Chapter 14 Taxes and Government Spending - … 14 Taxes and Government Spending 1. What are Taxes? 2. Federal Taxes 3. Federal Spending 4. State and Local Taxes and Spending How can

Chapter 14 Taxes and Chapter 14 Taxes and Government SpendingGovernment Spending

1.1. What are Taxes?What are Taxes?2.2. Federal TaxesFederal Taxes3.3. Federal SpendingFederal Spending4.4. State and Local State and Local

Taxes and Taxes and SpendingSpending

How can taxation meet the needs of government and the people?

1. What are Taxes1. What are Taxes Required paymentsRequired payments to a to a local, state, or national governmentlocal, state, or national government

The GovernmentThe Government’’s Authority to Taxs Authority to Tax

The Purpose of Taxation The Purpose of Taxation --gives the gives the government government money to functionmoney to function

reservesreserves -- the income the income received by a government received by a government for taxes and other non for taxes and other non tax sourcestax sources

The The ConstitutionConstitution grants grants the government the the government the power power to taxto tax, but it , but it spells outspells outspecific conditions on the specific conditions on the limitslimits of taxationof taxation

Tax StructuresTax Structures Progressive TaxesProgressive Taxes -- a tax for which the percentage of income a tax for which the percentage of income

paid in taxes paid in taxes increases as income increasesincreases as income increases Proportional TaxesProportional Taxes -- a tax for which the percentage of income a tax for which the percentage of income

paid in taxes paid in taxes remains the sameremains the same at all income levels at all income levels Regressive TaxesRegressive Taxes -- a tax for which the percentage of income a tax for which the percentage of income

paid in taxes paid in taxes decreases as income increases decreases as income increases

Tax BasesTax Bases The The income, property, good or serviceincome, property, good or service that is that is subject tosubject to a a taxtax individual income taxindividual income tax -- tax based on personal earningstax based on personal earnings corporate income taxcorporate income tax -- tax based on companytax based on company’’s profitss profits property taxproperty tax -- real estate taxreal estate tax sales taxsales tax -- goods and services soldgoods and services sold

What is the sales tax for New Jersey? Who was the highest? How about second highest?

Characteristics of a Good TaxCharacteristics of a Good Tax SimplicitySimplicity -- simple and easysimple and easy EfficiencyEfficiency -- not wasting time and moneynot wasting time and money CertaintyCertainty -- clear to a tax payerclear to a tax payer EquityEquity -- should be fairshould be fair

Taxes around the WorldTaxes around the World

0 5 10 15 20 25 30 35 40 45 50

Germany

Denmark

Sweden

United Kingdom

Canada

United States

Japan

Ireland

Korea

Mexico

Percent ofEarnings Paid inIncome andSocial SecurityTaxes

2. Federal Taxes2. Federal Taxes Taxes imposedTaxes imposed by the by the federal governmentfederal government

Personal Income Tax

Social Security,Medicare andUnemployment

Borrowing to CoverDeficit

Corportate Income Tax

Excise, Custom, Giftand Misc Taxes

39%

32%

9%

13%

7%

Federal Revenue•The main sources of government revenue are the taxes shown on this graph.

•What are the largest sources of federal revenue?

•What percentage of federal revenues do not come from individual and corporate income taxes?

Individual Income TaxesIndividual Income Taxes Pay as you Earn TaxationPay as you Earn Taxation Tax BracketsTax Brackets Withholdings Withholdings -- taking payments out of your check before you taking payments out of your check before you

receive itreceive it tax returntax return -- form used to file income taxesform used to file income taxes Taxable incomeTaxable income -- earnings on which taxes must be paidearnings on which taxes must be paid

Personal exemptionsPersonal exemptions -- amount that a taxpayer may subtract amount that a taxpayer may subtract from gross income for themselves, their spouse, and from gross income for themselves, their spouse, and dependentsdependents

