1. Harcourt Brace & Company Chapter 12 The Design of the Tax System (pp. 243-250)

2. Harcourt Brace & Company “In this world nothing is certain but death and taxes.” (Benjamin Franklin) 0 20 40 60 80 100 1789 Taxes paid in 1789 accounted for 5% of personal income

3. Harcourt Brace & Company “In this world nothing is certain but death and taxes.” (Benjamin Franklin) 0 20 40 60 80 100 1789Today Today, taxes account for about 35 % of personal income!

4. Harcourt Brace & Company The Tax System u When the government addresses the problem of externalities, provides public goods, or regulates the use of common resources, it can raise economic well-being. u For the government to perform these and its other many functions, it needs to raise revenue.

5. Harcourt Brace & Company A Financial Overview of the U.S. Government u Where does the government get its income from? u Who contributes the most to the U.S. Government in the form of taxes? u What does the government spend its income on?

6. Harcourt Brace & Company The U.S. Economy may be divided into two major sectors: u The Private Sector – About two-thirds of all economic activity in the U.S. takes place within the private sector. u The Public Sector – About one-third of all economic activity in the U.S. involves the government sector.

7. Harcourt Brace & Company The Government Sector: Federal, State and Local u The Federal Government collects about two-thirds of the taxes in our economy. (Figure 12-1) – Individual Income Taxes – Social Insurance Taxes – Corporate Income Taxes – Excise Taxes – Other

8. Harcourt Brace & Company Table 12-2 1999 Fed. Receipts

9. Harcourt Brace & Company Individual Income Taxes... The largest source of government revenue u Tax Liability is how much taxes a family owes and is based upon total income. u Marginal Tax Rate is the tax rate applied to each dollar of income. (Table 12-3) u Higher-income families pay a larger percentage of their income in taxes.

10. Harcourt Brace & Company Tax Relief Act of 2001 u Passed in May 2001 u Tax rebate checks of between $300- $600 were issued in Summer 2001 u Marginal Tax rates in 2006 will be lower (15% to 10%, 28% to 25%, 31% to 28%, 36% to 33% and 39.6% to 35%) u Rate changes will be phased in

11. Harcourt Brace & Company Social Insurance Taxes u Established in 1935 (part of New Deal). u Based on wages only (payroll tax). u Employee (and employer) each pay 7.65% of wages. u Social Security tax (6.2%) applies to first $80,400 in earnings (2001 limits). u Medicare rate (1.45%) applies to all earnings.

12. Harcourt Brace & Company Federal Government Spending u Spending of government revenues (taxes) includes transfer payments and the purchase of public goods and services. (Table 12-4) u Transfer Payments is a government payment not made in exchange for a good or a service. – Transfer payments accounts for the largest expenses of the government.

13. Harcourt Brace & Company Spending of the Federal Government Expense Category: Social Security National Defense Income Security Net Interest Medicare Health Other

14. Harcourt Brace & Company Financial Conditions of the Federal Budget u Budget Deficit – Situation where the expenses of the budget are greater than the revenues. – Government finances the deficit by borrowing from the public u Budget Surplus – Situation where the revenues are greater than the expenses. Used to pay outstanding debts.

15. Harcourt Brace & Company State and Local Governments: Collect about one-third of taxes paid u Expenses – Education – Public Welfare – Highways – Other u Receipts – Sales Taxes – Property Taxes – Individual Income Taxes – Corporate Income Taxes – Federal Government – Other

16. Harcourt Brace & Company Table 12-5 1996 S&L Receipts

17. Harcourt Brace & Company Tax Revenue by Source in Georgia u Individual Income Tax (47.1%) u General Sales Tax (34.3%) u Corporate Tax (5.3%) u Motor Fuel (4.7%) u Georgia State Government Tax (2000) Georgia State Government Tax (2000)

18. Harcourt Brace & Company Spending in Georgia (1999) by Function (% of total) u Education (42.7%) u Public Welfare (20.8%) u Highways (6.8%) u Corrections (4.1%)

19. Harcourt Brace & Company Local Government in Georgia u Main Tax Sources: Property Tax (71%) and Sales Tax (17%) u Main Spending Categories: Education (35%), Health (18%) and Public Safety (8%)