Chapter 16: Financing Government Section 1: T A X E S

 Objectives: Explain how and why the Constitution gives Congress the power to tax. Identify the sources of tax revenue of the U.S. Government and analyze their effect on the U.S. economy. Summarize why the Federal Government imposes taxes for nonrevenue purposes.

T A X E S  According to Benjamin Franklin’s oft- quoted comment, “in this world nothing is certain but death and taxes.”  We will consider the second of Franklin’s certainties.  More specifically, we will examined those taxes levied by the Federal Government.  A fiscal year in the US Government runs from September 01 st until October 31 st.

T A X E S  Our Federal Government expects to spend some $ 2 trillion.  It costs every person in this country $ 7,000+ to support the Federal Government.  This tells us that taxes are very important to the government and how much they rely on those taxes.

T A X E S The Power to Tax * The Constitution underscores the central importance of the power to tax by listing it first among all of the many powers granted to Congress. * The Constitution says…”To lay and collect Taxes, Duties, Imports, and Excises, to pay the Debts and provide for the common defense and general Welfare of the United States.

T A X E S * First and foremost, Congress exercises the power to tax in order to raise the money needed to operate the Federal Government. * The power to tax is NOT unlimited. * As with all powers, Congress must exercise the taxing power in accord with the Constitution. * Congress may not levy a tax on Churches.

T A X E S * Four expressed limits on the power to tax by Congress. 1) Taxes must be used for public purposes only. 2) Prohibiting the tax of exports. 3) Direct taxes must be equally apportioned. 4) All Duties, Imports, and Excises shall be uniform throughout the United States.

T A X E S * Custom duties can only be applied to Imports and not Exports. * Congress can prohibit the exports of products. * They do this under the expressed power to regulate foreign commerce. * This is done for national security. * Equal apportionment of taxes came about when the Southern States wanted the slaves to be counted in terms of population for representation in Congress.

T A X E S * This was from the 3/5s Compromise talks. * The Northern States insisted that if slaves were counted as population then the States should have to pay for them. * Direct taxes are borne by the person upon whom the tax is levied. * Congress first started to tax income of the citizens of the US back in 1861 to help finance the Civil War.

T A X E S * Finally, all taxes levied by the Federal Government must be set at the same rate in all parts of the country. Implied Limitation * The Federal Government cannot tax the States or the Local Governments. * The government cannot tax things like public education, health care, and etc. * It can tax state run liquor stores.

T A X E S Sources of Revenue * The Income Tax is the largest source of federal revenue today. * It became the major source of revenue back in * This tax is flexible because its rates can be adjusted to produce whatever amount of money Congress thinks is necessary. * The income tax is easily adapted to the principle of ability to pay.

T A X E S * It is also a progressive tax – the higher one’s income is, the higher the tax is. * This tax is levied on earnings of both individuals and corporations. * Deductions are allowed for each dependent (children). * Deductions are allowed for many things. * Such as medical care costs, State and local taxes paid (except Sales Tax), interest paid on home mortgages, charity contributions.

T A X E S * By April 15 th of each year, American citizens must have filed their tax return – a declaration of that income and of the exemptions and deductions he or she claims. * Internal Revenue Service (IRS) is the federal agency responsible with auditing and running the income tax game. * Lowest tax bracket is 10% * Highest tax bracket is 39.1%

T A X E S * Most people pay their taxes through with- holdings, a pay-as-you-go system. * Employers are required to withhold a certain amount from each employee’s paycheck. * You may have to pay additional money if there was not enough withheld throughout the year. * Self-Employed people pay every quarter what they expect to earn for the year.

T A X E S * Corporate Income Tax > Corporations pay taxes on their net income. > Nonprofit companies do not pay taxes. > Corp. tax is 15% first $50,000 of taxable income and up to 38% on $ million and more.

T A X E S * Social Insurance Taxes > The Federal Government collects huge sums of money to run three major social welfare programs 1) Old-Age, Survivors, and Disable – Social Security 2) Medicare – health care/elderly 3) Unemployment Compensation – jobless workers money

T A X E S * These taxes are called Payroll Taxes. * This amounts to 6.2% of the first $ 80,400 of a person’s salary. * Self-employee tax is 12.4% of first $ 80,400. * Medicare is 1.45% of their income is taxed * The Unemployment tax is a joint Federal/State program. * This is for workers who lost their job through no fault of their own.

T A X E S * Social Insurance taxes are regressive taxes – the taxes levied are a flat rate, without regard to a taxpayer’s income or ability to pay. * Excise Tax – is a tax laid on manufacture, sale, or consumption of goods and/or services. * Estate Tax – a levy imposed on the assets of one who has died. * Gift Tax – a tax on the making of a gift by a living person.

T A X E S * The first $ 5,000,000 is exempt from the federal tax. * The tax free gift is set at $ 10,000/year. *Custom Duties –is a tax laid on goods brought into the United States from abroad. Taxing for Nonrevenue Purposes * The power to tax is used for other things than to raise revenue.

T A X E S * This is done to regulate and discourage some activity in our country. * Examples are Tobacco and Alcohol. * This is placed on products that are harmful to people. * Many times these taxes do not discourage people from consuming these products.