Chapter 14 Taxes

Definition of taxes A Tax is a required payment to a local, state, or national government Income received from taxes by a government is called revenue (ex. – The Internal Revenue Service collect income taxes for the federal government.)

Taxes in the U.S. Constitution The federal government’s power to tax is expressed in Article 1, Section 8 of the U.S. Constitution. The Federal Income Tax was created with passage of the 16 th Amendment in State and local governments are allowed to collect taxes (sales, income, property, etc.) via the 10 th Amendment (often called the Reserve Clause).

Tax Structures There are three types of tax structures: Proportional: These taxes represent a constant percentage of income as income increases (ex. – a 20% “flat” tax on income). Progressive: These taxes collect a larger percentage of income as income increases (ex. – 10% of a single person’s income is collected as tax up to $17,400 earned, 15% is collected for income between $17,400 and $70,700.). Regressive: These taxes collect a smaller percentage of income as income increases (ex. – a 7.75% sales tax in Orange County on a $1,000 purchase represents a total tax of $ That is 1% of income for someone who makes $7,750 a year, but only.1% of income for someone who makes $77,500 a year).

Characteristics of a “good” tax Simplicity: The tax should be easily understood. Efficiency: Government officials should be able to collect taxes without spending too much time or effort. Certainty: It should be clear to the taxpayer when the tax is due, how it should be paid, and how much is due. Equity: The tax system should be fair, so that no one shares too little or too much of the tax burden.

Amount of federal taxes collected – Fiscal Year 2010 (The U.S. Government fiscal year runs from October 1 to September 30) Corporate income are 35% on profits earned. Social Security and Social Insurance (Medicare, Medicaid) are 6.2% of total income up to $106,000 (Social Security), and 1.45% of all incomes (Medicare). These taxes are to be used for Social Security and Medicare only. Excise taxes are user fees paid only by those who use the products (Alcohol, Tobacco, Gasoline, etc.) and represent a set percentage.