Tax deductionsTax deductions -- amount taxpayers can subtract from their amount taxpayers can subtract from their amount of their income amount of their income

tax credittax credit -- amount taxpayers can subtract from their amount taxpayers can subtract from their amount of their income taxamount of their income tax

Federal Income Tax Rates, 2008Federal Income Tax Rates, 2008

$0$0$16,050$16,050$65,100$65,100$131,450$131,450$200,300$200,300$357,700$357,700

10%10%$1,605.00 +15%$1,605.00 +15%$8,962.50 +25%$8,962.50 +25%$25,550.00 +28%$25,550.00 +28%$44,828.00 +33%$44,828.00 +33%$96,770.00 +35%$96,770.00 +35%

$16,050$16,050$65,100$65,100$131,450$131,450$200,300$200,300$357,700 $357,700 NO LIMITNO LIMIT

$0$0$16,050$16,050$65,100$65,100$131,450$131,450$200,300$200,300$357,700$357,700

Schedule Y Schedule Y ––use if your use if your status is status is married filing married filing jointlyjointly

$0$0$8,025$8,025$32,550$32,550$78,850$78,850$164,550$164,550$357,700$357,700

10%10%$802.50 + 15%$802.50 + 15%$4,481.25 +25%$4,481.25 +25%$16,056.25 +28%$16,056.25 +28%$40,052.25 +33%$40,052.25 +33%$103,791.00 +35%$103,791.00 +35%

$8,025$8,025$32,550$32,550$78,850$78,850$164,550$164,550$357,700 $357,700 NO LIMITNO LIMIT

$0$0$8,025$8,025$32,550$32,550$78,850$78,850$164,550$164,550$357,700$357,700

Schedule X Schedule X ––use if your use if your filing status filing status is singleis single

Of the Of the amount over amount over --

The tax is The tax is But not But not over over --

If Your If Your taxable taxable income is over income is over --

ScheduleSchedule

Corporate Income TaxesCorporate Income Taxes Must pay federal income taxMust pay federal income tax on their taxable incomeon their taxable income

Social Security, Medicare, and Social Security, Medicare, and Unemployment TaxesUnemployment Taxes

Social Security taxesSocial Security taxes -- fund fund old ageold age and and disabled disabled

MedicareMedicare -- national healthcarenational healthcare for people for people over over 6565

Unemployment Unemployment -- file for file for unemployment unemployment compensationcompensation

Other types of TaxesOther types of Taxes Excise TaxExcise Tax -- revenue tax on the sale of manufactured goodsrevenue tax on the sale of manufactured goods Estate TaxEstate Tax -- tax on total value of the property of a person who tax on total value of the property of a person who

has diedhas died Gift TaxGift Tax -- tax on the money or property that one living person tax on the money or property that one living person

gives to anothergives to another Import TaxImport Tax -- tariff tariff -- items coming into the countryitems coming into the country

Government receives 2.8 trillion dollars in the form of taxes,But what could it possibly do with all this money!

Ironically, only one third of that money remains to be spent!

3. Federal Spending3. Federal Spending How much can the federal government spend? What should the How much can the federal government spend? What should the

government spend its money on?government spend its money on? Source: The Internal Revenue Service, U.S. Department of TreasurSource: The Internal Revenue Service, U.S. Department of Treasury. Because of y. Because of

rounding, totals may be greater or less than 100 percentrounding, totals may be greater or less than 100 percent

Department ofDefense, MilitaryMedicare, andother retirementHomeland Security

Social Security

Other

Net Interest onthe debt

The federal government spends the funds it collects from taxes and other sources on a variety of programs.

Which are the three largest categories of expenditures in the federal budget?

On which does it spend the least?

