Taxes

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Chapter 14 Taxes Sources of Government Revenue
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Section One Economics of Taxation
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It takes a lot of tax money to run the
government. app. 7,629.00 per person the
largest amount of revenue goes to the federal
govt
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Single most important way to raise money is
thorough taxes on income sales
property college tuition Social Security
contributions unemployment insurance drivers
license fees
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Economic Impact of Taxes 1. reduce income of
individuals business. 2. effect buying
and consuming habits 3. growth of business 4.
savings habits
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Impact of Taxes 1. Resource Allocation costs of
production goes up consumers buy less people
lose jobs 2. Behavior Adjustment used to change
peoples behavior Sin Tax reduce consumption of
a socially unacceptable product
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Ex tobacco tax reduced consumption by 1/3 3.
Productivity Growth taxes too high people work
less less incentive to expand bus. less
savingsless for businesses
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1999 Income Paid includes Federal, FICA, State
Taxes 55,000 total paid 21 100,000 total
paid 31
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Criteria for Taxes 1. Equity should be fair
impartial What is Fair? depends on who you
ask. tax loopholes exemptions or oversights in
the tax laws that allow people or businesses to
AVOID taxes.
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2. Simplicity 3. Efficiency easy to administer
reasonably successful Payroll Payment
employer holds of pay sends a single check
to govt employer notifies how much has been
paid
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W2 Form employer gives to you tells 1. How
much you earned 2. What you paid in
taxes Deadline to you Jan. 31 Exemptions amount
subtracted for you and your spouse 1040EZ most
common tax form no exemptions
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tax must raise moneyunsuccessful Exsmall
private plane tax caused layoffs and income tax
s Two Principles of Taxation who pays what is
important 1. Benefit Principle of Taxation those
who receive benefits should pay in proportion to
the amount of services they receive
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Ex Gasoline Tax for roads Two limitations of
Tax 1. greatest benefit to those least able to
pay. Ex subsidized housing 2. hard to measure
benefits Exlots of benefits of gasoline tax
to those not using gasoline. Tourism Hotels,
Restaurants
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2. Ability-to-pay Principle taxed according to
ability to pay Disadvantages 1. cant always
measure benefits of govt services 2. people with
higher incomes suffer less from taxation than the
poor
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LIMITS ON THE POWER TO TAX 1.Cant bring in
money except for a. general welfare b. common
defense 2. Federal tax must be the same in
every state 3. Cant tax church services 4.
Cant tax exports 5. Must be divided by
population in states
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Three Types of Taxes 1. Proportional Tax same
on everyone uses average tax rate is
constant EX City Occupational Tax 2.
Progressive Tax higher income the more you
pay usesmarginal tax rate(nextof income) EX
Federal Income Tax
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3. Regressive Tax higher on lower
EX State Sales Tax
income
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Incidence of Tax final burden of tax Forward
shifted tax Inelastic produces/pass on tax to
buyer Backward shifted tax Elastic product/
sellers pays tax
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Section Two Federal Tax System
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Individual Income Tax 16th Amendment 1913 1.
Payroll Deduction sent to IRS branch of the
Treasury Dept. due April 15th file tax return
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Where does the money come from that the
government spends? 43.6 income tax 37.9 Social
Security 9.2 Corporation Tax 4.7 Excise
Tax Indexing upward revision of the
tax brackets to keep workers paying higher taxes
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Single Tax Rates 22,000 15 53,000 31 over
115,000 39.6 FICA(Fed.Insurance Contribution
Act) Medicare federal health insurance
available to ALL senior citizens
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Social Security 6.2 rate proportional up to
57,600 then regressive Medicare flat tax
1.45 proportional on all levels Corporate
Income Tax 15 to 34 paid on profits made
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Other Federal Taxes 1. Excise Tax sale and
manufacture of certain items Ex Liquor,
Gasoline, Legal Betting includes Luxury
items 10on passenger vehicle(over30,000), boats,
aircraft, jewelry, furs. regressive tax
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Other Federal Taxes 1. Excise Tax sale and
manufacture of certain items Ex Liquor,
Gasoline, Legal Betting includes Luxury
items 10on passenger vehicle(over30,000), boats,
aircraft, jewelry, furs. regressive tax
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Estate Tax transfer of property on death. Gift
Tax donations of money . used to prevent tax
avoidance. Customs Duty goods brought into the
country User Fees levied for use of a good
or service Ex national parks
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Section 3 Federal Spending
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Mandatory Spending money required to be spent
on programs getting larger Ex interest on the
national debt Discretionary Spending can make
choices on how to spend Ex education
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• Entitlement Programs
• social welfare people are
• entitled to by meeting certain
• requirements
• Ex age, income level
• Not all moneys are mean tested
• Medicare mean tested
• Social Security not
• Once requirement set Congress has
• No control over who gets what

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• Social Security
• Largest category
• Retired, disabled
• 2. Medicare
• over age 65
• hospital care, physician services
• Comes from withholding

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3. Medicaid low income families largest sources
of funds for poor Shares costs with States 4.
Other Programs food stamps SSI (supplemental
security) veterans benefits
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Future of Entitlement Programs will increase as
people get older Rising because of technology
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Discretionary Spending 1. Defend spending 16
of budget Pays salaries of people Buys weapons,
battleships etc. Other spending Education,
student loans, housing, national parks, farm
subsidies
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Federal Aid to States app. 1,000.00 per
person Share Medicaid, unemployment, highway
construction, Called Grants-in-aid Block
Grants the most popular
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Section 4 State Local Tax System
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State Budgets 2 parts 1. Operating
Budget day-t0-day expenses 2. Capital
Budget major investments, spending Balancing
State Budgets revenue spending Some states
require by law
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• Where are State Taxes Spent?
• Education
• Public universities
• Local schools
• State average6,251per student
• 2. Public Safety
• police force
• correctional system

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• 3. Highways Transportation
• 4. Public Welfare
• 5. Arts recreation
• 6. Administration
• State Tax revenue
• Limits on state taxation
• Cant tax imports or exports
• Cant tax goods from state to state
• Federal property

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Cant tax non profits Sales TAX major source of
revenue from 3 to 8 Local govt can have sales
tax also Exempt food and medicine Some sin
taxes Ex gasoline tax
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State Income Tax flat tax some tax interest
dividend Corporate Income Tax flat tax very
small of income to state low tax will attract
more businesses
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Other State Taxes licensing fees
beauticians transfer tax legal
documents severance tax for taking resources
from the state EX coal inheritance tax Property
Taxmost levied by local govt real property
land, real estate personal property jewelry
etc.
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Local Government imp. to schools, roads,
libraries. hospitals, and jails Forms of local
govt town, city townships county school
dist.
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Jobs of Local Govt public schools law
enforcement fire protection public
transportation elections record keeping social
services
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Property Tax levied by tax assessor fixed per
thousand major source of funding for
education Other Local Taxes sales tax, hotel
tax, movies, income,