Chapter 14 Taxes and Government Spending

Chapter 14 Taxes and Government Spending

Section 1 What are Taxes?

I. Funding Government Programs

A. tax- required payment to a local, state, or national government.

1. receive the money they need to operate.

2. primary way government collects money.

B. Revenue is income received by the government in Taxes and other nontax sources.

1. Provide highways, education, and law enforcement.

2. Provide help to people.

II. Taxes and the Constitution.

A. The power of Tax

1. first power granted to Congress.

2. Article 1, Section 8, Clause 1 is the basis for federal tax laws

B. Limits on the power to tax

1. cannot bring in money that goes to individual interests.

2. Federal taxes must be the same in every state.

3. Can’t tax church services because of freedom of religion.

4. Can’t tax exports.

5. Can’t impose taxes unless divided among states according to population.

III. Tax Bases and Tax Structures

A. Tax Bases is the income, property, good, or service that is subject to a tax.

1. individual income tax, sales tax, property tax, or corporate profits

B. Proportional Tax is a tax for which the percentage of income paid in taxes remains the same for all income levels

C. Progressive Taxes – Percentage of income paid in taxes increases as income increases

1. Federal income tax

D. Regressive tax - percentage of income paid in taxes decreases as income rises.

1. sales tax

2. higher income households spend lower proportion of their incomes on taxable goods and services.

IV. Four Characteristics of a good tax- Simplicity, Efficiency, Certainty, and Equity.

A. Fairness

1. Pay taxes based on the level of benefits you receive.

2. Pay taxes according to your ability.

B. Balancing tax revenues and Tax Rates

1. enough to meet citizens’ needs, but not so much as to discourage production.

2. Economy benefits from lower taxes.

V.Who Bears the Burden of a Tax?

A. Incidence of a tax

1. Final Burden of a tax.

2. The more inelastic the demand the more easily the seller can shift the tax to consumers.

Section 2 Federal Taxes

I. Individual Income Taxes

A. Pay as You Earn Taxation

1. Amount of federal income tax is determined on an annual basis.

2. April 15th taxpayers pay any additional income taxes they owe.

B. Tax withholding

1. taking payments out of your pay before you receive it.

2. employer forwards it to the federal government as an installment payment.

C. Filing a Tax return

1. tax return is formed used to file income taxes.

2. Taxable income is person’s gross income minus exemptions and deductions.

3. Personal Exemptions are yourself, your spouse and dependents.

4. Deductions are interest on a mortgage, medical expenses, and some state and local tax payments.

D. Tax Brackets

1. Different range of income.

IV. Corporate Income Taxes

A. Must pay federal income taxes based on income.

B. Can take many deductions.

C. Federal income tax rates are progressive.

V. Social Security, Medicare, and Unemployment taxes

A. Social Security Taxes Funds old age, survivors, and Disability Insurance

1. established in 1935 to ease hardships of Great Depression.

2. Government established income cap for Social Security taxes each year.

B. Medicare taxes

1. FICA also fund Medicare.

2. National health insurance program helps pay for health care for people over 65, certain disabilities.

C. Unemployment Taxes

1. Pays for an insurance policy for workers.

2. If workers are laid off through no fault of their own ,they may file for unemployment compensation.

VI. Other types of Taxes

A. Excise Taxes

1. gasoline, cigarettes, alcoholic beverages, telephone services, cable television

B. Estate Taxes is a tax on the estate or total value of the money and property of a person who has died

C. Gift Taxes are taxes on money or property that one living person gives to another.

1. Keep people from avoiding estate taxes by giving away their money before they died.

2. $10,000 or less per year can be given tax free.