32%

3%

21%

19%

8%

19%

Mandatory and Discretionary Mandatory and Discretionary SpendingSpending

Mandatory SpendingMandatory Spending -- Congress is Congress is requiredrequired to spend on certain programsto spend on certain programs Discretionary SpendingDiscretionary Spending -- spending about which lawmakers are spending about which lawmakers are free to free to

make choicesmake choices

Defense Spending Defense Spending National DebtNational Debt

EducationEducationMedicareMedicare

DefenseDefenseSocial SecuritySocial Security

DiscretionaryDiscretionaryMandatoryMandatory

Entitlement ProgramsEntitlement Programs Social welfare programsSocial welfare programs that people are that people are ““entitledentitled”” to benefit if to benefit if

they meet certain eligibility requirements they meet certain eligibility requirements Social Security Social Security –– about 50 million Americans receive monthly about 50 million Americans receive monthly

benefits from the federal government (Social Security benefits from the federal government (Social Security Administration)Administration)

Medicare Medicare –– serves about 42 million people; 65 or over serves about 42 million people; 65 or over –– covers covers hospital care and for the costs of physicians and medical hospital care and for the costs of physicians and medical servicesservices

MedicaidMedicaid –– low low –– income families, some people with disabilities, income families, some people with disabilities, and elderly in nursing homes; the largest service for the poor!and elderly in nursing homes; the largest service for the poor!

The Average Expenditure for healthcare rose from $891 per The Average Expenditure for healthcare rose from $891 per person in 1960 to $5,670 in 2003! As a result, 47 million peopleperson in 1960 to $5,670 in 2003! As a result, 47 million peopleare left without healthcare!are left without healthcare!

Discretionary SpendingDiscretionary Spending Defense Spending Defense Spending -- accounts for 19% of federal spending and accounts for 19% of federal spending and

has dropped since the Cold War, but has increased after 2001. has dropped since the Cold War, but has increased after 2001. Why?Why?

Education and training Education and training –– more during recessions/depressionsmore during recessions/depressions Scientific Research Scientific Research –– if you donif you don’’t produce, you lose moneyt produce, you lose money Student loans Student loans –– at their lowest in history (MR. S pays 2.36%)at their lowest in history (MR. S pays 2.36%) Law Enforcement Law Enforcement –– varies, mostly to pay for millions of people varies, mostly to pay for millions of people

who work for the civilian branch of the federal governmentwho work for the civilian branch of the federal government

Federal Aid to State and LocalFederal Aid to State and Local 404 billion dollars a year404 billion dollars a year in federal monies divided among the in federal monies divided among the

states; average of around $1,400 per personstates; average of around $1,400 per person State and local governments rely on federal aidState and local governments rely on federal aid Hurricane Katrina Hurricane Katrina –– states were in ruin and Congress states were in ruin and Congress

appropriated $116 billion to help the states recover from the appropriated $116 billion to help the states recover from the disaster!disaster!

4. State and Local Taxes and 4. State and Local Taxes and SpendingSpending

Taxes imposed by local and state governmentTaxes imposed by local and state government U.S. Census BureauU.S. Census Bureau

Individual Income

Corporate Income

Sales and Excise

Insurance TrustRevenue

IntergovernmentalRevenue

Interest Earning

Other

Property Tax

13.4%7%

16%

2%

25%21.8%

19%

2.4%

Individual income taxes, sales, and other taxes, insurance premiums, and local and federal funds are major sources of state revenue

State BudgetsState Budgets Budget Budget -- an an estimate of future revenue and expensesestimate of future revenue and expenses Operating Operating -- day to dayday to day spending needsspending needs CapitalCapital -- spending on spending on major investmentsmajor investments BalancingBalancing -- revenue is equal to spendingrevenue is equal to spending

Other

Intergovernmental Revenue

Education

Public Welfare

Hospitals

Health

Corrections

Natural Resources

Governmental Administration

Interest on general debt

Highways

Insurance trust expenditures

2.9%

2.6%1.1%

5.4%

2.3%

5.1%

11.4% 5%

21.6%13%

27.4%

2.1%

Where are State Taxes SpentWhere are State Taxes Spent Education Education –– every state spends taxpayer money to support at every state spends taxpayer money to support at

least one public state university; national average per student least one public state university; national average per student is is $8, 701 per student from kindergarten till 12$8, 701 per student from kindergarten till 12thth grade (every grade (every year)year)

