1. Chapter 14: Taxes and Government Spending Section 1

2. Introduction What are the features of a tax system? Fairness
Simplicity
Efficiency
Certainty
Balance between tax revenue and tax rates

3. Government’s Authority to Tax
We authorize the federal government, through the Constitution and our elected representatives in Congress, to raise money in the form of taxes.
Taxation is the primary way that the government collects money. Taxes give the government the money it needs to operate.
The first power granted to Congress is the power to tax, which is the basis of all federal laws.

4. Limits on the Government
There are also limits on the government’s power to tax.
The purpose of a tax must be “for the common defense and general welfare.” A tax cannot bring in money that goes to individual interests.
Federal taxes must be the same in every state.
The government cannot tax exports, only imports.

5. Progressive Taxes
Economists describe taxes based on their structure and according to the tax base.
A progressive tax is a tax for which the percentage of income paid in taxes increases as income increases.

6. Other Taxes
A proportional tax is a tax for which the percentage of income paid in taxes remains the same at all income levels.
A regressive tax is a tax for which the percentage of income paid in taxes decreases as income increases.
A sales tax is regressive because higher income households spend a lower proportion of their incomes on taxable goods and services.
Checkpoint Answer: Progressive

7. Tax Bases Different taxes have different tax bases.
The individuals income tax is based on a person’s earnings.
The corporate income tax is based on a company’s profits.
The property tax is based on real estate and other property.
The sales tax is based on goods and services that are sold.

8. Elasticities of Demand and Tax Effects
Taxes affect more than just the people who pay them.
Producers often pass on a portion of tax to consumers.
Generally, the more inelastic the demand, the more easily the seller can shift the tax to consumers.
Answer: Elastic

10. Characteristics of a Good Tax
Simplicity—tax law should be easy to understand
Efficiency—the tax should be able to be collected without spending too much time or money
Certainty—it should be clear when the tax is due, how much is due, and how to pay the tax
Equity—the tax system should ensure that no one bears too much or too little of the tax
Checkpoint Answer: Simplicity, efficiency, certainty, and equity.

11. Determining Fairness
Economists have proposed two different ideas about how to measure the fairness of a tax.
The benefits-received principle holds that a person should pay taxes based on the level of benefits he or she expects to receive from the government.
The gasoline tax is an example of the benefits- received principle.

12. Determining Fairness, cont.
The ability-to-pay principle holds that people should pay taxes according to their ability to pay.
Good taxes generate enough, but not too much, revenue. Citizens needs are met, but not to such an extensive degree that the tax discourages production.

13. Chapter 14: Taxes and Government Spending Section 2

14. Introduction What taxes does the federal government collect?
Individual income taxes
Corporate income taxes
Social Security, Medicare, and unemployment taxes
Excise taxes and tariffs
Estate and gift taxes

15. Individual Income Taxes
The government’s main source of revenue comes from the federal tax on individual’s taxable income.
Answer: 44%

16. “Pay-As-You-Earn” Taxation
The amount of federal income tax a person owes is determined on an annual basis.
To lessen the burden that one large yearly tax would place on an individual and to make it possible for the government to meet its regular expenses, federal income tax is collected in a “pay-as-you-earn” system.
This means that individuals usually pay most of their income tax throughout the year as they earn income.

17. Tax Brackets
The federal income tax is a progressive tax, which rises with the amount of taxable income.
Your range of income puts you in a specific tax bracket.
If you are single, at what rate would you pay taxes on income over $29,500 and less than $71,950?
Answer: $4,220 plus 25%

18. Withholdings and Tax Returns
Employers help collect taxes by withholding money from your paycheck based on an estimate of how much you will owe in federal income tax for that year.
After the calendar year ends, employers give their employees a report of how much income tax has already been paid.
Employees then fill out a tax return to send to the federal government.

19. Tax Returns, cont.
On your tax return, you figure out how much of your income is taxable.
Taxable income is a person’s total income minus exemptions and deductions.
Tax returns are due to the Internal Revenue Service by April 15.

20. W-2’s

21. Corporate Income Taxes
Like individual income taxes, corporate income taxes are progressive.
Determining corporate income taxes can be more difficult than determining an individual’s because businesses can take many deductions.
Companies often deduct the cost of employee’s health insurance as well as many other costs of doing business.
Checkpoint Answer: because businesses can take many deductions.

22. Social Security and Medicare
Employees also withhold money to help fund Social Security, Medicare, and unemployment insurance under the Federal Insurance Coalition Act (FICA).
Most of the FICA taxes you pay go to Social Security benefits for retired people, surviving members of wage earners, and disabled people.
The Medicare tax helps pay for health insurance for people over 65.

23. Unemployment
The unemployment tax pays for “unemployment compensation” that people can receive when they are laid off.

24. Other Types of Taxes
Excise taxes—a general revenue tax on the sale or manufacture of a good or service such as gasoline, cigarettes, and other items
Estate taxes—a tax on the total value of the money and property of a person who has died
As of 2008, if the total value of an estate is $2 million or less, there is no federal estate tax.

25. Other Types of Taxes, cont.
Gift taxes—a tax on the money or property that one living person gives to another
The goal of the gift tax is to stop people from avoiding the estate tax by giving away property before they died.
Import taxes—Tariffs, or import taxes, are taxes placed on imported goods.

