1. CHAPTER 14--TAXES AND GOVERNMENT SPENDING
SECTION 1--WHAT ARE TAXES
SECTION 2--FEDERAL TAXES
SECTION 3--FEDERAL SPENDING
SECTION 4--STATE AND LOCAL TAXES AND SPENDING

2. THE AMERICAN TAX SYSTEM
Tax- a required payment to various levels of government
Authority to levy taxes--given to federal, state and local government by the U.S. Constitution.
Article I Section 8 of U.S. Constitution
16th amendment--Federal Income Tax
America is a “middle class” tax system.
Designed to draw largest amount from more populated middle class!
Creates “revenue” for U.S. Government.
Revenue used to fund government programs and services.

3. LIMITS ON THE POWER TO TAX
MUST BE FOR COMMON DEFENSE AND NOT FOR GENERAL INTERESTS
FEDERAL TAXES MUST BE THE SAME IN EVERY STATE
NO TAXES ON CHURCH SERVICES
NO TAXES ON EXPORTS

4. TAX STRUCTURE AND TAX BASE
TAX STRUCTURE--REFERS TO THE WAY THE TAX IS ASSESSED AND COLLECTED.
TAX BASE--THAT WHICH IS SUBJECT TO TAX.
INCOME TAX--PEOPLE’S EARNINGS
CORPORATE TAX--COMPANY PROFITS
PROPERTY TAX--VALUE OF OWNED LAND OR PROPERTY
SALES TAX--VALUE OF A PRODUCT SOLD

5. TAX STRUCTURE--PROGRESSIVE TAX STRUCTURE
AS INCOME INCREASES, SO DOES THE PERCENT PAID IN TAXES.
FEDERAL INCOME TAX STRUCTURE IS A PROGRESSIVE TAX

6. TAX STRUCTURE--PROPORTIONAL TAXES
ALSO CALLED A “FLAT TAX”
IT APPLIES THE SAME PROPORTION OR PERCENT ON ALL DESPITE THE VALUES OR SIZE OF THE TAX BASE.
MANY STATE TAXES ARE PROPORTIONAL.

7. TAX STRUCTURE--REGRESSIVE TAX
PERCENT OF INCOME IN TAXES DECREASES AS INCOME OR TAX BASE INCREASES.
EXAMPLE--SALES TAX
$35,000 YEARLY INCOME PAYS 5% SALES TAX ON $250 OF GROCERIES X 12 MONTHS--$150
$35O,000 YEARLY INCOME PAYS 5% SALES TAX ON $250 OF GROCERIES X 12 MONTHS--$150

8. WHO BEARS THE “BURDEN OF TAX”
“INCIDENCE OF TAX”. --IS WHO IS REALLY ASSIGNED THE PAYMENT OF TAX.
PRODUCERS LOOK TO “PASS ON” THE BURDEN OF A TAX RATE.
INELASTIC DEMAND PRODUCTS-- THE BURDEN OF TAX CAN BE SHIFTED TO THE CONSUMER.

9. WHAT ARE THE CHARACTERISTICS OF A GOOD TAX?
SIMPLICITY
EASY FOR TAXPAYERS TO UNDERSTAND, FILE AND PAY.
EFFICIENCY
EASY TO ADMINISTER AND COLLECT BY GOVERNMENT
CERTAINTY
CLEAR WHEN THE TAX IS DUE, HOW MUCH IS DUE, AND HOW TO PAY THE TAX
EQUITY
FAIR SO THAT THE “BURDEN” IS NOT TOO MUCH OR TOO LITTLE
APPLIED EQUALLY TO ALL PEOPLE!

10. MEASURING THE FAIRNESS OF A TAX.
BENEFITS RECEIVED PRINCIPLE
PAY TAXES IN PROPORTION TO BENEFITS RECEIVED FROM THE GOVERNMENT
Example--People who drive a lot on government roads pay more in gas tax.
ABILITY TO PAY PRINCIPLE
Pay more in tax based on your wealth status
Basis of the Progressive tax.

11. Section 2: FEDERAL TAXES
FEDERAL TAXES--SOURCES OF REVENUE
5 CHIEFS SOURCES / TAXES
1) FEDERAL INCOME TAXES %
2) FICA--FEDERAL INSURANCE CONTRIBUTORY ACT--32%
SOCIAL SECURITY, MEDICARE, UNEMPLOYMENT
3) CORPORATE INCOME TAX %
4) BORROWING FOR FEDERAL DEFICIT--9%
5) MISCELLANEOUS TAXES--7%
CUSTOMS DUTIES, EXCISE TAX, GIFT& INHERITANCE TAX

