Paying For Government: Types of Taxes

Individual Income Taxes The largest source of income for the federal government is income taxes Taxes on the earnings of individuals and companies Allowed to deduct a certain amount for yourself or your dependents (people who rely on you, such as your children)- this is called an exemption You’re also allowed to deduct certain expenses (deductions) Charitable donations, most business expenses, or interest paid on home mortgages

Individual Income Taxes The amount of income left after all subtractions are made from total income is called taxable income The amount from which your income tax is paid Income taxes are progressive- takes a larger percentage from higher-income groups and a lower percentage from lower-income groups Based on ability to pay, or how much you make

How Do We Pay? U.S. taxpayers must fill out and mail their tax forms before April 15 each year You can also electronically file your taxes Income taxes are already taken out of paychecks Tax forms show you how much you owe in taxes for the previous year Whether or not you get a refund or owe more depends on your amount contributed in the previous year, plus any deductions or exemptions

State/Local Taxes & Corporate Income Taxes All but a few state governments collect individual income taxes These rates are much lower than the federal income tax Corporations pay taxes based on their profits Can also deduct certain amounts to lower their taxable income (buying new machinery or paying employee salaries) Corporations that make more money are taxed at a higher rate

Social Security Taxes Money collected from social security taxes provide income to retired and disabled Americans Taxes paid by workers are matched by the employers

Sales & Excise Taxes Sales taxes are taxes collected on most any product sold in a particular state A 5% sales tax means you would pay $1.05 for something listed as $1.00 Sales taxes are regressive- takes a larger percentage of income from lower-income groups than high- income groups If a wealthy and poor person buy the same smart TV, the taxes on the TV will take a higher percentage of the poor person’s money

Sales & Excise Taxes Excise taxes are sales taxes on “luxury” items Airplane tickets, gasoline, alcohol, luxury automobile, tobacco Sometimes intended to discourage the use of potentially harmful products like alcohol or tobacco

Property Taxes Property taxes are the chief source of income for local governments Taxes on the value of property owned by a person or business Collected on two types of property: Real Property- land, buildings, and other structures Personal Property- stocks, bonds, jewelry, cars, and boats Difficult to determine the value of personal property- most states will just tax real property If personal property is taxed, the rates are usually very low

Taxing Real Property Tax assessors visit a property and determine its value Local government adds up the assessed value of all property in a certain area and determines the total amount of money it needs from the property tax It divides this amount of money needed by the total assessed value of property in that area to come up with the property tax rate Property taxes in city limits are higher than in rural areas Much of the funding from public schools comes from local property taxes Critics say this system is unfair because wealthier communities have higher property values, and therefore contribute more money to their schools versus low income communities

Estate, Inheritance, & Gift Taxes If someone dies, that person’s heirs may have to pay taxes on property left behind Real estate, money, personal property Estate taxes are federal taxes on the wealth a person leaves behind Rates depend on the value of the estate left behind

Estate, Inheritance, & Gift Taxes Individuals may also be taxed on the share of the estate they inherit Different from an estate tax- inheritance taxes is based on the portion of the estate received by an individual Estate taxes are based on the value of the entire estate before it is divided up

Estate, Inheritance, & Gift Taxes Even gifts of money are subjected to being taxed Gift taxes must be paid by any person who gives a gift worth more than $10,000 Money, cars, houses

Import Taxes U.S. government collects taxes on products imported into the country from foreign countries Import taxes are called tariffs Tariffs are primarily used today to retaliate against foreign tariffs on U.S. goods or to protect American industries from foreign competition If we place a tariff on a certain product, foreign countries might not ship as much of that product to avoid paying us the tariff Foreign countries pay their workers less, so lower labor costs = manufacturing goods less expensively = these goods can be sold in the U.S. for far less money than American products = American industries losing business and laying off workers Tariffs can raise the price of these goods to protect against unfair competition

? What is the largest source of income for the federal government? What is a progressive tax? What is a regressive tax? Many public schools are funded by property taxes. What is the big criticism of this method of funding public schools? What is the difference between estate and inheritance taxes? How do tariffs protect American industries?