26. Taxes That Affect Behavior
The government sometimes uses taxes to encourage good behavior, which is known as a tax incentive.
Tax credits are often used as an incentive.
For example, people who use solar power receive an income tax credit.

27. Chapter 14: Taxes and Government Spending Section 3

28. Introduction How does the federal government spend its income?
Federal spending is divided up into mandatory and discretionary spending.
Mandatory spending pays for Social Security, Medicare, Medicaid, and other entitlements.
Discretionary spending pays for everything else, including defense, education, law enforcement, environmental cleanup, and disaster aid.

29. Federal Spending There are two types of government spending.
Mandatory spending is money that Congress is required by existing law to spend on certain programs or to use for interest payments on the national debt.
Discretionary spending is spending about which lawmakers are free to make choices.

30. Federal Spending, cont.
The federal government spends the funds it collects from taxes and other other sources on a variety of programs.
Answer: Medicare and other retirement, Social Security, and Defense (Other is equal to Defense at 19%).

31. Entitlement Programs
Most of the mandatory spending items are for entitlement programs, which fund social welfare programs.
The federal government guarantees assistance for all people who quality for such programs.
Entitlements are a largely unchanging part of government spending.
Congress can only change the eligibility requirements or reduce benefits if there is a change in the law.

32. Social Security Social Security is a huge portion of federal spending.
About 50 million Americans receive monthly benefits from the Social Security Administration.
The future of Social Security is uncertain.
As the millions of baby boomers—people born after World War II— start to retire, the ratio of existing workers, who pay for Social Security, to retirees will fall.

33. Medicare and Medicaid
About 42 million people receive Medicare benefits.
It pays for hospital care and for the costs of physicians and medical services.
Medicare costs have been rising as a result of expensive technology and people living longer. It faces the same problem as Social Security.
Medicaid benefits help low- income families pay for their medical expenses
The federal government shares the cost of Medicaid with state governments.

34. Other Mandatory Programs
Other means-tested entitlements benefit people and families whose incomes fall below a certain level. These entitlements include:
Food stamps and child nutrition programs
Retirement benefits and insurance for federal workers
Veterans’ pensions
Unemployment insurance
In recent years, there has been a debate over governmentally funded universal healthcare.

35. Discretionary Spending
Defense spending accounts for about half of the government’s discretionary spending.
The Department of Defense uses this money to pay salaries of enlisted men and women as well as its civilian employees.
This money also buys weapons, missiles, ships, tanks, airplanes, and equipment.
Checkpoint Answer: About half

36. Discretionary Spending, cont.
The remaining discretionary funds goes to pay for the following:
Education and training
Scientific research
Student loans
Law enforcement
Environmental cleanup
Disaster relief

37. Federal Aid
Federal taxes are sometimes used to help state and local governments.
State and federal governments share the cost of Medicaid, unemployment insurance, education, lower-income housing, highway construction, and dozens of other programs.
States also rely on federal aid for disaster relief.

38. Chapter 14: Taxes and Government Spending Section 4

39. Introduction How do local governments manage their money?
Local governments manage their money in accordance with priorities set by elected local government officials.
Local governments create budgets and collect taxes just like the federal government.

40. State Budgets Governments plan their spending by creating a budget.
The federal government has one budget while state governments have two budgets.
An operating budget is a budget for day-to-day spending needs.
A capital budget is spending on major investments.
Unlike the federal government, 49 states require balanced budgets—budgets in which revenues are equal to spending.
Checkpoint Answer: capital budget

41. Where are State Taxes Spent?
Education
Every state spends taxpayer money to support at least one public state university.
They also provide financial help to local governments for public elementary and secondary schools.
Public Safety
State police enforce traffic laws and help motorists in an emergency.
State governments build and run corrections systems.
Public Welfare
State funds support hospitals and clinics and unemployment benefits.

42. Where are State Taxes Spent?
Highway and Transportation
State crews resurface roads and repair bridges.
States pay some of the cost of facilities like waterways and airports.
Arts and Recreation
States fund parks, nature reserves, museums, and art and music programs.
Administration
State governments spend money to keep the government running.
Revenues pay for state workers’ salaries.

43. State Revenue and Spending, 2004-2005

44. State Tax Revenue States receive most of their revenue through taxes.
Sales tax on goods and services is the main source of state revenue.
Some goods, like food and clothing, are tax exempt in certain states.
Even states without a sales tax impose excise taxes that apply to specific products and activities.
Many states also collect an individual income tax, which is paid in addition to the federal income tax.
Some states tax at a flat rate while other have progressive rates.

45. State Tax Revenue, cont.
Corporate income tax—Most states collect income taxes from corporations that do business in the state.
These taxes make up a small amount of state tax revenues.
Other state taxes include:
Licensing fees on certain businesses
Transfer taxes on stock certificates
Inheritance taxes
Property taxes, including real property and personal property

47. Local Government
Local governments, including towns, cities, countries, and school districts, carry major responsibilities in the public school systems, law enforcement, and fire protection.
They also manage public facilities, parks, and recreation facilities.
They monitor public health, public transportation, elections, record keeping, and social services.

48. Local Revenue and Spending 2007

49. Local Government Taxes
Local governments levy property taxes, sales taxes, excise taxes, and income taxes.
Many local taxes affect visitors and are designed to raise revenue from nonresidents.
Wall-to-wall traffic jams, for example, are prompting a few cities to consider a congestion tax.