1. Objectives Identify the sources of the government’s authority to tax.
Describe types of tax bases and tax structures.
List the characteristics of a good tax.
Identify who bears the burden of a tax.

2. Key Terms
tax: a required payment to a local, state, or national government
revenue: the income received by a government from taxes and other nontax sources
progressive tax: a tax for which the percentage of income paid in taxes increases as income increases
proportional tax: a tax for which the percentage of income paid in taxes remains the same at all income levels
regressive tax: a tax for which the percentage of income paid in taxes decreases as income increases

3. Key Terms, cont.
tax base: the income, property, good, or service that is subject to a tax
individual income tax: a tax based on a person’s earnings
corporate income tax: a tax based on a company’s profits
property tax: a tax based on real estate and other property
sales tax: a tax based on goods or services that are sold
incidence of tax: the final burden of a tax

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

5. Government’s Authority to Tax
The Constitution allows the Federal Govt. to tax.
Taxation is necessary for government operation
Power to tax is the first power given to the Federal Govt.

6. Limits on the Government
There are limits
A tax must be “for the common defense and general welfare.”
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.

7. Progressive Taxes
Economists describe taxes based on their structure and according to the tax base.
% paid increases as income increases.

8. Other Taxes Proportional Tax Regressive Tax Sales tax = regressive
Flat Tax
Everyone pays the same %.
Regressive Tax
% paid decreases as income goes up
Sales tax = regressive
Higher income earners spend less % of income on sales taxes
Checkpoint Answer: Progressive

9. 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.

10. 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

12. Characteristics of a Good Tax
What is 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.

13. Determining Fairness How do you measure fairness?
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.

14. 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.

15. Objectives Describe the process of paying individual income taxes.
Identify the basic characteristics of corporate income taxes.
Explain the purpose of Social Security, Medicare, and unemployment taxes.
Identify other types of taxes.

16. Key Terms
withholding: taking tax payments out of an employee’s pay before he or she receives it
tax return: a form used to file income taxes
taxable income: the earnings on which tax must be paid; total income minus exemptions and deductions
personal exemption: a set amount that taxpayers may subtract from their gross income for themselves, their spouse, and any dependents
tax deduction: a variable amount that taxpayers may subtract from their gross income

17. Key Terms, cont.
tax credit: a variable amount that taxpayers may subtract from the total amount of their income tax
estate tax: a tax on the total value of the money and property of a person who has died
gift tax: a tax on the money or property that one living person gives to another
tariff: a tax on imported goods
tax incentive: the use of taxation to discourage or encourage certain types of behavior

18. 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

19. Individual Income Taxes
Government’s main source of income
What is the difference between individual income taxes and corporate in %
Answer: 44%

20. “Pay-As-You-Earn” Taxation
The amount of federal income tax a person owes is determined on an annual basis.
You pay your income taxes out of each paycheck.
One yearly lump sum would result in failure to pay
Helps the government keep income flowing and the tax payer able to pay their taxes

21. 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.
Answer: $4,220 plus 25%

22. Withholdings and Tax Returns
Employers withhold money based upon an estimated amount owed (filled out in a W4)
After the calendar year ends, employers give their employees a report of how much income tax has already been paid. (W2)
Employees then fill out a tax return to send to the federal government.

25. Corporate Income Taxes
Like individual income taxes, corporate income taxes are progressive.
Determining corporate income taxes is more complex .
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.

26. 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.

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

28. 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
Import taxes—Tariffs, or import taxes, are taxes placed on imported goods.
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.

29. Taxes That Affect Behavior
These taxes change how people make choices .
Tax credits are often used as an incentive
Solar Panels
Hybrid Cars
Energy Efficient appliances

30. Objectives Distinguish between mandatory and discretionary spending.
Describe the major entitlement programs.
Identify categories of discretionary spending.
Explain the impact of federal aid to state and local governments.

31. Key Terms
mandatory spending: spending that Congress is required by existing law to do
discretionary spending: spending about which Congress is free to make choices
entitlement: social welfare program that people are “entitled to” benefit from if they meet certain eligibility requirements

32. 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.

33. Federal Spending There are two types of government spending.
Mandatory Spending – Required spending by the govt. by law
Social Security
Medicare
Discretionary Spending – Government has choices on how to spend
Defense
Education
Environmental Protection
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.

34. Federal Spending, cont.
Taxes are spent on programs intended to keep Americans safe and secure.
Answer: Medicare and other retirement, Social Security, and Defense (Other is equal to Defense at 19%).

35. 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.

36. Social Security Social Security is a huge portion of federal spending.
50 million Americans receive benefits
Uncertainty in the Future
Upside down ration of payers and takers.
Baby Boomers

37. Medicare and Medicaid
About 42 million people receive Medicare benefits. It pays for
Hospital care
Costs of physicians
Medical services.
Medicaid – Helps low income families pay medical bills
The federal government shares the cost of Medicaid with state governments.

38. Other Mandatory Programs
Include the following:
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.

39. Discretionary Spending
Defense spending = about 50% 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.
Buys weapons, missiles, ships, tanks, airplanes, and equipment.
Checkpoint Answer: About half

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

41. Federal Aid
Federal taxes are sometimes used to help state and local governments.
Medicare
Education
Unemployment
Road Work
Disaster relief.