1. Topic 8:Taxes and Spending

2. Before We Get Into the Chapter…
Governments collect taxes to pay for programs, but taxes can have powerful effects on the general economy
The federal government taxes income, the manufacture or sale of some goods, imports, and other sources of wealth
The federal government spends tax money on mandatory outlays, including entitlements such as Social Security and on discretionary spending
State taxes provide money for education, public safety, transportation, and other public goods
Before We Get Into the Chapter…

3. Section 1: Understanding Taxes
Fairness is the goal of any tax system
Some people argue that all people should be taxed the same
Other people believe it should be based on what people earn
Section 1: Understanding Taxes

4. When you receive a paycheck, there will be taxes that get taken out, but what are they for?
State Income Tax
Federal Income Tax
FICA (Federal Insurance Contribution Act) = Social Security and Medicare
Social Security- funds Old-Age, Survivors, and Disabled
Medicare- Health insurance for people who are older than 65
Income Taxes

5. Taxes and the Government
We authorize the federal government, through the Constitution and Congress, to raise money in the form of taxes (under Article 1 Section 8)
Taxation is the primary way that the government collects money
The income received by a government from taxes and other nontax sources is called revenue
We authorize the government to spend over $3.5 trillion a year
Taxes and the Government

6. The purpose of a tax must be “to pay the debts and provide for the common defense and general welfare of the United States”
Tax cannot bring money that goes to individual interests
Federal taxes must be the same in every state
Congress cannot tax religious services
24th Amendment: “poll taxes” have been eliminated
Constitution prohibits taxing exports
Taxes must be paid by every single person
Limits of Taxation

7. There are three types of structures: Progressive, Proportional, and Regressive
Progressive taxes- tax for which the percentage of income paid in taxes increases as income increases
People with higher incomes pay a higher percentage of their income in taxes
People with very small incomes might pay no tax at all
Proportional tax- tax for which the percentage of income paid in taxes remained the same at all income levels
Regressive tax- tax for which the percentage of income paid in taxes decreases as income increases
Sales taxes is an example
Tax Structures

9. 3 Key Characteristics of a Tax
1. Simplicity- tax laws should be simple and easily understood
Efficiency- government administrators should be able to assess and collect taxes without spending too much time or money
3. Certainty- should be clear when a tax is due, how much is due and how the tax should be paid
3 Key Characteristics of a Tax

11. Section 2: Federal Taxes
Government main source of revenues is the federal tax on individuals taxable income
The amount of federal income tax a person owes is determined on an annual basis
Out system is “pay-as-you-earn”
Income tax is a progressive tax- tax rate rises when the amount of taxable income
Helps support economic growth
Employers are responsible for tax withholdings
Tax withholdings- taking payments out of your pay before you received it
Same for the whole year
Section 2: Federal Taxes

12. Tax Return and Tax Deductions
Tax Return- form used to file income taxes
Declare income and figure out how much is taxable
Taxable income- a person’s gross (total) income minus exemptions and deductions
Gross income includes earned income- salaries, wages, tips, and commissions
Personal exemptions- set amounts that you subtract from your gross income for yourself, your spouse, and any dependents
Tax deductions- mortgages interest, large medical expenses, and state and local tax payments
Tax Return and Tax Deductions

13. Tax Credit- an amount you can subtract from the total amount of your income tax
Completing a tax return allows you to determine whether the amount of income taxes you have already paid is higher or lower than the actual amount owed
Other features of Tax

14. Section 3: Federal Spending
Mandatory spending- money that Congress is mandated by existing law to spend on certain programs or to use for interest payments on the national debt
Discretionary spending- spending about which law makers are free to make choices
Entitlements- social welfare programs that people are “entitled to” and benefit from if they meet certain eligibility requirements
Section 3: Federal Spending

15. Federal Budget & Fiscal Policy
Fiscal policy: the use of government spending and revenue collection to influence the economy
Used to expand /slow down economic growth, to achieve full employment, and maintain price stability.
Government makes key fiscal policy decisions each year when it creates the federal budget.
Federal Budget & Fiscal Policy

16. Executive Branch draws up budget with help of Office of Management & Budget.
Congress debates, makes changes and returns to President for signature/veto.
Role of committees: House Budget, Senate Budget, House Ways & Means, Senate Finance
Fiscal year: a 12 month period used for budget purposes (Oct 1 through Sept 30).
Figure 9.2
Federal Budget Basics

17. How does Fiscal Policy Impact the Economy?
Remember: the government uses fiscal policy to promote full employment and maintain stable prices.
Two ways: Expansionary or Contractionary Fiscal Policy
How does Fiscal Policy Impact the Economy?

18. Expansionary Fiscal Policy
Govts use expansionary fiscal policy to raise the level of output in the economy and encourage growth.
This either prevents a recession or tries to move the economy out of a recession.
Involves increasing govt spending, cutting taxes, or both.
The goals is to increase demand, prices, and output.
Expansionary Fiscal Policy

19. Contractionary Fiscal Policy
Contractionary Fiscal policy tries to decrease demand and reduce the growth of economic output.
Govt tries to slow down the economy to fight inflation, a rapid increase in prices.
Govt can decrease spending, raise taxes, or both.
Figure 9.5
Contractionary Fiscal Policy