Sources of Government Revenue

Payroll Deductions Taxes – government fees on business and individual income, activities, products or property. Medical Insurance Savings in Retirement accounts

4 Common Tax Deductions 1.Federal Income Tax – tax on the amount of income people earn 2.State Income Tax - TN does not have 3.Social Security Tax – Provides a small income and other services to the elderly, disabled Americans, and orphaned minors. 4.Medicare Tax – provides medical insurance to the elderly and some disabled Americans

Let’s Review… What’s role does the government play in the economy? – Acts as a protector, provider, regulator and consumer The government has direct and indirect roles. What are some examples of each? – USPS, TVA, FDIC, Public Colleges and Universities, Police and Fire Protection, Public roads, libraries, parks – Monitoring and regulating public utilities, Social Security, Medicare, WIC, Financial aid to college students, Unemployment compensation`

For taxes to be fair and as effective as possible, they must meet 3 criteria 1.Equity – fair, impartial and just 2.Simplicity – Everyone can understand it 3.Efficiency – Easy to administer and successful at generating revenue

Two Principles of Taxation Benefit Principle – belief that taxes should be paid according to benefits received regardless of income Ability-to-Pay Principle – belief that taxes should be paid according to level of income, regardless of benefits received

How is Tax Revenue Obtained? Taxes on Income – Earnings of Individuals and Corporations – Federal Income Tax, State Income Tax Taxes on Consumption – Sales tax: general state or city tax levied on a product at the time of sale – Excise/Luxury tax: tax on products not considered essential (concert tickets, gasoline, entertainment) – Sin tax: relatively high tax designed to raise revenue and discourage consumption of a product (alcohol, cigarettes) Taxes on Property and Wealth

3 Types of Taxes Proportional – Percentage of income paid in taxes stays the same regardless of income – Example: Medicare Progressive – Percentage of income paid taxes goes up as income goes up – Higher income = higher taxes – Examples: Individual Income Tax Regressive – Percentage of income paid in taxes goes down as income goes up – Example: Sales Tax

FEDERAL, STATE, AND LOCAL REVENUE SYSTEMS

Federal Government Sources of Revenue 1.Individual Income Taxes – Employer automatically deducts income tax and sends directly to IRS (W-4) collected with a payroll withholding system 2.FICA – Federal Insurance Contribution Act – Social Security and Medicare deductions 3.Borrowing – If it does not collect enough money in taxes, it borrows the rest by selling bonds to investors 4.Corporate Income Tax – Tax on corporate profits 5.Excise/Luxury Tax 6.Estate Tax – Tax on the transfer of property when a person dies 7.Gift Tax – Tax on the transfer of money or wealth and is paid by the person who makes the gift

State Government Sources of Revenue 1.Intergovernmental Revenue – funds collected by one level of government that are distributed to another level of government for expenditures 2.Sales tax 3.State Income Tax 4.Other Revenue – tuition and fees from state owned colleges, hospitals, etc

Local Government Sources of Revenue 1.Intergovernmental Revenue 2.Property Taxes – tax on tangible and intangible possessions such as real estate, buildings, furniture, stocks, etc. 3.Utility Revenues – Income from public utilities that supply water, electricity, sewage, telecommunications 4.Sales Tax – Many cities can have their own sales tax, an additional sales tax 5.Other Revenues