Government Revenue

& Spending

Topic 9

What are Taxes?

Required payment to local, state, or national gov’t

Primary way the gov’t collects money

Congress has the power to tax

The Power to TaxThe Power to Tax

Article 1, Section 8, Clause 1 of the Article 1, Section 8, Clause 1 of the Constitution grants Congress the power Constitution grants Congress the power to tax.to tax.

The Sixteenth Amendment gives The Sixteenth Amendment gives Congress the power to levy an income Congress the power to levy an income tax.tax.

Revenue

Income received by a gov’t from taxes & other non tax sources

Helps gov’t provide goods & services

Origins of Government RevenueOrigins of Government Revenue

Income TaxesIncome Taxes

The largest source of The largest source of government revenue is government revenue is

income taxesincome taxes..

Limits on Taxes

Purpose must be for the “common defense & general welfare”

Federal taxes must be the same in every state

Types of Taxes Types of Taxes

Proportional Taxes Taxes that remain the same regardless of

income. Example:

15 percent flat income tax for all Americans

Types of Taxes Types of Taxes

Progressive Taxes Taxes that increase as income increases. Income taxes are progressive taxes; the more

you earn, the more you pay.

Types of Taxes Types of Taxes

Regressive Taxes Taxes that decrease in proportion to income.

Has a greater burden on lower income-earners than higher-income earners.

Example: Sales Tax: Paying a seven percent tax on a cup of

coffee hurts me more than in hurts Bill Gates.

Types of Taxes

Type Description

Proportional

Ex. Property taxes

The percentage of income paid in taxes remains the same for all income levels. “Flat tax”. The more you make the more you pay. The more you spend the more you pay.

Progressive

Ex. Income

The percentage of income paid in taxes increases as income increases

Ex. Income rises, taxes rise

Regressive

Ex. Sales Tax

The percentage of income paid in taxes decreases as income increases

Progressive Taxes

Taxes that Taxes that increase inincrease in proportion proportion to increases in to increases in

income. income.

Income taxes are Income taxes are progressive taxesprogressive taxes

because as you because as you earn more, earn more, you pay more in taxesyou pay more in taxes..

Sources of Government Revenue

Individual & corporate income taxes

Social insurance taxes

Excise taxes

Estate & gift taxes

Taxes on imports

Taxes Taxes

Taxes are often used by the government to change people’s behavior. Raise on cigarettes to stop people from smoking. Lower taxes on business to stimulate economic activity. Give homeowners a tax cut to encourage

homeownership. Cut capital gains taxes to encourage investments.

Taxable Income

Person’s gross (or total) income minus exemptions & deductions

Includes salaries, wages, tips, and commissions

Includes income from investments

Taxable Income

1. Wages, tips, and salaries

2. Interest and dividend income

3. Unemployment

4. Alimony

5. Other

(self-employment, rent)

Non-taxable Income

1.Child support

2.Gifts

3.Veterans benefits

4. Social Security

Misc. Definitions

Personal ExemptionsPersonal Exemptions: Set amounts that you subtract from your gross income for yourself, your spouse, and any dependents

DeductionsDeductions: variable amounts that you can subtract, or deduct, from your gross income Ex. Interest on mortgage, donations to charity,

state & local tax payments

Other Sources of Gov’t Revenue

Social Security Tax Taxes to FICA that go to the Social Security Administration to fund old age, survivors, & disability insurance

Medicare National health insurance program that helps pay for health care for people over the age of 65

Property Taxes/Estate Taxes Tax on total value of the money & property of a person who has died

Excise Taxes Tax on the sale & manufacture of a good

Gift Taxes Tax on money or property that one living person gives another

Ways Taxing Influences Economic Behavior

Tax Incentive: use of taxation to encourage or discourage behavior

Sin taxes: federal taxes on tobacco and alcohol

Certain tax deductions encourage energy conservation

The Flow of TaxesThe Flow of Taxes

Money is collected from people and businesses then redistributed in the areas where Money is collected from people and businesses then redistributed in the areas where the government sees need. the government sees need. Money is collected from people and businesses then redistributed in the areas where Money is collected from people and businesses then redistributed in the areas where the government sees need. the government sees need.

Your Pay CheckYour Pay CheckHOURS AND EARNINGSHOURS AND EARNINGS

HoursHours EarningsEarnings

TAXES AND DEDUCTIONSTAXES AND DEDUCTIONS

DescriptionDescription AmountAmount

2020 200.00200.00 FICAFICA

FederalFederal

StateState

CityCity

Total TaxesTotal Taxes

15.2015.20

10.2510.25

5.105.10

1.001.00

31.5531.55

TOTALTOTALTaxable WagesTaxable Wages

200.00200.00

Less TaxesLess Taxes

31.5531.55

Net PayNet Pay

168.45168.45

Where do my taxes go? Where do my taxes go? Where do my taxes go? Where do my taxes go?

• The federal The federal government will government will spend a $2.5 trillion spend a $2.5 trillion in 2006. in 2006.

• $2,500,000,000,000$2,500,000,000,000

• The federal The federal government will government will spend a $2.5 trillion spend a $2.5 trillion in 2006. in 2006.

• $2,500,000,000,000$2,500,000,000,000

(Taxes 5:10)

Topic 9-SpendingFederal, State, & Local Governments

Mrs. Cohen

Federal Spending

How does the federal government make money & what is it spent on?

Two Main Categories:•Mandatory Spending•Discretionary Spending

Federal Spending

•Mandatory Spending- Spending on certain programs that is mandated, or required by existing law.

Examples: transportation, agriculture, energy, social security, etc.

•Discretionary Spending- Spending category about which government planners can make choices.

–Examples: Defense, education, training, student loans, environment, technology, etc.

Federal Spending

Entitlement Programs(Sub-category of Mandatory Spending)

Social welfare program that people are “entitled to” of they meet certain eligibility

requirements.

Examples:

Social Security

Medicare (Over 65 yrs.)

Medicaid (low income families)

How are state taxes spent?

•Education, Public Safety, Highways & Transportation, Public Welfare, Recreation, Administration (State Workers)

State Tax RevenueHow does the state make money?

•Income taxes, Corporate Income Tax, Sales Tax, & Excise Tax

Local Government RevenueHow does the local government make money?•Property taxes, school taxes, other local taxes

Local SpendingWhat are local taxes spent on?•Public schools, roads, libraries, jails, salaries (teachers and administrators)