Taxes – money given to government Help to run different institutions and services Necessary to civilized groups; used for centuries Four general rules to taxation (Adam Smith) Equity – fairness in who pays Certainty – should know what, when and how you pay Convenience – should be an easy process for people Efficiency – should be efficient in collection and use What are Taxes?
Federal government allocates tax revenue as follows: Entitlements Interest Payments http://www.youtube.com/watch?v=0efqnvYz4YI http://www.youtube.com/watch?v=0efqnvYz4YI National Defense State and Local governments allocate tax revenues as follows: Public services & public safety Education Social welfare Where do tax dollars go?
Individual Income tax Payroll Taxes Corporate Income Tax Excise Taxes Sources of Federal Revenue
Revenue comes from 4 major areas Fiscal year is from Oct 1 – Sept 30, when $ is used Income, Payroll, Corporate Income and Excise Taxes Federal gov’t doesn’t usually cover all expenses Leads to deficit – current $17,234,132,052,323 2 types of spending – Mandatory & Discretionary Mandatory – fixed spending by law Entitlements – Social Security, Medicare, welfare, etc. Discretionary – can change based on Congressional decisions Largest amount spent on national defense. The rest is spent on: education, science, health care, foreign aid How Revenue is Spent
Get most of money from taxes Property tax, state income tax, etc. Also use tax referenda – vote must pass Cannot raise taxes unless people vote for it Lotteries – used as a major income source State spending usually focuses on education, and public safety: law enforcement & fire protection Also focus on public issues – health clinics, road projects, assistance for low income earners, etc. State Gov’t Revenue and Spending
Tax equity – asks are taxes equal? Tough to answer due to differing definitions of equal Should all pay, or only those who use it, etc. Two principles to answer this Ability-to-Pay Principle Says those who make more, pay more – b/c they can Benefits-Received Principle Says only those who receive benefit should pay Tax Incidence – who actually ends up paying tax At times burden falls to others Who should Pay?
Tax base – what is taxed (Income, property, etc.) Tax rate – the percentage of tax paid Types of Taxes – 3 kinds Proportional Tax – same % for all levels (5% tax) Also called a flat tax – very simple to use Progressive Tax – increased % with increased income Based on ability-to-pay principle – ex. Income taxes Regressive Tax – increased % with decreased income Proportional taxes can act as regressive – ex. Sales tax People making less money pay higher % of yearly income Taxation Basics 101
Graphing the Differences Difference in spendable money not much Difference in spendable money is huge
Income Tax – once a year, each April 15 Fill out a W-2; tells gov’t how much to withhold Payroll Taxes – 2 major taxes paid Social Security Tax – money taken for retirement Medicare Tax – money to pay for medical needs Also may pay a disability and unemployment tax Property Tax – % paid on value of owned land Sales Tax - % paid on purchased goods Types of Taxes You Will Pay
Corporate Income Taxes – levied on businesses Excise Taxes – used to regulate goods the gov’t wants to control Cigarettes, alcohol, etc. Luxury Taxes – used on major luxury items User Fees and Tolls – tax the user Estate or Inheritance Taxes (progressive) – Estate tax taken by gov’t on money left after death Inheritance tax may be levied by the state gov’t on top of the estate tax. Other Taxes