1. { Topic 8:Taxes and Spending

2.  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.  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 Disables  Medicare- Health insurance for people who are older than 65 Income Taxes

5.  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  24 th 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.  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.  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- 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.  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.  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.  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.  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 taxe, or both.  The goals is to increase demand, prices, and output. Expansionary Fiscal Policy

19.  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