Topic 8: Taxes & Spending

Can & should government be fair to everyone? ● Fairness is a value all people in the United States cherish. When it comes to their government, most people want the costs and benefits to be shared fairly. But agreeing on what fair means is not so simple. Does it mean that all people pay taxes in the same amount or at the same rate? Does it mean the wealthy pay a larger share than those who have less? And who should receive the benefits that taxes make possible?

● What are your views on government’s responsibility for fairness? Consider these questions, and formulate your own answers. ● 1. Should taxes be the same for all people, or should some people pay a higher portion of their income? ● 2. Should people’s taxes be based on their ability to pay or on the benefits they receive? ● 3. What is government’s responsibility to aid people who are retired, have a disability, or are out of work? ● 4. What is an individual’s responsibility to provide for him- or herself?

● “Taxes are what we pay for a civilized society” – Oliver Wendell Holmes Jr.

Where do Indiana Property Taxes Go?

Power to Tax ● The constitution gives government the right to tax ● Article I, Section 8 ● Grants Congress the right to levy Taxes ● Also limits power to tax ● Purpose of a tax must be “to pay the debts and provide for the common defense & general welfare of the United States.” ● Taxes can’t bring in money that goes to individual interests ● Federal taxes must be the same in every state ● Can’t tax religious services ● Can’t charge a tax to vote ● Can’t tax exports ● Can’t levy a “head” tax (paid by every single person) 8.1

Tax Structure Progressive Tax: a tax for which the percentage of income paid in taxes increases as income increases Proportional Tax: a tax for which the percentage of income paid in taxes remains the same at all income levels Regressive Tax: a tax for which the percentage of income paid in taxes decreases as income increases

Proportional Taxes: Selena earned $350,000 Tony earned $50,000 6% proportional tax $21,000 $3,000

Progressive tax ● People with higher incomes pay a higher percentage of their income in taxes ● People with very small incomes might pay no tax at all ● Ex. Federal income tax

Tax Burden ● Who actually bears the burden of a tax? If the government imposed a $.50 per gallon gasoline tax collected from service stations, would the burden only fall to the service stations? When considering a new tax, Congress looks at incidence of a tax: the final burden of the tax

Characteristics of a Tax ● A tax should have 4 qualities/characteristics ● 1. Simplicity ● 2. Efficiency ● 3. Certainty ● 4. Equity

8.2 Federal Taxes ● Government’s main source of revenue is the federal tax on individuals’ taxable income ● Collected on a “pay-as-you-earn” system ● You have until April 15 of the following year to pay any additional income taxes you owe

Individual Tax Brackets Does a progressive tax promote the economic goal of equity? Or does it discourage people from working hard to earn more?

Tax Withholding ● Employers are responsible in part for carrying out the system of collecting federal income taxes ● They withhold, or take payments out of your pay before you receive it ● Based on an estimate of how much you will owe ● Forward that money to government as installment payment

Filing a Tax Return ● After the calendar year ends, employers give their employees a report stating how much income tax has already been withheld & sent to the government ● You use that info to complete a tax return: Form used to file income taxes ● You declare your income to the gov’t ● Figure out how much of your income is taxable

Taxable Income ● Taxable income is a person’s gross (total) income minus exemptions & deductions ● Gross income includes ● Salaries, wages, tips & income from investments (dividends & interest) ● Exemptions: set amounts that you subtract from your gross income for yourself, your spouse, & any dependents ● Tax deductions: amounts that you can subtract or deduct from your gross income ● Examples: mortgage interest, large medical expenses, state & local tax payments, charitable donations ● Once you figure out what you owe, you can apply tax credits: amounts you can subtract from your income tax ● (ex. Child care, higher education)

Standard Deduction ● The standard deduction is a dollar amount that reduces your taxable income. It is a benefit that eliminates the need for many taxpayers to itemize actual deductions, such as medical expenses, charitable contributions, and taxes. ● $6300 ● $12, 600 for married filing jointly

Tax Rates ● The current tax rate for Social Security is 6.2% for the employer and 6.2% for the employee, or 12.4% total. The current rate for Medicare is 1.45% for the employer and 1.45% for the employee, or 2.9% total. ● Indiana's state tax rate is a flat 3.4 percent of a taxpayer's federal adjusted gross income. ● Lake County has adopted a 1.5% resident rate

FICA: Federal Insurance Contributions Act ● Most go to Social Security Administration to fund Old- Age, Survivors, & Disability Insurance (OASDI) ● Established in 1935 ● Maximum taxable income cap is currently $118,500 ● Medicare is national health insurance program for people over 65 ● Also covers some disabilities ● No ceiling

Other Taxes ● Excise Tax: general revenue tax on sale or manufacture of a good (gasoline, cigarettes, alcohol, telephone service, television) ● Estate Tax: tax on total value of the money & property of a person who died ● Paid before heirs receive their share ● $5,430,000 in 2015 ● Progressive ● Gift Tax: tax on the money or property one living person gives to another ● $14,000 tax free in 2015 ● Tariffs: tax on imported goods ● Once the most important source of federal revenue ● Protect American farmers & industries ● Taxes that affect behavior: Tax incentives ● “ Sin tax”, tax deductions for charity, tax credits for energy conservations

8.3 Federal Spending Mandatory Spending: money that Congress is required by existing law to spend on certain programs or interest on national debt Discretionary Spending: spending about which lawmakers are free to make choices

Except for interest on the national debt, most of the mandatory spending items in the federal budget are for entitlement programs. ●Entitlements are social welfare programs that people are “entitled to” and benefit from if they meet certain eligibility requirements ●As the number of people who qualify rises, mandatory spending rises as well. As a result, managing the cost of entitlement programs has become a major concern. Current predictions indicate that the Social Security trust fund will run out in 2037

Social Security Medicare: serves about 47 million people (most 65 and older) Medicaid: benefits low-income families Other Mandatory programs: National school lunch program, retirment for federal workers, veterans pensions

8.4 State & Local Taxes & Spending

State Spending ● Education: States give some taxpayer money to public universities and some to local governments running public elementary, middle, & high schools ● Public Safety: State police ● Transportation ● Healthy & Welfare: Support some public hospitals & clinics, inspect water supplies, test for pollution ● Art & Recreation: sate parks, nature preserves, museums ● Administration: Salaries

Property tax is the most significant source of tax revenue for local governments.