1. Government in the Economy

2. Reasons to Allow Government Intervention:
Establish and enforce private property rights and the law
Ensure market competition
Protect consumers
Stabilize the economy
Promote economic security: i.e. social security, food stamps, unemployment
Provide public goods/services – national defense

3. How Do We Pay For These Interventions?
Taxes: Required payment to a local, state, or national government
Primary way governments raise money they need to operate
Called revenue: Income received by a government from taxes and non-tax sources
“Taxes are the price of civilization.”
Oliver Wendell Holmes

4. Why the Government Collects Taxes
Pay for the cost of government
Protect selected industries (tariffs)
Discourage activities (“sin taxes”)
Encourage certain activities (tax breaks)
Tax policy as economic stabilizer

5. Federal Taxes: what taxes provide a majority of revenue?
51% - Income and Corporate Taxes
40% - Payroll Taxes (FICA, Medicare)
6% - Excise Taxes: specific items (perfume, liquor)
3% - Misc: Estate and gift taxes, customs duties
Total revenues 2012 – $2.5 Trillion

6. Idaho State Taxes: Total Revenue
33% Property Taxes (Homes & Vehicles)
28% Sales Tax (Consumption Tax)
28% Individual Income Taxes
6% Fuel Tax
5% Various taxes that you may or may not pay throughout your lifetime!
There are also Local Taxes/Municipal taxes that cover property, sales, water, sewer, school, etc.

7. Two Principles Taxes Are Based On
Benefits Received
Tax people in proportion to the benefits they receive from a government service
Toll bridge
Fees for public golf courses
Campgrounds
“Sin Taxes” (alcohol, gambling, tobacco…)
Gas taxes towards road construction (hypothetically)
Those that use it should pay for it, those that don’t use, don’t pay
San Francisco Golden Gate Bridge - Toll

8. Principles Taxes Are Based On
Ability to Pay
Promotes the idea that the rich can afford to pay taxes the poor cannot afford to pay
The wealthier you are, the greater your ability to pay the tax
Federal and State Income Taxes were supposed to be designed this way.

9. Tax Structures Proportional – “Flat Tax”
A tax for which the percentage of income paid in taxes remains the same for all income levels
$350,000 X 10% = $35,000 tax
$50,000 X 10% = $5,000 tax
Ex: Sales Tax

10. Tax Structures Progressive tax
A tax for which the percentage of income paid increases as income increases
People with very small income might not pay any tax at all
$100,000 X 35% = $35,000 tax
$25,000 X 20% = $5,000 tax
$5,000 = 0% tax
Ex: Federal Income Tax

11. Tax Structures Regressive Tax
A tax that takes a larger percentage from low-income people than from high-income people.
A regressive tax is generally a tax that is applied uniformly (proportional). This means that it hits lower-income individuals harder.
Sales tax – a low income earner pays the same amount as a high income earner on a refrigerator, but pays a higher percentage of their income.
FICA/Medicare – only pay up to $110,100 (2012) of your income, so millionaires pay the same as a $400,000 wage earner. Up to $113,700 (2013)
Income Tax – 25% of income earners pay 85% of the income taxes

12. Who Pays the Most Tax in the United States?
Income group
Income split point
Group’s share of total U.S. income
Group’s share of federal income taxes
Top 1%
Above $364,657
16.12%
33.71%
Top 5%
Above $145,283
30.55%
53.80%
Top 10%
Above $103,912
41.77%
65.73%
Top 25%
Above $62,068
64.37%
83.90%
Top 50%
Above $30,851
85.77%
96.50%
Bottom 50%
Below $30,851
14.23%
3.5%

13. Payroll Taxes
“Pay-as-you-earn” system throughout the year, mostly by employers withholding
Withholding taxes
FICA/Medicare – 7.65%
Federal Income Taxes
State Income Taxes

14. Types of Government Spending
Mandatory – money lawmakers are required by law to spend on certain programs or to use for interest payments on the national debt
Most mandatory is for entitlement programs: benefits paid to people who meet certain requirements or income
Example: Social Security, Medicare, VA benefits
Discretionary – government planners can choose to spend (1/4 of budget)
Example: education, defense spending, foreign aid