Ch. 14: Taxes and Government Spending

Section 1: What Are Taxes?

• “Nothing in life is certain but death and taxes.” -Benjamin Franklin

Taxes/Revenue

• A tax is a required payment to the local, state, or national government.

• Income raised by the government from taxes is called revenue.

Taxes and the Constitution• The Constitution grants that Congress may tax:

“To lay and collect taxes, duties, imposts and excises, to pay the debts, and provide for the common defense and general welfare of the United States.”

Types of Collection: Income Tax

• Individual income tax: tax on a person’s annual earnings.

Types of Collection: Sales Tax

• Sales tax is a tax on the dollar value of a good or service being purchased.

Types of Collection: Property Tax

• Property tax is a tax on the value of a property.

Types of Collection: Corporate Income Tax

• Corporate income tax is a tax on the earnings of corporations.

Types of Collection: Capital Gains

• Long-Term Capital Gains Taxes are paid on earnings from investments held for more than 1 year (less than 1 year is taxed as income tax).

Tax Structures: Proportional Tax

• A proportional tax is when the tax rate percentage is the same for all income levels.

Joe Tony

Income $150,000 $50,000

Tax percent rate 10% 10%

Tax payment $15,000 $5,000

Tax Structures: Progressive Tax

• A progressive tax is when the tax percentage rate increases as income increases.

Joe Tony

Income $150,000 $50,000

Tax percent rate 25% 10%

Tax payment $37,500 $5,000

Tax Structures: Regressive Tax

• A regressive tax is when the tax percentage rate decreases as income increases.

• Does this ever happen? Examples?

Tax Structures: Regressive Tax• A regressive tax is when the tax percentage rate

decreases as income increases.• Does this ever happen? Examples?

Joe Tony

Income $150,000 $50,000

Cost of new car $10,000 $10,000

Sales tax percent 6% 6%

Sales tax $600 $600

Tax as % of income .006% .012%

Tax WebTypes of Collection:

Income Tax

Sales Tax

Property Tax

Capital Gains Tax

Estate (Inheritance) Tax

Recipient:

Federal

Social Security

State

Local

Spent On:

Section 2: Federal Taxes

• The Federal Government is the branch that receives the most taxes.

Tax Withholding

• Employers withhold money from employees paychecks throughout the year and send it to the government.

• Estimated amount of taxes owed.

Tax Return

• At the end of the year, the amount withheld might have been too much or too little.

• Tax payers must file a tax form which either returns or pays money.

Personal Exemptions• Tax exemptions are amounts of money that

you don’t need to pay taxes on. • Examples:– Charitable donations– Interest on loan– Business expenses/investment– Medical expenses

Gross Income vs. Taxable Income

• Gross income is the total amount of money earned.

• Taxable income is after tax deductions have been taken out.– Taxable Income = Gross Income – Deductions

Practice Problem:

• You make $30,000/year, your spouse makes $40,000

• You gave $5,000 away this year• You paid $4,000 in interest for loans

• Your tax rate is 15%– How much do you end up with?

Tax Incentives

• The tax system incentivizes certain behavior• You pay less if you…– Marry– Have children– Donate money– Invest in a home

• You pay more if you…– Purchase a second (vacation) property– Smoke or gamble– Live lavishly

Section 3: Federal Spending

• The Federal Budget goes primarily to the Military, Medicare/Medicaid, and Social Security.

Federal Spending Graph

Mandatory vs. Discretionary Spending

• Mandatory Spending: Spending required by current legislation– Social Security, Medicare/Medicaid

• Discretionary Spending: Spending that is optional (not required)– Military, Transportation, Agriculture

Discretionary “Other” Spending

• Dept. of Education• Dept. of Agriculture• Dept. of Energy• Corps of Engineers• Dept. of Labor• Dept. of Health Services• Dept. of Energy• EPA

Debt/Deficit

• Spending outpaces Revenue

Section 4: State and Local Spending

• State and Local governments spend money on infrastructure (roads) and education.

State Budgets

• State revenue comes from…– State income tax– Sales tax – Excise tax (Sin tax)

• State money is spent on…– Education– Roads/infrastructure– Public welfare

Pennsylvania State Budget

Local Budgets

• Local budgets receive most of their money through…– Property taxes

• Local government spends most of their money on…– Education (Local area school district)

Local Budgets/Education

• If funding for schools is local, what effect does that have on public school systems?

Tax WebTypes of Collection:

Income Tax

Sales Tax

Property Tax

Capital Gains Tax

Estate (Inheritance) Tax

Recipient:

Federal

Social Security

State

Local

Spent On:

Social Security

Medicare/Medicaid

Education

Military/National Defense

Roads/Infrastructure