Taxes:

The Power to Tax: Recall, the Constitution give Congress the power to tax in order to raise the money needed to fund the Federal Government. 4 Constitutional limitations: (expressed) 1. only be levied for common defense and general welfare. 2. cannot tax exports (Commerce Compromise) 3. direct taxes must be evenly distributed among the States. 4. all indirect taxes must be levied at the same rate.

Implied Limitations: -The Federal Government cannot tax States or local governments in the exercise of their governmental functions. (ex:) providing education, building streets and highways.

Tax Base and Tax Structures: A tax base is the income, property, good, or service that is subject to a tax. (ex:) individual income tax, sales tax, property tax, corporate income tax. When policymakers create a new tax, they first decide what the base will be for the tax: income, sales, property…etc. Next, the government decides how to structure the tax on that particular base. (ex:) Proportional, Progressive, or Regressive

Proportional (flat) Tax: tax rate is the same for all income levels. Proportional or flat taxes are often seen as a fair way to levy taxes, because everyone pays the same rate. But is it really fair? (ex:) 10% proportional tax on incomes. - Cashier at Wal-Mart makes $20,000, taxes = $2,000 - Doctor makes $200,000, taxes = $20,000 Although individuals are taxed at the same rate, flat taxes can be considered regressive.

Regressive Tax: Percentage of income paid in taxes goes down as income increases. (ex:) Sale tax Ron’s Taxes on $50,000 Mary’s taxes on $150,000 Total sales taxes paid = $5,000 10% of income Around 3%

Progressive Tax: Higher the income, the higher percentage of income is paid. (ex:) Federal income tax

Current Federal Taxes: Income Taxes- authorized by the 16th Amendment, in 1913. -Largest source of federal revenue ( 2010 = $2.2 trillion) -Progressive (more you make, more you pay.) Corporate Income Tax- Each corporation must pay a tax on its net income. Nonprofit organizations, churches, and charitable foundations are not subject to corporate taxes Corporate tax rates: *15% on first $50,000 *35% on more than $10 million.

Social Insurance Taxes: The Federal Government collects huge sums of money to finance three major social welfare programs. 1.) Social Security 2.) Medicare- health insurance for the elderly. 3.) Unemployment Compensation Both Social Security and Medicare are imposed on nearly all employers and their employees. Both are payroll taxes, which means they are withheld from their paychecks.

Excise Taxes: An excise tax is tax laid on the manufacture, sale, or consumption of goods and/or services. (ex:) gasoline, oil, tires, tobacco, liquor, beer, firearms, telephone service. Excise taxes are often called -“hidden taxes”, because retailers figure them into their prices. -“luxury taxes”, because they are imposed on goods not considered to be necessities. - “Sin taxes”, because some are laid on wine, liquor, cigarettes, and gambling.

Customs Duties: Customs duties are taxes laid on goods brought into the United States from abroad. (also known as tariffs, import duties, or imposts. Congress decides which items will be dutied, and at what rate. Over 30,000 items have duties placed on them. (Bibles, coffee, and up to $800 of a tourist purchases are exempt.) Customs duties were the first major source of income for the Federal Government for more than a century. -now makes up 1% of total government revenue.

Taxing for Nonrevenue Purposes: The power to tax is often used for other purposes than raising revenue. Can also be used to discourage some activity that Congress thinks is harmful or dangerous to the public. (ex:) narcotics, firearms, excise tax on gas-guzzling cars. Court first upheld taxing for non-revenue purposes in Veazie Bank v. Fenno in 1869 1912, Congress used its taxing power to destroy a part of the domestic match industry.

Bell Work: 3/13/12 Explain the implied limitation on the power to tax.

Nontax Revenues and Borrowing: 16.2

Nontax Revenues: The government makes a large sum of money each year (upwards of 50 billion) from non-tax sources.   Examples of these sources  Interest on federal loans, canal tolls, passports, copyrights, patents, sale of public lands, federal court fines, national park fees, unused stamps, etc…. Seigniorage = The amount of profit that the U.S. mint makes in the production of coins (cost of metals and production compared to the value of the coin).  About $2 billion in most years.

BORROWING: Article 1 Section 8 of the Constitution states that Congress has the power to borrow money on the credit of the U.S. The government will usually borrow money for two reasons: 1. Meet the costs of a crisis (war, terrorism, etc….) 2. Finance a large-scale projects that cannot be met by current government income. In recent times, the government borrows money to overcome the budget deficit. ~ Deficit = The yearly shortfall between revenue and spending (basically spending more than you are making). ~ Surplus = The amount of money leftover at the end of the fiscal year.

Public Debt: The current public debt is nearing 15 trillion dollars. ~ Public Debt = The government’s outstanding indebtedness, all of the money borrowed and not yet repaid, plus the accrued interest. There is no constitutional limit on the amount of money that can be borrowed, so there is no limit on public debt. - recall, Congress did establish a debt ceiling, but raise it whenever they need to borrow more money.

In 2007, interest on the debt alone was $235 billion. -approximately one in every ten dollars the Federal Government now spends goes to service the debt. So where does the money go?

Bell Work: 3/14/12 List the three reasons why the government borrows money. 1. Meet the cost of a crisis 2. Large scale projects 3. Overcome budget deficits

Spending and the Budget: 16.3

Federal Spending: For more than half of our nation’s history, independence to the mid-1930s, the Government’s income and spending were both small. That changed dramatically during the Great Depression and then WWII. Today, the Federal Government take billions of dollars from one segment of the national economy, then pumps those billions back into other segments of the economy.

