SSEMA3 The student will explain how the government uses fiscal policy to promote price stability, full employment, and economic growth. a. Define fiscal policy. b. Explain the government’s taxing and spending decisions. SSEPF3 The student will explain how changes in monetary and fiscal policy can have an impact on an individual’s spending and saving choices. a. Give examples of who benefits and who loses from inflation. b. Define progressive, regressive, and proportional taxes. c. Explain how an increase in sales tax affects different income groups.

What is a tax? A required payment to a local, state, or national government. The main way that government collects money needed to operate.

What allows government to tax? Article I, Section 8, clause 1 Limits: must be for common defense and general welfare (not for individual interests), must be same in every state (federal taxes), can’t tax church services (freedom of religion), can’t tax exports (only imports). 16th Amendment allows tax on incomes

What is a tax base? The income, property, good or service that is subject to a tax. might be your earnings, value of a good or service being sold, value of property, value of a company’s profits. EXAMPLES: Individual income tax Sales tax Property tax Corporate income tax

3 tax structures Proportional: tax for which the percentage of income paid in taxes is the same for everyone. Ex: flat tax, Social Security (proportional up to $87,000, regressive after because lower income pays greater percentage of income.), Medicare (1.45% of income) Progressive: tax for which the percentage of income paid in taxes increases as income increases. Ex: income tax Regressive: tax for which the percentage of income paid in taxes decreases as income increases. Ex: sales tax (higher income families spend a lower percentage of their income on sales tax than lower income families. They pay more in actual dollars, but not in percentage of income.)

Incidence of a Tax Who bears the final burden of a tax? Taxes affect more than just the people who send in the checks to pay them. Ex: Government imposes a 50 cent/gallon tax on gasoline and collects the tax from gas stations. Seems like burden is on the gas station – they pay the government. In fact, when the cost of supplying the gas goes up, supply decreases (remember when costs rise, suppliers supply less, shift to the left). If demand is relatively inelastic (not much reaction to price increase to consumers) they bear a large share of the burden. If demand is more elastic, they will bear a smaller share of the burden.

What are the characteristics of a good tax? Simplicity – easy to understand. Economy - can be collected without spending too much time or money. Certainty - clear when it’s due, how much, and how it should be paid. Equity – fair – no one bears too much or too little of the tax burden.

Where do our tax dollars go? Federal Six major sources of revenue Individual income taxes – main source (45%) Corporate income taxes – 7% Social insurance taxes – 40% (FICA – Social Security and Medicare) Excise taxes – 4% (on sale or manufacture of a good) Estate and gift taxes - 1% Taxes on imports – 1%

Individual Income Taxes Main source of federal government income. Pay-as-you-earn – payments made throughout the year, gives government money throughout the year to meet expenses.

Process of Paying Income Taxes W-4 – new employees fill out the form determining the withholding from their pay. Employers withhold $$ from your check based on that W-4. $$ is forwarded to the government by the employer. (installment on what you will owe at the end of the year) End of the year, employer gives you a report that shows what they held out of the check all year (W-2). Employee completes a tax return (by April 15). Declare your income to the government. Taxable income = income minus exemptions and deductions. Determine whether you owe the government or whether the amount paid already through your payroll deductions was enough. May have a return due.

Federal Spending Mandatory v. Discretionary Required v. choice Which categories receive the most federal funds?

Activity Create a chart of some sort that shows federal, state and local revenues. Create a chart of some sort that shows federal, state and local spending. Compare and contrast Which categories of federal spending would you lower? Which categories would you raise? Explain why!!

Federal Revenues Spending Individual Income Tax 45% FICA 40% Corporate Income Taxes 7% Excise taxes 4% Miscellaneous 2% Estate and Gift Taxes 1% Customs duties and tariffs 1% Spending 22% Social Security 18% Defense 15% Income security 11% Medicare 10% Health 8% Net interest 4% Education 3% Veterans benefits 3% transportation 2% administration of justice 1% agriculture 1% energy, natural resources, environment 1% science, space, and technology

State Revenues Spending 26% Intergovernmental Revenue 22% Sales and excise taxes 18% Individual Income Taxes 18% Other (licensing fees, transfer tax on deeds, tax for using certain resources) 10% insurance trust revenue 3% interest earnings 3% corporate income tax 1% property taxes Spending 30% parks and recreation 19% public welfare 13% education 10% insurance trust expenditure 8% other 6% highways 3% governmental administration 3% interest on general debt 3% hospitals 3% corrections 2% health 1% natural resources

Local Revenue Spending 35% intergovernmental revenue 24% property taxes 19% other taxes and charges 8% utility revenue 6% sales and excise taxes 4% interest earnings 2% individual income taxes 2% insurance trust revenue Spending 38% education 13% other 10% utility 5% governmental administration 5% police protection 4% hospitals 4% interest on general debt 4% highways 3% parks and recreation 3% public welfare 2% housing and community development 2% insurance and trust expenditure 2% fire protection 2% sewerage