CHAPTER 14--TAXES AND GOVERNMENT SPENDING

•SECTION 1--WHAT ARE TAXES

•SECTION 2--FEDERAL TAXES

•SECTION 3--FEDERAL SPENDING

•SECTION 4--STATE AND LOCAL TAXES AND SPENDING

THE AMERICAN TAX SYSTEM• Tax- a required payment to various levels of

government• Authority to levy taxes--given to federal, state and

local government by the U.S. Constitution.– Article I Section 8 of U.S. Constitution– 16th amendment--Federal Income Tax

• America is a “middle class” tax system.– Designed to draw largest amount from more populated

middle class!

• Creates “revenue” for U.S. Government.– Revenue used to fund government programs and

services.

LIMITS ON THE POWER TO TAX

• MUST BE FOR COMMON DEFENSE AND NOT FOR GENERAL INTERESTS

• FEDERAL TAXES MUST BE THE SAME IN EVERY STATE

• NO TAXES ON CHURCH SERVICES

• NO TAXES ON EXPORTS

TAX STRUCTURE AND TAX BASE

• TAX STRUCTURE--REFERS TO THE WAY THE TAX IS ASSESSED AND COLLECTED.

• TAX BASE--THAT WHICH IS SUBJECT TO TAX.• INCOME TAX--PEOPLE’S EARNINGS• CORPORATE TAX--COMPANY PROFITS• PROPERTY TAX--VALUE OF OWNED

LAND OR PROPERTY• SALES TAX--VALUE OF A PRODUCT

SOLD

TAX STRUCTURE--PROGRESSIVE TAX STRUCTURE

• AS INCOME INCREASES, SO DOES THE PERCENT PAID IN TAXES.

• FEDERAL INCOME TAX STRUCTURE IS A PROGRESSIVE TAX

TAX STRUCTURE--PROPORTIONAL TAXES

• ALSO CALLED A “FLAT TAX”

• IT APPLIES THE SAME PROPORTION OR PERCENT ON ALL DESPITE THE VALUES OR SIZE OF THE TAX BASE.

• MANY STATE TAXES ARE PROPORTIONAL.

TAX STRUCTURE--REGRESSIVE TAX

• PERCENT OF INCOME IN TAXES DECREASES AS INCOME OR TAX BASE INCREASES.

• EXAMPLE--SALES TAX• $35,000 YEARLY INCOME PAYS 5% SALES

TAX ON $250 OF GROCERIES X 12 MONTHS--$150

• $35O,000 YEARLY INCOME PAYS 5% SALES TAX ON $250 OF GROCERIES X 12 MONTHS--$150

• http://www.youtube.com/watch?v=OsGd6FWnY_0&feature=related

WHO BEARS THE “BURDEN OF TAX”

• “INCIDENCE OF TAX”. --IS WHO IS REALLY ASSIGNED THE PAYMENT OF TAX.

• PRODUCERS LOOK TO “PASS ON” THE BURDEN OF A TAX RATE.

• INELASTIC DEMAND PRODUCTS-- THE BURDEN OF TAX CAN BE SHIFTED TO THE CONSUMER.

• http://www.youtube.com/watch?v=zjoNnxsfibU

WHAT ARE THE CHARACTERISTICS OF A

GOOD TAX? • SIMPLICITY

– EASY FOR TAXPAYERS TO UNDERSTAND, FILE AND PAY.• EFFICIENCY

– EASY TO ADMINISTER AND COLLECT BY GOVERNMENT• CERTAINTY

– CLEAR WHEN THE TAX IS DUE, HOW MUCH IS DUE, AND HOW TO PAY THE TAX

• EQUITY– FAIR SO THAT THE “BURDEN” IS NOT TOO MUCH OR

TOO LITTLE– APPLIED EQUALLY TO ALL PEOPLE!

MEASURING THE FAIRNESS OF A TAX.

• BENEFITS RECEIVED PRINCIPLE– PAY TAXES IN PROPORTION TO BENEFITS

RECEIVED FROM THE GOVERNMENT– Example--People who drive a lot on government

roads pay more in gas tax.

• ABILITY TO PAY PRINCIPLE– Pay more in tax based on your wealth status– Basis of the Progressive tax.

Section 2: FEDERAL TAXES• FEDERAL TAXES--SOURCES OF REVENUE• 5 CHIEFS SOURCES / TAXES• 1) FEDERAL INCOME TAXES--39-43%• 2) FICA--FEDERAL INSURANCE

CONTRIBUTORY ACT--32%• SOCIAL SECURITY, MEDICARE, UNEMPLOYMENT

• 3) CORPORATE INCOME TAX--10-13%• 4) BORROWING FOR FEDERAL DEFICIT--

9%• 5) MISCELLANEOUS TAXES--7%

• CUSTOMS DUTIES, EXCISE TAX, GIFT& INHERITANCE TAX

FEDERAL INCOME TAX• PEOPLE FILE TAX RETURNS UNDER

THE “PAY AS YOU EARN SYSTEM”• MAKES IT EASIER THAN PAYING A LUMP SUM.