12. FEDERAL INCOME TAX
PEOPLE FILE TAX RETURNS UNDER THE “PAY AS YOU EARN SYSTEM”
MAKES IT EASIER THAN PAYING A LUMP SUM.
GOVERNMENT HAS MONTHLY FINANCIAL NEEDS
TAX RETURNS FILED BY APRIL 15
PROGRESSIVE TAX WITH 6 BRACKETS
TAX SYSTEM IS A COOPERATIVE EFFORT BETWEEN EMPLOYER AND EMPLOYEE

13. FILING A TAX RETURN RECEIVE W-2 STATEMENT FILL OUT W-4 FORM
LIST PERSONAL EXEMPTIONS AND POSSIBLE DEDUCTIONS
(TOTAL INCOME)- EXEMPTIONS AND DEDUCTIONS =
TAXABLE INCOME
TAX CREDITS--AMOUNT YOU CAN SUBTRACT FROM YOUR TAXABLE INCOME
FILL OUT W-4 FORM
LIST POSSIBLE EXEMPTIONS
HAVE EMPLOYER “WITHHOLD” THE CORRECT AMOUNT FROM MONTHLY PAY
BASED ON EXEMPTIONS AND SALARY.

14. FICA TAX

15. F.I.C.A. TAX
SOCIAL SECURITY(OASDI)
Provides retirement fund for people who reach a specific age.
Provides benefits for surviving members and to those with a disability.
MEDICARE
A Federally funded health care program for those over the age of 65.
UNEMPLOYMENT
Paid by employers and funded by state and federal government.
Provides an income for workers who lose their jobs through no fault of their own. Specific rules apply.
TAX STRUCTURE BEGINS AS PROGRESSIVE TILL A CERTAIN AMOUNT, THEN TURNS REGRESSIVE

16. CORPORATE INCOME TAXES
TAX ON THE PROFIT OF A CORPORATION.
DIFFICULT TO CALCULATE BECAUSE CORPORATIONS CAN HAVE MANY DEDUCTIONS AND “LOOPHOLES”.
LOOPHOLES ARE WAYS TO AVOID PAYING CERTAIN AMOUNTS OR TYPES OF TAXES.
PROGRESSIVE TAX
RATES BEGIN AT 15%….RISE TO 35-39%

17. OTHER FEDERAL TAXES! EXCISE TAXES TAX ON MANUFACTURE / SALE OF CERTAIN
DOMESTIC PRODUCTS.(ALCOHOLIC BEVERAGES, TOBACCO, AUTOS, GAS,ETC.)
ESTATE TAX
TAX ON PROPERTY / ASSETS OF PERSON WHO HAS DIED.
LEVIES BEFORE HEIRS RECEIVE THEIR SHARE
PROGRESSIVE $2 MILLION
GIFT TAXES
TAX ON MONEY PROPERTY ONE LIVING PERSON GIVES ANOTHER.
STARTS AT $12000
IMPORT TAXES
LEVIES TO PROTECT DOMESTIC PRODUCERS
CALLED “TARIFFS” OR CUSTOM “DUTIES”

18. TAXES ALSO INFLUENCE BEHAVIOR
TAX INCENTIVE.
A TAX THAT IS LEVIED THAT ALSO ENCOURAGES OR DISCOURAGES BEHAVIOR OR PURCHASING.
SOME PRODUCTS ARE IDENTIFIED AS OR WITH “SIN TAX”.
EXAMPLES OF SIN TAX PRODUCTS ARE CIGARETTES, ALCOHOLIC BEVERAGES, AND EVEN GASOLINE.

19. SECTION 3--FEDERAL SPENDING
FEDERAL SPENDING IS DIVIDED INTO 2 CATEGORIES:
MANDATORY SPENDING--MONEY THAT CONGRESS MUST,BY LAW, SPEND ON PROGRAMS OR AREAS!
DISCRETIONARY SPENDING--IS AREAS OF SPENDING THAT LAWMAKERS CAN VARY HOW MUCH THEY SPEND OR IF THEY SPEND ANY AT ALL!

20. MANDATORY SPENDING INTEREST ON FEDERAL DEBT ENTITLEMENT PROGRAMS
SOCIAL SECURITY
RETIREMENT FUND
RATIO OF PEOPLE PAYING TO COLLECTING IS CHANGING FROM 4:1 to soon 2:1
AFFECTED BY THE BABY BOOMERS--STRAIN ON SOCIAL SECURITY
MEDICARE
FEDERALLY FUNDED HEALTH CARE (INSURANCE) AND DISABILITY PAYMENTS
MEDICAID
FEDERAL-STATE FUNDED HEALTH INSURANCE FOR LOW INCOME AND ELDERLY
SOCIAL WELFARE PROGRAMS
MEAN TESTED PROGRAMS (ELIGIBILITY BASED ON AGE, INCOME, HEALTH)
PROVIDE SOCIAL ASSISSTANCE

21. INTERGOVERNMENTAL TRANSFERS OF REVENUE
MONEY COLLECTED BY FEDERAL GOVERNMENT RETURNED TO STATE GOVERNMENTS.
APPROXIMATELY $400 BILLION ANNUALLY DIVIDED AMONG 50 STATES AND WASHINGTON D.C.
MONEY RETURNED MUST BE SPENT ACCORDING TO SPECIFIC GUIDELINES

