taxes?
What is different about our current system of taxes versus those the colonists protested against?
Discuss:

6. 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.
Funding Government Programs

7. 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. According to 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.
Taxes and the Constitution

8. Tax Bases and Tax Structures
A tax base is the income, property, good, or service that is subject to a tax.
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.
Tax Bases and Tax Structures

9. Characteristics of a Good Tax
A good tax has the following characteristics:

10. QW #13! Why are taxes “necessary for a civilized society”?
What are the positives that come from taxation?
What are some negatives that come from taxation?
What type of income tax should be implemented and why?
(proportional, progressive, regressive)

11. STOP FOR NOW!
HW: Read Chapter 14 Section 2

12. How do we pay individual income taxes?
S E C T I O N 2 Federal Taxes
How do we pay individual income taxes?
What are the characteristics of corporate income taxes?
What is the purpose of Social Security, Medicare, and unemployment taxes?
What are other types of taxes?

13. 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.
Individual Income Taxes

14. Single Person Tax Brackets

15. Married Couple Tax Brackets

16. Standardized Deductions

17. CA Tax Information

18. FIT = Federal Income Tax
FICA-SS = Social Security Insurance Tax = 12.4 % split between employee and eomployer (so 6.2 on you)
FICA-MHI = Medicare, 2.9 % total, split (so 1.45% on you)
CA SIT = CA state income tax.
CA SDI = CA State Disability Insurance = 1%

19. Social Security Taxes Medicare Taxes Unemployment Taxes
This program is funded by the Federal Insurance Contributions Act (FICA). 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. Medicare is also funded by FICA taxes.
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. Calculate your Tax Liability
You earned a gross income (GI) of $49,800.00
How much money will be deducted from your income over the year?
How much money will you receive after taxes? (Adjusted GI, or AGI)
Guesses?

21. Results! – 49,800 Total Deducted = $14,807.85
Federal Income Taxes = $5, plus 25% of $12,900
$5, $3,225 = $8,306.25
Social Security (FICA) = 6.2% of GI = $
Medicare = 1.45% of GI = $722.10
CA State = $2, (9.3% of $26.00)
$2, $2.42 = $2,193.90
CA State Disability = 1% of GI = $498.00
Total Adjusted Income = GI minus deductions
$49,800 - $14, = $34,992.15

22. 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.
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.

23. W4 Form

24. W2 Form

25. Tax Returns
You are only eligible for a tax return (state, federal, or both) if you paid more taxes than your liability.
Example –
If you earned $98,000 and paid $25,000 in federal taxes, you paid more than the $20, you owed.
Thus, you’d receive a federal tax return of $4,384.25
If you earned $98,000 and paid the state $7000, you paid more than the $6, owed.
Thus, you’d receive a state tax return of $323.50
The total return would be $4,707.75
The amount you are taxed per paycheck is dependent on the number of allowances you claimed on your W4 form.

26. 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.
Corporate Income Taxes

27. Corporations can deduct many things from their gross income, so it is often difficult to determine the tax bracket for businesses. (medical coverage, investments, etc.)

28. Other Types of Taxes

29. S E C T I O N 3 Federal Spending
What is the difference between mandatory and discretionary spending?
What are some major entitlement programs?
What are some of the categories of discretionary spending?
How does federal aid impact state and local governments?

30. 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.
Mandatory and Discretionary Spending

33. 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
Other discretionary spending categories include:
education
training
environmental cleanup
national parks and monuments
scientific research
land management
farm subsidies
foreign aid
Discretionary Spending

34. An entitlement program is a social welfare program that people are “entitled” to if they meet certain eligibility requirements.
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.
Entitlements

35. Future Issues w/ Entitlements
Social Security – Baby Boomers are retiring. Not enough going into the pool.
Medicare – Costs of medical coverage are increasing over time and people are living longer.
In 1995, there was 4 people working for every 1 person receiving Medicare. By 2050, there will only be a 2 to 1 ratio.
Future Issues w/ Entitlements

36. Quick Write #14
Consider the current status of the various entitlement programs (Social Security, Medicare, Medicaid). Then suppose you are running for office.
What public needs should the government move to resolve quickly?
Would you propose any new entitlement programs? If so what and why; or why not?
Would you propose eliminating or modifying any existing entitlement programs?
Explain all of your answers.