• GOVERNMENT HAS MONTHLY FINANCIAL NEEDS

• TAX RETURNS FILED BY APRIL 15

• PROGRESSIVE TAX WITH 6 BRACKETS

• TAX SYSTEM IS A COOPERATIVE EFFORT BETWEEN EMPLOYER AND EMPLOYEE

FILING A TAX RETURN• FILL OUT W-4 FORM• LIST POSSIBLE

EXEMPTIONS• HAVE EMPLOYER

“WITHHOLD” THE CORRECT AMOUNT FROM MONTHLY PAY

BASED ON EXEMPTIONS AND SALARY.

• RECEIVE W-2 STATEMENT

• LIST PERSONAL EXEMPTIONS AND POSSIBLE DEDUCTIONS

• (TOTAL INCOME)- EXEMPTIONS AND DEDUCTIONS =

TAXABLE INCOME• TAX CREDITS--AMOUNT

YOU CAN SUBTRACT FROM YOUR TAXABLE INCOME

FICA TAX

• http://www.youtube.com/watch?v=UP9xy2eVj7s

F.I.C.A. TAX• SOCIAL SECURITY(OASDI)• Provides retirement fund for people who reach a

specific age.• Provides benefits for surviving members and to those

with a disability.• MEDICARE• A Federally funded health care program for those over

the age of 65.• UNEMPLOYMENT• Paid by employers and funded by state and federal

government.• Provides an income for workers who lose their jobs

through no fault of their own. Specific rules apply. • TAX STRUCTURE BEGINS AS PROGRESSIVE TILL A

CERTAIN AMOUNT, THEN TURNS REGRESSIVE

CORPORATE INCOME TAXES

• TAX ON THE PROFIT OF A CORPORATION.• DIFFICULT TO CALCULATE BECAUSE

CORPORATIONS CAN HAVE MANY DEDUCTIONS AND “LOOPHOLES”.

• LOOPHOLES ARE WAYS TO AVOID PAYING

CERTAIN AMOUNTS OR TYPES OF TAXES. • PROGRESSIVE TAX• RATES BEGIN AT 15%….RISE TO 35-39%

OTHER FEDERAL TAXES!• EXCISE TAXES

– TAX ON MANUFACTURE / SALE OF CERTAIN DOMESTIC PRODUCTS.(ALCOHOLIC BEVERAGES, TOBACCO,

AUTOS, GAS,ETC.)• ESTATE TAX

– TAX ON PROPERTY / ASSETS OF PERSON WHO HAS DIED. – LEVIES BEFORE HEIRS RECEIVE THEIR SHARE– PROGRESSIVE TAX-STARTS @ $2 MILLION

• GIFT TAXES– TAX ON MONEY PROPERTY ONE LIVING PERSON GIVES

ANOTHER.– STARTS AT $12000

• IMPORT TAXES– LEVIES TO PROTECT DOMESTIC PRODUCERS– CALLED “TARIFFS” OR CUSTOM “DUTIES”

TAXES ALSO INFLUENCE BEHAVIOR

• TAX INCENTIVE.• A TAX THAT IS LEVIED THAT ALSO

ENCOURAGES OR DISCOURAGES BEHAVIOR OR PURCHASING.

• SOME PRODUCTS ARE IDENTIFIED AS OR WITH “SIN TAX”.

• EXAMPLES OF SIN TAX PRODUCTS ARE CIGARETTES, ALCOHOLIC BEVERAGES, AND EVEN GASOLINE.

SECTION 3--FEDERAL SPENDING

• FEDERAL SPENDING IS DIVIDED INTO 2 CATEGORIES:

• MANDATORY SPENDING--MONEY THAT CONGRESS MUST,BY LAW, SPEND ON PROGRAMS OR AREAS!

• DISCRETIONARY SPENDING--IS AREAS OF SPENDING THAT LAWMAKERS CAN VARY HOW MUCH THEY SPEND OR IF THEY SPEND ANY AT ALL!

MANDATORY SPENDING • INTEREST ON FEDERAL DEBT• ENTITLEMENT PROGRAMS

– SOCIAL SECURITY• RETIREMENT FUND• RATIO OF PEOPLE PAYING TO COLLECTING IS CHANGING FROM

4:1 to soon 2:1• AFFECTED BY THE BABY BOOMERS--STRAIN ON SOCIAL

SECURITY– MEDICARE

• FEDERALLY FUNDED HEALTH CARE (INSURANCE) AND DISABILITY PAYMENTS

– MEDICAID• FEDERAL-STATE FUNDED HEALTH INSURANCE FOR LOW

INCOME AND ELDERLY• SOCIAL WELFARE PROGRAMS

– MEAN TESTED PROGRAMS (ELIGIBILITY BASED ON AGE, INCOME, HEALTH)

– PROVIDE SOCIAL ASSISSTANCE

INTERGOVERNMENTAL TRANSFERS OF REVENUE

• MONEY COLLECTED BY FEDERAL GOVERNMENT RETURNED TO STATE GOVERNMENTS.

