Chapter 14 Government Revenue & Spending

SEC 1. HOW TAXES WORK

Government Revenue◦Street lighting, highways, law

enforcement, & the court system◦Government also provides aid for

people in need

Government RevenueWhere does the money come from to pay for such goods and services?

Government Revenue

◦Borrowing & lotteriesRights to tax are set in the U.S.

Constitution and in state constitutions

Principles of Taxation◦Benefits taxpayers receive from

taxes◦Their ability to pay

Question 1Can you explain why a worker

earns $264 but receives a paycheck for less than $264?

Question 2What happens to the amount

earned not received by the employee? Meaning where did the $30.84 that the employee go to?

Benefits-Received Principle◦Financing of road construction &

maintenance through gasoline

◦Difficult for governments to asses exactly how much different taxpayers benefit from services like national defense, national parks, local police, fire protection, and public education

Ability-to-Pay Principle◦People with higher incomes will pay

more than people of lower incomes

◦The level of benefits is not a consideration

Ability-to-Pay Principle

Questions to Consider◦Should everyone pay the same

percentage of income?

◦Should those with higher incomes pay a higher percentage of their income in taxes?

Criteria for Taxation◦Equity, Simplicity, & Efficiency

Equity◦Requires people in similar situations

pay a similar amount of taxesExample

◦Everyone pays the same price for taxSome believe

◦Equity requires that people with higher incomes pay more than people with lower incomes

Simplicity

◦Should be NO confusion bout the time the tax is due and the amount to be paid

◦Sales tax meets the criterion of simplicity

Efficiency

Taxpayers’ view◦Tax efficiency can be judged by the

amount of effort and expense it takes to pay the tax

◦Individual income tax best meets the criterion efficiency

Tax Base & Structures

Tax base, each type of wealth is subject to taxes◦Individual income, corporate income,

sales, and property

Individual Income Tax◦Wages, interests, dividends, and tips

All taxes are ultimately paid from Income, but using income as a tax base means that the amount of tax is directly linked to a person’s earnings

Corporate Income Tax◦From savings & investment in the

form of interests & dividends

Sales Tax◦Generally imposed on a wide range of

goods or services◦Percentage of the posted price of the

good or service◦Included in the final price the buyer

paysThe seller then passes the tax

revenue collected from customers on to the government that has imposed the tax

Property Tax◦Generally real estate◦Pay on the values of their buildings and

the land◦Property tax is generally included in

rent charges◦Can be imposed on other assets like

automobiles

If overall personal income rises, the individual income tax base grows

If there are fewer homes or businesses in a certain locality or if the value declines, the property tax base shrinks

Tax StructuresThe way in which taxes are

imposed on the different tax bases gives rise to three different tax structures

These tax structures are distinguished from one another

Proportional Tax◦Flat tax, rate of the tax is the same for

all taxpayersExample

◦All taxpayers in a given state might be charged a flat 15% tax on the income

◦No matter a person’s income is

Progressive Tax◦Income increases so does your tax

rate

United States ◦Federal income tax = progressive tax◦Tax rate increases as income

increases

Taxable income of $40,000Page 413

Income Bracket

Marginal Tax Rate

$0-10,000 10 %$10,000-$30,000

15%

$30,000-$50,000

25%

Income in each bracket

Tax Bracket

$ 10,000 10%

$ 20,000 15%

$10,000 25%

Income in Bracket X Marginal

Tax Rate = Marginal Tax

$ 10,000 X 10 % = $1,000$ 20,000 X 15% = $3,000$10,000 X 25% = $2,500

Total Tax $6,500

Regressive Tax◦Income paid in taxes decreases as

income increases◦Sales tax

Incidence of a Tax

Resource Allocation

Productivity & Growth

Economic Behavior

FEDERAL TAXESSection 2

Individual Income TaxThe federal government takes in

around $2.5 trillion in revenue each year◦Individual income tax , Social

insurance taxes, Corporate income taxes, Estate taxes, Gift taxes, Excise taxes, & Customs taxes

◦Largest source of taxes = individual income tax

Government uses income tax◦16 Amendment to the US Constitution

in 1913

Withholding

Taxable Income

Tax Return

Indexing

Federal Insurance Contribution Act

Social Secuity

Medicare

Unemployment Taxes

Corporate Income Taxes

Estate Tax

Gift Tax

Excise Tax

Customs Duty

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