Government Revenue and Spending How Taxes Work, Federal Taxes & Federal Government Spending, State and Local Taxes & Spending

How Taxes Work Activity Develop a list of 10 goods or services provided only by the government. Answer the following questions with complete sentences: A) How would life be different if government had no power to tax? B) In your opinion, are public goods and services 100% necessary? Defend your answer.

The U.S. government was given the authority to collect income taxes with the passage of the 16th Amendment

Government Intervention If the unemployment rate rose and GDP is declining then the government would increase spending and lower taxes. If the unemployment rate lowered and GDP was rising then the government could afford to lower spending and increase taxes.

Government Revenue Governments provide public goods such as, street lighting, highways, law enforcement, and the court system. They also provide aid for people in need. Tax is a mandatory payment to a government. Revenue is government income from taxes and nontax sources (inside borrowing and lotteries).

**Criteria for Taxation Tax systems attempt to meet 3 criteria: Equity (Fairness)- People in similar situations pay similar amount of taxes. Ex: gas Simplicity- Refers to how easy it is for tax payers to understand and how easy it is for the government to collect. Ex: Sales tax Efficiency- How well the tax raises revenue for the government with least cost to in terms of administration. Ex: individual income tax

Tax Base Tax bases are forms of wealth that are subject to taxes. 4 most common tax bases are: Individual income tax- tax based on an individual’s income from all sources: wages, interest (savings), dividends (stocks), and tips. (Btw donating to charities can be considered a tax deduction) Corporate income tax Sales tax- tax based on the value of designated goods or services at the time of sale. (state and local) Property tax- Money paid based on the value of their buildings and land.

**Tax Structures 3 Basic Tax Structures: Proportional tax (Flat tax)- takes the same percentage of income from all taxpayers. Progressive tax- places a higher percentage rate of taxation on high income people. Regressive tax- takes a larger percentage of income from low-income people. Ex: Sales tax

*Principles of Taxation Economists use certain principles and criteria to evaluate whether or not taxes should be paid and who should pay them. Benefits-Received Principle- States that people who benefit directly from public goods should pay for them in proportion to the amount of benefits received. Ex: Road construction & taxes on gas Ability-to-Pay Principle- States that people should be taxed on their ability to pay, no matter the level of benefits they receive. Should everyone pay the same % of income?

*Impact of Taxes on the Economy Resource Allocation- if a supplier isn’t able to pass increased costs along to the consumer in the form of higher prices, they may choose to shift production to another good. Productivity and Growth- people tend to save less when taxes on source of income are high. Underground Economies are a result of high tax Economic Behavior- Tax incentives is the use of taxes to encourage or discourage certain economic behaviors. Ex: Rebates & Sin Tax

**Federal Tax Revenue Individual income tax, social insurance taxes, corporate income taxes, estate taxes, gift taxes, excise taxes, and customs taxes make up about $2.35 trillion that the government receives from taxes.

a) If total revenue for 2007 is estimated to be about 2 a) If total revenue for 2007 is estimated to be about 2.35 trillion, about how much revenue will come from individual income taxes? b) What if it is combined with social insurance taxes?

*Paying Your Taxes Payroll tax- a tax that is taken from a worker’s paycheck. The tax is deducted as withholding. Federal income tax is a progressive tax based on ability-to-pay principle. Each year, taxpayers must complete a tax return. This is a form used to report income and taxes owed to various levels of government. This shows how much income has been earned, the exemptions being claimed, and how much tax has been paid through withholding.

Tax Rates Chart Single-$24,000 a year Single- $14,500 a year

Single-$53,000 a year Single-$172,000 a year

Federal Government Funding The Federal Government funds are divided into two categories: Mandatory spending, required by law. Social security is the largest mandatory expenditure. Discretionary spending, has to be authorized each year. National defense is the largest discretionary expenditure.

Mandatory Spending Entitlements- social welfare programs with specific requirements. FICA= Federal Insurance Contributions Act This contains Social Security, Medicare, and Unemployment Taxes. Social Security is a federal program to aid older citizens who have retired, children who have lost a parent(s), and people with disabilities. Unemployment Taxes provides benefits for a certain period of time to employees who lose their jobs through no fault of their own.

a federal revenue source and an expenditure. Social Security Tax IS BOTH- a federal revenue source and an expenditure.

Mandatory Spending Medicare is a national health insurance program for citizens over 65. Medicaid is a joint federal-state medical insurance program for low-income people. Food Stamp program provides funds for about 26 million low-income people to purchase food. Veterans’ benefits include healthcare coverage and disability payments for service- related illness or injury.

Discretionary Spending Natural resources, conservation programs, national parks Science, space, technology and other research programs. Justice administration, enforcement agencies, and federal court system Education, college tuition Interstate highway system and transportation programs, such as Amtrak

Assume the federal budget was 2 Assume the federal budget was 2.77 trillion, about how much money is budgeted for Education? Social Security?

*Federal Budget Fiscal year is a 12 month period for which an organization plans its expenditures. Appropriations are specific amounts of money set aside for specific purposes. Congress votes on final budget and sends it to the president for approval.

*Federal Spending Federal funds are spent through different ways… A grant-in-aid is a transfer payment from the federal government to the state/local governments. Highway construction, Medicaid funding, certain school services Transfer payments occur when money is distributed to individuals who provide no good or service in return. Medicare, Social Security retirement or disability Direct spending is when the government buys goods and services that it needs to operate. Military equipment, office supplies, paying salaries of government employees

Crash Course Taxes https://www.youtube.com/watch?v=7Qtr_vA 3Prw

What % of the Federal Budget is Medicare? Final Question What % of the Federal Budget is Medicare?

List an example of a regressive tax. Final Question List an example of a regressive tax.

Who is Keynesian Economics named after? Final Question Who is Keynesian Economics named after?