1. Chapter 14 Government Revenue & Spending

2. Sec 1. How Taxes Work

3. Government Revenue
Street lighting, highways, law enforcement, & the court system
Government also provides aid for people in need

4. Where does the money come from to pay for such goods and services?
Government Revenue
Where does the money come from to pay for such goods and services?

5. Government Revenue
Borrowing & lotteries
Rights to tax are set in the U.S. Constitution and in state constitutions

6. Principles of Taxation
Benefits taxpayers receive from taxes
Their ability to pay

8. Question 1
Can you explain why a worker earns $264 but receives a paycheck for less than $264?

9. Question 2
What happens to the amount earned not received by the employee? Meaning where did the $30.84 that the employee go to?

10. Benefits-Received Principle
Financing of road construction & maintenance through gasoline
Difficult for governments to asses exactly how much different taxpayers benefit from services like national defense, national parks, local police, fire protection, and public education

11. Ability-to-Pay Principle
People with higher incomes will pay more than people of lower incomes
The level of benefits is not a consideration

12. Ability-to-Pay Principle
Questions to Consider
Should everyone pay the same percentage of income?
Should those with higher incomes pay a higher percentage of their income in taxes?

13. Criteria for Taxation
Equity, Simplicity, & Efficiency

14. Equity Example Some believe
Requires people in similar situations pay a similar amount of taxes
Example
Everyone pays the same price for tax
Some believe
Equity requires that people with higher incomes pay more than people with lower incomes

15. Simplicity
Should be NO confusion bout the time the tax is due and the amount to be paid
Sales tax meets the criterion of simplicity

16. Efficiency Taxpayers’ view
Tax efficiency can be judged by the amount of effort and expense it takes to pay the tax
Individual income tax best meets the criterion efficiency

17. Tax Base & Structures
Tax base, each type of wealth is subject to taxes
Individual income, corporate income, sales, and property

18. Individual Income Tax
Wages, interests, dividends, and tips
All taxes are ultimately paid from Income, but using income as a tax base means that the amount of tax is directly linked to a person’s earnings

19. Corporate Income Tax
From savings & investment in the form of interests & dividends

20. Sales Tax
Generally imposed on a wide range of goods or services
Percentage of the posted price of the good or service
Included in the final price the buyer pays
The seller then passes the tax revenue collected from customers on to the government that has imposed the tax

21. Property Tax Generally real estate
Pay on the values of their buildings and the land
Property tax is generally included in rent charges
Can be imposed on other assets like automobiles

22. If overall personal income rises, the individual income tax base grows
If there are fewer homes or businesses in a certain locality or if the value declines, the property tax base shrinks

23. Tax Structures
The way in which taxes are imposed on the different tax bases gives rise to three different tax structures
These tax structures are distinguished from one another

24. Proportional Tax Example
Flat tax, rate of the tax is the same for all taxpayers
Example
All taxpayers in a given state might be charged a flat 15% tax on the income
No matter a person’s income is

25. Progressive Tax United States Income increases so does your tax rate
Federal income tax = progressive tax
Tax rate increases as income increases

26. Taxable income of $40,000 Page 413
Income Bracket
Marginal Tax Rate
$0-10,000
10 %
$10,000-$30,000
15%
$30,000-$50,000
25%

27. Income in each bracket
Tax Bracket
$ 10,000
10%
$ 20,000
15%
$10,000
25%

28. Income in Bracket X
Marginal Tax Rate =
Marginal Tax
$ 10,000
10 %
$1,000
$ 20,000
15%
$3,000
$10,000
25%
$2,500
Total Tax
$6,500

29. Regressive Tax Income paid in taxes decreases as income increases
Sales tax

30. Incidence of a Tax

31. Resource Allocation

32. Productivity & Growth

33. Economic Behavior

34. Section 2
Federal Taxes

35. Individual Income Tax
The federal government takes in around $2.5 trillion in revenue each year
Individual income tax , Social insurance taxes, Corporate income taxes, Estate taxes, Gift taxes, Excise taxes, & Customs taxes
Largest source of taxes = individual income tax
Government uses income tax
16 Amendment to the US Constitution in 1913

36. Withholding

37. Taxable Income

38. Tax Return

39. Indexing

40. Federal Insurance Contribution Act

41. Social Secuity

42. Medicare

43. Unemployment Taxes

44. Corporate Income Taxes

45. Estate Tax

46. Gift Tax

47. Excise Tax

48. Customs Duty

49. User Fee