• APPROXIMATELY $400 BILLION ANNUALLY DIVIDED AMONG 50 STATES AND WASHINGTON D.C.

• MONEY RETURNED MUST BE SPENT ACCORDING TO SPECIFIC GUIDELINES

DISCRETIONARY SPENDING

• SPENDING THAT VARIES ACCORDING TO NEEDS OR SITUATIONS

• LARGEST DISCRETIONARY SPENDING INCLUDES:

• DEFENSE

• EDUCATION

• ENVIRONMENT

• SCIENTIFIC RESEARCH (SPACE PROGRAM)

Sect. 4 STATE AND LOCAL TAXES

• States collect over $500 bilion on taxes each year.

• TWO LARGEST SOURCES OF STATE REVENUE ARE:

• INTERGOVERNMENTAL TRANSFERS OF REVENUE.--25%

• MONEY TRANSFERRED FROM FEDERAL TO STATE GOVERNMENTS

• INSURANCE TRUST REVENUE.--22%• MONEY PAID TO THE STATE BY TAXPAYERS

SIMILAR TO SOCIAL SECURITY.

OTHER STATE TAXES

• SALES TAX & EXCISE TAX--19%• 2.9% to 7.25% rate (varies state to state)• Can act as a “Sin Tax”• INCOME TAXES--13%• Like most state taxes, they tend to be

proportional !• CORPORATE TAXES--2.5%• Low corporate taxes tend to encourage

industrial development.

OTHER STATE TAXES--16%

• LICENSING FEES

• TRANSFER FEES

• STOCK VALUE FEE

• SEVERANCE TAX

• INHERITANCE TAX– A TAX ON VALUE OF PROPERTY THE

FAMILIES OF THE DECEASED. A STATE TAX SIMILAR TO FEDERAL ESTATE TAX.

LIMITATIONS ON STATE TAXES

• CANNOT TAX FEDERAL PROPERTY

• CANNOT TAX INTERSTATE COMMERCE--TAX SALE OF PRODUCTS BETWEEN STATES

• CANNOT TAX NON PROFIT GROUPS.• CHURCHES, SCHOOLS ETC.• TAX EXEMPT STATUS--NOT

SUBJECT TO TAXES

STATE SPENDING

• STATES HAVE 2 CATEGORIES OF SPENDING:

• OPERATING BUDGET--DAY TO DAY SPENDING NEEDS.(SALARIES, RESOURCES, ETC).

• MANY STATE BY LAW MUST HAVE A BALANCED OPERATING BUDGET.

• CAPITAL BUDGET--SPENDING ON LONG TERM AND MAJOR INVESTMENTS

WHERE ARE STATE TAXES SPENT?

• EDUCATION• FUNDING OF STATE UNIVESITIES

• EVERY STATE HAS AT LEAST ONE UNIVERSITY

• FUNDING PUBLIC LOCAL SCHOOL SYSTEMS.

• SCHOOLS RECEIVE APPROXIMATELY $8701 PER STUDENT IN STATE AID. (BASED ON ATTENDANCE)

• PUBLIC SAFETY• STATE POLICE, STATE CRIME LABS,

CORRECTIONS DEPT, FIRE DEPTS.

WHERE ARE STATE TAXES SPENT? (Continued)

• PUBLIC WELFARE– HOSPITALS --SOME UNEMPLOYMENT– TEST FOR POLLUTION– MEDICAL CLINICS – INSPECT WATER SUPPLIES

• HIGHWAYS AND TRANSPORTATION– CONSTRUCTION AND MAINTENANCE OF ROADS

• ARTS AND RECREATION– STATE FORESTS & PARKS, MUSEUMS

• ADMINISTRATION.– PAY SALARIES OF STATE OFFICIALS

LOCAL GOVERNMENT FORMS OF REVENUE

• 87,000 LOCAL GOVERNMNET UNITS

• COLLECT ALMOST $484 BILLION IN TAX REVENUE.

• THREE LARGEST SOURCES OF REVENUE ARE:

• INTERGOVERNMENTAL FORMS OF REVENUE

• PROPERTY TAXES

• OTHER TAXES

PROPERTY TAXES• TAX ON VALUE OF ASSESSED PROPERTY.• REAL PROPERTY--TAX ON REAL ESTATE &

STRUCTURES ON LAND• PERSONAL PROPERTY--MOVABLE

POSSESSIONS OR ASSETS• VALUE DETERMINED BY TAX ASSESSORS

– 1) TAX VALUES HARD TO COMPARE– 2) ASSESSORS HARD TO TRAIN– 3) DISCOURAGES PROPERTY IMPROVEMENT

OTHER TAXES INCLUDE:

• HOTEL / MOTEL TAXES

• OCCUPATIONAL TAXES(LIKE INCOME)

• EXCISE TAXES

• LICENSING FEES

LOCAL SPENDING

• LARGEST CATEGORIES OF SPENDING ARE:– 1) EDUCATION 40%– 2) UTILITES– 3) GENERAL WELFARE (POLICE AND FIRE)