Chapter 14Taxes and Government Spending

Section 1Chapter 14

Taxation is the primary way that the government collects money

Without revenue, or income from taxes, government would not be able to provide goods and services

What are taxes?

The constitution gives Congress the power to tax

The 16th amendment gives Congress the power to levy an income tax

Taxes and the Government

Taxes must be for “the common defense and general welfare”

Federal taxes must be the same in each state

Government cannot tax exports

Limits on the Power to Tax

A tax base is the income, property, good or service that is subjected to a tax

Proportional taxes are a tax for which the percentage of income paid in taxes remains the same for all income levels

Tax Bases and Tax Structures

Progressive Taxes are taxes for which the percent of income taxed increases as income increases

Regressive Taxes are taxes for which the percentage of income taxed decreases as income increases

Tax Bases and Tax Structures

1) Simple- easy to understand 2) Economy- Government should be able to

collect taxes without spending too much time or money

3) Certainty- Should know when the tax is due

4) Equity- Should be fair

Characteristics of a Good Tax

Incidence of a tax examines who bears the final burden of a tax

If a good is inelastic, the consumer will bear the burden of the tax. If a good is elastic, the seller will bear the burden of the tax.

Who bears the burden of the tax?

Section 2Chapter 14

Federal Income taxes are collected throughout the year as you earn income

Withholding is the process by which employers take tax payments from you before your receive your paycheck

The federal income tax is progressive

Individual Income Taxes

A tax return is a form where you declare your income to the government

A taxable income is a person’s total income minus exemptions and deductions

Filing a Tax Return

Filing a Tax Return

Exemptions are set amounts that you subtract from your income (spouse, kids)

Deductions are variable amounts that you can subtract from your income (school supplies for students)

Corporations must pay a federal tax on their income

This is a progressive tax i.e. Profit = taxes

Corporate Income Taxes

Social Security Tax- Funded by Federal Insurance Contributions Act (FICA). Go to those of old age, survivors and disability insurance.

Medicare Taxes- Funded by FICA. Health insurance for those over 65 and some with disabilities.

Unemployment Taxes- Collected by both the federal and state government. You can collect unemployment if you were laid off or are actively seeking work

Social Security, Medicare and Unemployment Taxes

Excise Tax- a tax on a production of a good (ex. Cigarettes)

Estate Tax- a tax on the total value of money and property of a person that has died. Paid before inheritors receive their share

Gift Tax- a tax on the money or property one living person gives to another

Import tax- taxes on imported good are called tariffs

Other Types of Taxes

Section 3Chapter 14

Mandatory spending is money that lawmakers must spend on certain programs or to use for interest payments on the national debt

Mandatory and Discretionary Spending

Discretionary spending allows lawmakers to spend money wherever they like

Mandatory and Discretionary Spending

Defense spending- counts for about half of the federal government’s discretionary spending

-includes military salaries, military equipment and operating costs of military bases

Discretionary Spending

An entitlement program is a social welfare program that people are “entitled” to if they meet certain requirements (Social Security, Medicare)

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

Entitlements

Section 4Chapter 14

A state’s operating budget pays for everyday expenses such as salaries, supplies and maintenance of state facilities.

A state’s capital budget pays for investment spending.

State Budgets

Education- Help finance public state universities and some aid to local governments for K-12.

Public Safety- State police systems and prisons

Highways and Transportation- States build and maintain highways. Also pay some costs of waterways and airports

Where are State Taxes Spent?

Public Welfare- Support some public hospitals and clinics. Help pay for and administer federal benefits programs

Arts and Recreation- State parks, some museums and historical sites

Administration- Help keep the state running (Congressman)

Where are State Taxes Spent?

Limits to State Taxation-Since trade and commerce are

considered national enterprises, states cannot tax imports or exports. They also cannot tax goods sent between states.

State Tax Revenues

Sales tax- sales taxes are the main source of revenue for many states

Other state taxes include state income tax, excise tax and property tax

State Tax Revenues

Local government help assist with public school systems, fire protection, public transportation, record keeping (birth/death certificates) and law enforcement

Local Government Spending and Revenues

Property taxes are the main source of local revenue

Local governments can collect their own excise, sales or income tax

Some taxes, such as room and occupancy rates, are aimed at nonresidents in order for local governments to earn extra money

Local Government Spending and Revenues