Federal Government Businesses Consumers Banks Taxes Taxes Gov’t Spending Gov’t Spending Loans Savings

Spending Priorities: What the Federal Government spends can be described in terms of discretionary (controllable), and mandatory (uncontrollable) spending Mandatory spending: refers to money that lawmakers are required to spend in certain areas. (entitlements) -Entitlements are social welfare programs that people are “entitled to” if they meet a certain criteria. (ex:) 1. social security 2. interest on the national debt 3. Medicare 4. Medicaid 5. benefits for federal employees.

These entitlements take up most (80%) the Federal Governments spending, and in the future, these cost will continue to increase. Mandatory (uncontrollable) spending takes up the majority of the governments yearly budget.

Discretionary spending: refers to government spending in which choices can be made in regard to the amount of money spent. Discretionary spending is divided among a wide variety of other categories: 1. defense 6. disaster aid 2. education 7. foreign aid 3. scientific research 8.farm subsidies 4. law enforcement 9. transportation 5. national parks 10. environmental cleanup Also pays salaries of federal workers.

The Federal Budget: The Constitution gives Congress the “power of the purse”. However, it is the President who initiates the process by proposing a budget. (Occurs shortly after Congress begins their yearly sessions. In essence, the budget making process is a joint- effort by the President and both houses.

The President and the Budget: The process of building a budget is very lengthy. -begins 18 months before the start of the fiscal year. Budget Process: Each federal agency prepares detailed estimates of its spending needs for the upcoming year. Those reports get sent to the President’s budget making agency, the Office of Management and Budget. (OMB) OMB reviews all of the budget proposals, and holds hearings. (usually lowers spending plans) OMB put all of the information into a document, then the President sends it to Congress.

Congress and the Budget: Once Congress receives the President’s Budget: Both the House and the Senate form a standing committee to review the budget proposal. Those committees then study and dissect the budget proposal with the help of the Congressional Budget Office. (CBO) The information the CBO supplies is independent of the information provided by the OMB. President’s budget is also sent to the House and Senate Appropriation subcommittees, which hold hearings, and take testimony from a wide range of groups.

Lobbyists for most of the interest groups are actively involved in those hearings. -They testify, bring grassroots pressure, and otherwise work to promote the organization they represent. (ex:) National Federation of Teachers (NFT), UAW Campaign contributions often find their way to members of those subcommittees. (crooks!)

Passing the Budget: The budget must be finalized by October 1st, the beginning of the fiscal year. -This usually never happens. -Congress must then pass emergency spending legislation, continuing resolution, to avoid a government shutdown. (ex:) Government shutdown of 1995 When the continuing resolution is signed by the President, the government will continue to fund federal agencies based on last years budget.

Bell Work: 3/15/12 Explain the difference between mandatory and discretionary Spending.

State and Local Taxes and Spending: 16.4

State Budgets: The federal government has one budget that covers all kinds of spending. States have two budgets: operating budgets and capital budgets. Operating budget: pays for day-to-day expenses. (ex:) State employees salaries, supplies, and maintenance of state facilities. Capital Budget: pays for major capital, or investment spending. (ex:) Building a new building or bridge.

Balancing State Budgets: In most states, the governor prepares the budget with the help of a budget agency. The legislature then discusses and eventually approves the budget. Unlike the federal government, states have laws the require a balanced budget. -These laws apply to the operating budget only. - Laws vary in stringency from state to state. (ex:) Some require a budget being proposed to be balanced, while others require policy makers to maintain a balanced budget.

Where are State Taxes Spent?: Spending policies differ from state to state. In general, states spend the largest amount of their revenue on the following three categories: Education Highways Public welfare Other expenditures include: - public safety (police, prisons) - Arts and recreation (state parks) - Administration (salaries, legislature, and the courts)

State Tax Revenues: Sales taxes: The main source of revenue for state governments. -all but a few of the 50 states collect sales taxes. -In every state, some things are not taxed. (food) State income taxes: Income taxes are another large contributor to many states’ budgets. - People pay these income taxes on top of federal income taxes. - either proportional or progressive. Corporate income taxes: Taxes place on the profits of a corporation. (either proportional or progressive)

Business taxes: besides corporate income tax, businesses pay a variety of other state taxes. -licensing fees -transfer tax Other State Taxes: - inheritance tax -real property (land, buildings, or real estate) -personal property (bank accounts)

Local Government Spending and Revenue: Your local government plays a part in many aspects of everyday life. - schools, build roads, libraries, hospitals and jails. All units of local governments are created by the state government. The State gives them their powers and authority. - Today there are more than 87,000 local government units in the U.S. - Together, they collect nearly $300 billion in tax revenue

Jobs of Government: Local governments carry major responsibilities in these areas: - Public school system Law enforcement Fire protection Parks/recreation facilities Public health (restaurant inspectors) Elections Record keeping (birth/death certificates, wills) Social services (food stamps, welfare)

Local Revenue: Property taxes: the main source of tax revenue levied by local governments -paid by people who own real estate , buildings, or land. -An official called a tax assessor determines the value of the property. - in most states, property tax is the main source of funding for schools. Other local taxes: -sale tax, excise taxes, income taxes, -some large cities collect income taxes as payroll taxes.

16.4 Questions (add to your page) 1. Describe the difference a state’s operating budget and its capital budget. 2. What is a balanced budget? 3.What are the main sources of state revenue?

Bell Work: 3-20-12 The Federal Government collects large sums of money that go toward 3 social welfare programs, what are those 3 programs? 1. 2. 3.