D. Import taxes are called tariffs.

1. protect American farmers and industries

E. Taxes that affect behavior

1. Tax incentive – use of taxation to encourage or discourage behavior.

Section 3 Federal Spending

I. Mandatory and Discretionary spending

A. Mandatory Spending- money lawmakers are required to spendon certain programs.

1. Medicare

2. Social Security

B. Discretionary spending allows government planners to make choices.

II. Entitlement Programs - Social welfare programs people are entitled to if they meet certain eligibility requirements.

A. Social Security is largest level of federal funding

B. Medicare serves 36 million people

C. Medicaid benefits low income families, people with disabilities, and elderly people in nursing homes.

D. Other mandatory Spending programs

1. Food stamps, Supplemental Security Income, and child nutrition, retirement benefits and insurance to federal workers.

2. Veterans’ pensions and unemployment insurance.

E. The Future of entitlement spending

1. Social Security payments will rise as people in “baby boomer” generation reach 65..

2. Medicare costs growing due to expensive technology

III. Discretionary Spending

A. Defense Spending

1. Pays salaries of 1.37 million men and women in uniform.

2. 703,000 civilian workers working for the armed forces.

B. Other Discretionary Spending

1. Small portion of federal spending goes into this category.

2. pays salaries of millions of people who work for the civilian branches of the federal government.

VI. Federal Aid to State and Local Governments

A. $284 billion a year is divided among the states.

1. $1,000 per person on average.

B. Federal grants-in-aid are grants of federal money for certain closely defined purposes.

1. In 1980s, many grant-in-aid programs were converted to a block grant format.

2. Lump sums of money intended to be used in a broadly defined area of public need.

Section 4 State and Local Taxes and Spending

I. State Budgets

A. Operating Budgets

1. Pay for day to day expenses

2. salaries of state employees

B. Capital budgets

1. Pays for major capital, or investment spending.

2. Building a new bridge or building.

C. Balancing State Budgets

1. State have laws that require balanced budgets.

2. Balanced budgets have revenues equal to spending.

3. can borrow or carry deficits for several years.

II. Where are State Taxes Spent?

A. Education

1. Every state has at least one state supported university

2. The national average states spend per students in local schools is $6,251.

B. Public Safety

1. Police force enforce traffic laws and helps motorists in emergencies.

2. Correctional systems

C. Highways and Transportation

1. Building and maintaining highways systems

2. Waterways and airports

D. Public Welfare

1. Public hospitals and clinics

2. Unemployment compensation benefits

E. Arts and Recreation

1. Parks and nature reserves

2. Museums and music and art programs

F. Administration

1. State tax revenues pay salaries of all state workers including maintenance crews in state parks, governor, and state court judges.

III. State Tax Revenue

A. Limits on State Taxation

1. Cannot tax imports or exports.

2. Cannot tax goods sent between states.

3. Cannot tax federal property.

4. Nonprofit organizations are tax exempt, not subject to taxes.

B. Sales tax

1. Sales tax rates range from 3 to 8 percent

2. Some categories are exempt from sales tax.

C. State Income Tax

1. Texas has no state income tax.

D. Corporate Income tax

1. Some states collect taxes on a flat rate and some at a progressive rate.

2. Lower corporate taxes attract businesses to a state.

E. Other State taxes

1. Licensing fee is a type of tax that people pay to carry on different kinds of businesses.

2. Transfer tax when documents are transferred or recorded

3. Severance tax is charged when companies take resources out of a state.

4. Inheritance tax is charged on the value of the property that goes to each heir.

5. Property tax is charged on real property, such as land and buildings.

a. Also includes personal property, such as jewelry, furniture, and boats.

IV. Local Government Spending and Revenue

A. Forms of Local Government

1. town or City

2. Townships

3. Counties

4. Special districts

5. Today, there are more than 87,000 local government units.

B. Jobs of Local Government

1. Public school systems

2. Law enforcement

3. Fire protection

4. Libraries

5. Public Health

6. Elections

7. Record keeping

8. Social Services.

C. Property Taxes

1. Tax Assessor determines the value of the property.

2. Main source of funding for public schools.

D. Other Local Taxes

1. Sales, excise, and income taxes.

2. Raise revenue from nonresidents.

a. Room occupancy tax

b. City tax

c. Sales taxes on rental cars and hotel rooms

d. Airport taxes

e. Taxes on movies or theater taxes

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