Taxes and Government Spending

Power To Tax Granted Congress by the Constitution A tax is a charge levied by the government on persons or property to meet public needs. Limitations on taxes: may only tax for public purposes may not tax exports tax must be the same in every state Two types: Direct Tax: paid directly to the government (Income tax) Indirect Tax: paid by one person, then passed on to another (Sin Tax)

How Taxes are Structured Tax base: the income, property, good, or service that is subject to a tax Income tax: tax based on an individuals earnings - payroll deducted or paid quarterly if you are self-employed 2014 Official Tax Brackets Tax Bracket Single Married Filing Jointly Head of Household 10% Bracket $0 – $9,075 $0 – $18,150 $0 – $12,950 15% Bracket $9,076 – $36,900 $18,151 – $73,800 $12,951 – $49,400 25% Bracket $36,901 – $89,350 $73,801 – $148,850 $49,401 – $127,550 28% Bracket $89,351 – $186,350 $148,851 – $226,850 $127,551 – $206,600 33% Bracket $186,235 – $405,100 $226,851 – $405,100 $206,601 – $405,100 35% Bracket $405,101 – $406,750 $405,101 – $457,600 $405,101 – $432,200 39.6% Bracket $406,751+ $457,601+ $432,201+

How Taxes are Structured Payroll tax: taxes that employers are required to collect from employees - Social Security - Unemployment Sales tax: taxes placed on the sale or lease of goods and services Property tax: tax on property owned - may be taxed by Federal, State, and local Corporate Income Tax: tax on the income or capital of some types of legal entities

Tax Structures Proportional or Flat Tax: percentage of income paid in taxes remains the same for all income levels Progressive Tax: percentage of income paid in taxes increases as income increases (Ex. Federal Income tax) Regressive Taxes: percentage of income paid in taxes decreases as income increases (Ex. Sales tax) Other taxes: Excise tax: tax on the production and selling of certain goods (gas, alcohol) Gift tax: tax paid on gifts or prize winnings Estate taxes: tax on real estate or personal property of someone who has died (also known as Death or Inheritance Tax)

Characteristics of a “Good Tax” Simple and easy to understand Efficiently administered Certainty Equitable

Define/Identify the following terms: p. 371 Mandatory spending Social Security Federal grant-in-aid Discretionary spending Medicare block grants Entitlements Medicaid Answer the following questions: What does it mean for an entitlement program to be “means-tested”? Identify an entitlement program that is “means-tested” and one that is not. Why are entitlement programs largely unchanging? Who does the Federal Government share the cost of Medicaid with? List two additional entitlement programs funded by the Federal Government. What is the largest discretionary spending program funded by the Federal Government? List three examples of discretionary spending. How must states’ use federal funds?

Federal Spending Is there such thing as “government money”? Answer: No. There is “tax payer money”. - government is entrusted w/spending it wisely Two types of government spending. Mandatory Discretionary

Mandatory Spending Spending on certain programs that is mandated, or required by existing law - Social Security - Medicare and Medicaid - food stamps - Interest on the National debt Mandatory spending continues to increase as the number of entitlements grow and the amount provided increases. Are certain types of Mandatory spending sustainable?

Mandatory Spending and SSI Social Security and the possibility of bankruptcy. Is it possible? How does Social Security work? Workers pay in to Social Security until they retire Payouts to beneficiaries are based upon a greater number of people paying more into the system than is being paid out As the “Baby Boomer Generation” retires, the ratio of workers to beneficiaries is shrinking 1950, ratio was 16.5 to 1, 1975, 3.2 to 1 Ratio has remained constant since Estimates say that by 2035, the ratio could be 2 to 1

SSI: How is the $ being used? Social Security Trust Fund: holds the surplus SSI benefits - SSI has run a surplus during most of its time One of the BIG problems!!!!!!!!!!!!!!!!!!!!!! - our government borrowed money from the Trust, and replaced it with government bonds - government wrote itself IOU’s for $2.4 trillion - at some point, the bonds will be cashed in and have to be paid back by the tax payer or via additional borrowing

Proposed Solutions Raise the amount deducted Reduce benefits Raise the age at which benefits begin (currently 62) Some combination of the above Privatizing SSI

Pros and Cons for Privatization Likely have more $ due to stock market trends Direct Control over the investments and the accounts could be inherited Cons: Ugly transition (fewer paying in to the current beneficiaries) Investments are not guaranteed Would not allow for redistribution

Discretionary Spending Government planners can make decisions on where to spend the remainder of our budget. Categories such as: - defense (largest expenditure) - education - transportation - scientific research - housing - foreign aid - national parks and land management

Government Subsidies A subsidy is a government payment that supports a business or market. Why do we have subsidies? Control prices Control supply Jobs But what happens when government subsidies are out of control?

State Taxes Alabama has two budgets: Operating Capital Operating Budget covers day-to-day expenses. - employee salaries - facilities maintenance - supplies Capital Budget pays for major capital or investment spending. - new building/highway projects

State and Local Taxes Balanced Budgets: revenues must equal spending Alabama State Law requires the governor to submit and the legislature to pass a balanced budget. Simple majority is needed to pass the budget. Alabama is one of 44 states in which the governor has line item veto authority.