Unit 7 Macroeconomics: Taxes, Fiscal, and Monetary Policies Chapters 14.2 Economics Mr. Biggs

During fiscal year 2010, the federal government collected approximately $2.16 trillion in tax revenue. Individual Income Taxes Primary receipt categories include: Individual income taxes (42%) Social Security/Social Insurance or Medicare taxes (40%) Corporate taxes (9%) Federal Taxes

“Pay-As-You-Earn” Taxation People pay most of their income taxes as they earn income throughout the year. It is more convenient for both the government and the taxpayer because the government has regular expenses and taxpayers might have difficulty paying their taxes in one lump sum by midnight on April 15 th. Tax Withholding Withholding - Employers withhold tax payments out of an employee’s paycheck before he or she receives their pay. The employer then forwards the money to the federal government as an “installment payment”.

Filing a tax return By the end of January, employees receive a report (W-2) showing how much income tax has been withheld and then they use this form to fill out a tax return. Tax return - A form used to file income taxes. On a tax return, employees declare their income to the government and figure out their taxable income. Taxable income - A person’s gross income minus exceptions and deductions. Personal exceptions - Set amounts that you subtract from your gross income for yourself, spouse, and dependents. Deductions - Variable amounts that you can subtract, or deduct, from your gross income. For example, mortgage interest and donations to charity. If your withholdings were greater than your tax bill, you will get money back as a tax return. If your withholdings were less then your tax bill, you must send the government the amount you owe.

Tax Brackets The federal income tax is progressive. The tax rate rises with the amount of taxable income. Corporate Income Taxes Corporate taxes make up about 9% of federal revenues and are based on a percentage of corporate income. Corporate taxes are difficult to determine because corporations have many complicated deductions.

Social Security, Medicare, and Employment Taxes Employees and employers make FICA payments which comprise 40% of US Federal tax receipts. FICA - Taxes that fund Social Security and Medicare. Social Security Taxes Social Security - Established in 1935 to fund Old-Age, Survivors, and Disability Insurance (OASDI). Medicare Taxes Medicare - A national health insurance program for people over 65 with certain disabilities.

Unemployment Taxes Unemployment tax is paid for by employers and is used to pay laid off workers for a fixed amount of time. Other Types of Taxes Other types of taxes include excise, estate, gift, and import taxes. Excise Taxes Excise tax, or sin tax, is a general revenue tax on the sale or manufacture of a good. For example, gas, cigarettes, and liquor. Estate Taxes Estate tax or death tax - A tax on the estate, or total value of the money and property, of a person who has died. Estates worth more than $5 million are taxed 35%.

Gift Taxes Gift tax - A tax on money or property that one living person gives to another. A person can give up to $13,000 tax-free each year to several different people. Import Taxes Tariff - A tax on imported goods. Tariffs raise the price of foreign items and help keep the price of American products competitive, like steel. Taxes that Affect Behavior Tax incentive - The use of a tax to encourage or discourage certain behaviors. For example, gas guzzler tax on cars with low gas mileage or tax deductions to encourage energy conservation.

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