22. DISCRETIONARY SPENDING
SPENDING THAT VARIES ACCORDING TO NEEDS OR SITUATIONS
LARGEST DISCRETIONARY SPENDING INCLUDES:
DEFENSE
EDUCATION
ENVIRONMENT
SCIENTIFIC RESEARCH (SPACE PROGRAM)

23. Sect. 4 STATE AND LOCAL TAXES
States collect over $500 bilion on taxes each year.
TWO LARGEST SOURCES OF STATE REVENUE ARE:
INTERGOVERNMENTAL TRANSFERS OF REVENUE.--25%
MONEY TRANSFERRED FROM FEDERAL TO STATE GOVERNMENTS
INSURANCE TRUST REVENUE.--22%
MONEY PAID TO THE STATE BY TAXPAYERS SIMILAR TO SOCIAL SECURITY.

24. OTHER STATE TAXES SALES TAX & EXCISE TAX--19%
2.9% to 7.25% rate (varies state to state)
Can act as a “Sin Tax”
INCOME TAXES--13%
Like most state taxes, they tend to be proportional !
CORPORATE TAXES--2.5%
Low corporate taxes tend to encourage industrial development.

25. OTHER STATE TAXES--16% LICENSING FEES TRANSFER FEES STOCK VALUE FEE
SEVERANCE TAX
INHERITANCE TAX
A TAX ON VALUE OF PROPERTY THE FAMILIES OF THE DECEASED. A STATE TAX SIMILAR TO FEDERAL ESTATE TAX.

26. LIMITATIONS ON STATE TAXES
CANNOT TAX FEDERAL PROPERTY
CANNOT TAX INTERSTATE COMMERCE--TAX SALE OF PRODUCTS BETWEEN STATES
CANNOT TAX NON PROFIT GROUPS.
CHURCHES, SCHOOLS ETC.
TAX EXEMPT STATUS--NOT SUBJECT TO TAXES

27. STATE SPENDING STATES HAVE 2 CATEGORIES OF SPENDING:
OPERATING BUDGET--DAY TO DAY SPENDING NEEDS.(SALARIES, RESOURCES, ETC).
MANY STATE BY LAW MUST HAVE A BALANCED OPERATING BUDGET.
CAPITAL BUDGET--SPENDING ON LONG TERM AND MAJOR INVESTMENTS

28. WHERE ARE STATE TAXES SPENT?
EDUCATION
FUNDING OF STATE UNIVESITIES
EVERY STATE HAS AT LEAST ONE UNIVERSITY
FUNDING PUBLIC LOCAL SCHOOL SYSTEMS.
SCHOOLS RECEIVE APPROXIMATELY $8701 PER STUDENT IN STATE AID. (BASED ON ATTENDANCE)
PUBLIC SAFETY
STATE POLICE, STATE CRIME LABS, CORRECTIONS DEPT, FIRE DEPTS.

29. WHERE ARE STATE TAXES SPENT? (Continued)
PUBLIC WELFARE
HOSPITALS --SOME UNEMPLOYMENT
TEST FOR POLLUTION
MEDICAL CLINICS
INSPECT WATER SUPPLIES
HIGHWAYS AND TRANSPORTATION
CONSTRUCTION AND MAINTENANCE OF ROADS
ARTS AND RECREATION
STATE FORESTS & PARKS, MUSEUMS
ADMINISTRATION.
PAY SALARIES OF STATE OFFICIALS

30. LOCAL GOVERNMENT FORMS OF REVENUE
87,000 LOCAL GOVERNMNET UNITS
COLLECT ALMOST $484 BILLION IN TAX REVENUE.
THREE LARGEST SOURCES OF REVENUE ARE:
INTERGOVERNMENTAL FORMS OF REVENUE
PROPERTY TAXES
OTHER TAXES

31. PROPERTY TAXES TAX ON VALUE OF ASSESSED PROPERTY.
REAL PROPERTY--TAX ON REAL ESTATE & STRUCTURES ON LAND
PERSONAL PROPERTY--MOVABLE POSSESSIONS OR ASSETS
VALUE DETERMINED BY TAX ASSESSORS
1) TAX VALUES HARD TO COMPARE
2) ASSESSORS HARD TO TRAIN
3) DISCOURAGES PROPERTY IMPROVEMENT

32. OTHER TAXES INCLUDE: HOTEL / MOTEL TAXES
OCCUPATIONAL TAXES(LIKE INCOME)
EXCISE TAXES
LICENSING FEES

33. LOCAL SPENDING LARGEST CATEGORIES OF SPENDING ARE: 1) EDUCATION 40%
2) UTILITES
3) GENERAL WELFARE (POLICE AND FIRE)