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Chapter 12 - Taxation

 Taxes – money given to government  Help to run different institutions and services  Necessary to civilized groups; used for centuries  Four general rules to taxation (Adam Smith)  Equity – fairness in who pays  Certainty – should know what, when and how you pay  Convenience – should be an easy process for people  Efficiency – should be efficient in collection and use What are Taxes?

 Federal government allocates tax revenue as follows:  Entitlements  Interest Payments   National Defense  State and Local governments allocate tax revenues as follows:  Public services & public safety  Education  Social welfare Where do tax dollars go?

 Individual Income tax  Payroll Taxes  Corporate Income Tax  Excise Taxes Sources of Federal Revenue

 Revenue comes from 4 major areas  Fiscal year is from Oct 1 – Sept 30, when $ is used  Income, Payroll, Corporate Income and Excise Taxes  Federal gov’t doesn’t usually cover all expenses  Leads to deficit – current $17,234,132,052,323  2 types of spending – Mandatory & Discretionary  Mandatory – fixed spending by law  Entitlements – Social Security, Medicare, welfare, etc.  Discretionary – can change based on Congressional decisions  Largest amount spent on national defense. The rest is spent on: education, science, health care, foreign aid How Revenue is Spent

 Get most of money from taxes  Property tax, state income tax, etc.  Also use tax referenda – vote must pass  Cannot raise taxes unless people vote for it  Lotteries – used as a major income source  State spending usually focuses on education, and public safety: law enforcement & fire protection  Also focus on public issues – health clinics, road projects, assistance for low income earners, etc. State Gov’t Revenue and Spending

 Tax equity – asks are taxes equal?  Tough to answer due to differing definitions of equal  Should all pay, or only those who use it, etc.  Two principles to answer this  Ability-to-Pay Principle  Says those who make more, pay more – b/c they can  Benefits-Received Principle  Says only those who receive benefit should pay  Tax Incidence – who actually ends up paying tax  At times burden falls to others Who should Pay?

 Tax base – what is taxed (Income, property, etc.)  Tax rate – the percentage of tax paid  Types of Taxes – 3 kinds  Proportional Tax – same % for all levels (5% tax)  Also called a flat tax – very simple to use  Progressive Tax – increased % with increased income  Based on ability-to-pay principle – ex. Income taxes  Regressive Tax – increased % with decreased income  Proportional taxes can act as regressive – ex. Sales tax  People making less money pay higher % of yearly income Taxation Basics 101

Examples of Each Tax

Graphing the Differences Difference in spendable money not much Difference in spendable money is huge

 Income Tax – once a year, each April 15  Fill out a W-2; tells gov’t how much to withhold  Payroll Taxes – 2 major taxes paid  Social Security Tax – money taken for retirement  Medicare Tax – money to pay for medical needs  Also may pay a disability and unemployment tax  Property Tax – % paid on value of owned land  Sales Tax - % paid on purchased goods Types of Taxes You Will Pay

 Corporate Income Taxes – levied on businesses  Excise Taxes – used to regulate goods the gov’t wants to control  Cigarettes, alcohol, etc.  Luxury Taxes – used on major luxury items  User Fees and Tolls – tax the user  Estate or Inheritance Taxes (progressive) –  Estate tax taken by gov’t on money left after death  Inheritance tax may be levied by the state gov’t on top of the estate tax. Other Taxes