1. Chapter 14: Taxes and Government Spending Section 1

2. 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.

3. 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

4. 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

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

6. 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.

7. 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.

8. 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.

9. 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: Is the federal income tax proportional, progressive, or regressive?
Checkpoint Answer: Progressive

10. 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.

11. 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.
Under what conditions, elastic or inelastic demand, would price of a good increase from $1.00 to $1.10?
Answer: Elastic

13. Characteristics of a Good Tax
Checkpoint: What are the four 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.

14. 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.

15. 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.

16. Review
Now that you have learned about the features of a tax system, go back and answer the Chapter Essential Question.
How can taxation meet the needs of government and the people?

17. Chapter 14: Taxes and Government Spending Section 2

18. 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.

19. 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

20. 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

21. 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

22. Individual Income Taxes
The government’s main source of revenue comes from the federal tax on individuals’ taxable income.
What percentage of federal revenues do not come from individual and corporate income taxes?
Answer: 44%

23. “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.

24. 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%

25. 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.

26. 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.

27. 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: Why is it difficult to determine a corporation’s taxable income?
Checkpoint Answer: because businesses can take many deductions.

28. 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.

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

30. 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.

31. 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.

32. 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.

33. Review
Now that you have learned about the taxes that the federal government collects, go back and answer the Chapter Essential Question.
How can taxation meet the needs of government and the people?

34. Chapter 14: Taxes and Government Spending Section 3

35. 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.

36. 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

37. 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.

38. 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.

39. Federal Spending, cont.
The federal government spends the funds it collects from taxes and other other sources on a variety of programs.
Which are the three largest categories of expenditures in the federal budget?
Answer: Medicare and other retirement, Social Security, and Defense (Other is equal to Defense at 19%).

40. 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.

41. 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.

42. 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.

43. 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.

44. Discretionary Spending
Checkpoint: Approximately how much of the federal government’s discretionary spending goes toward defense?
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

45. 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

46. 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.

47. Review
Now that you have learned about how the federal government spends its income, go back and answer the Chapter Essential Question.
How can taxation meet the needs of government and the people?

48. Chapter 14: Taxes and Government Spending Section 4

49. Objectives Explain how states use a budget to plan their spending.
Identify where state taxes are spent.
List the major sources of state tax revenue.
Describe local government spending and sources of revenue.

50. Key Terms budget: an estimate of future revenue and expenses
operating budget: a budget for day-to-day spending needs
capital budget: a budget for spending on major investments
balanced budget: a budget in which revenue and spending are equal

51. Key Terms, cont. tax exempt: not subject to taxes
real property: land and any permanent structures on the land to which a person has legal title
personal property: movable possessions or assets
tax assessor: an official who determines the value of property

52. 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.

53. 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: Would the construction of a new courthouse come out of a state’s operating budget or capital budget?
Checkpoint Answer: capital budget

54. 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.

55. 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.

56. State Revenue and Spending, 2004-2005

57. 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.

58. 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

60. 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.

61. Local Revenue and Spending 2007

62. 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.

63. Review
Now that you have learned about how local governments manage their money, go back and answer the Chapter Essential Question.
How can taxation meet the needs of government and the people?