Public Safety Public Safety –– state police along nationstate police along nation’’s highwayss highways Highways and Transportation Highways and Transportation –– major state expense major state expense Public Welfare Public Welfare –– support some hospitals and clinics; help pay support some hospitals and clinics; help pay

unemployment unemployment Arts and Recreation Arts and Recreation –– state forests and state parks; museums state forests and state parks; museums Administration Administration –– need to spend money just to keep running; need to spend money just to keep running;

administrative feesadministrative fees

State Tax RevenueState Tax Revenue Sales Tax Sales Tax –– varies from state to state, major source of revenuevaries from state to state, major source of revenue Individual Income tax Individual Income tax –– paid in addition to federal income tax; paid in addition to federal income tax;

about 13 percent of state revenueabout 13 percent of state revenue Corporate Income tax Corporate Income tax –– make up only a small portion, but can make up only a small portion, but can

influence a stateinfluence a state’’s economys economy Other state taxes Other state taxes --

real propertyreal property -- land and any permanent structures to which a land and any permanent structures to which a person has legal title toperson has legal title to

Personal propertyPersonal property -- movable possessions or assets movable possessions or assets

Local Government Spending and Local Government Spending and RevenueRevenue

Cities, Towns, townships, counties, and special districtsCities, Towns, townships, counties, and special districts Responsibilities Responsibilities -- public buildings, fire stations, schools, law public buildings, fire stations, schools, law

enforcementenforcement Property TaxProperty Tax –– levied on properties owned by individuals to levied on properties owned by individuals to

offset the expense of services such as street construction and offset the expense of services such as street construction and maintenance; major source of funding public schoolsmaintenance; major source of funding public schools

Other local taxesOther local taxes –– sales, excise, and income taxessales, excise, and income taxes

Local RevenueLocal RevenueUtility Revenue

Property Taxes

Individual Income Tax

Sales and Excise Taxes

Other taxes andcharges

Intergovernmentalrevenue

Interest Earning

2%

34.3%

.88%

1.6%5.5%

35.5%

20%

Local SpendingLocal Spending

Education

Hospitals

Health

Police Protection

Governmental Administration

Public Welfare

Fire Protection

Parks and Recreation

Other

Interest on General Debt

Insurance Trust Expenditures

Highways

Sewerage

Housing and Community Development

Utility

37.9%

10.2%

4.6%

13.9%

2.7%

2.7%

3.7%

2.1%

3.5%

2.1%

2.3%3.4%

3.3% 4.9% 2.7%

Three Types of Tax StructuresThree Types of Tax Structures

$3,000 or 5 percent $3,000 or 5 percent of total purchases of total purchases of $60,000; tax bill of $60,000; tax bill is 2 percent of is 2 percent of incomeincome

$2,000 or 5 percent $2,000 or 5 percent of total purchases of total purchases of $40,000, tax bill of $40,000, tax bill is 4 percent of is 4 percent of incomeincome

Sales TaxSales TaxA smaller A smaller percentage of percentage of income is taken in income is taken in taxes as income taxes as income increasesincreases

RegressiveRegressive

$45,000 or 30 $45,000 or 30 percent of incomepercent of income


Income TaxIncome TaxA larger percentage A larger percentage of income is taken of income is taken in taxes as income in taxes as income increasesincreases

ProgressiveProgressive



Some State TaxesSome State TaxesA constant A constant percentage of percentage of income is taken in income is taken in taxes as income taxes as income increasesincreases

ProportionalProportional

MaryMary’’s s Taxes on a Taxes on a $150,000 $150,000

incomeincome

RonRon’’s Taxes s Taxes on a on a

$50,000 $50,000 incomeincome

ExampleExampleDescriptionDescriptionType of TaxType of Tax

Documents

Chapter 14 Taxes and Government Spending - … 14 Taxes and Government Spending 1. What are Taxes? 2. Federal Taxes 3. Federal Spending 4. State and Local Taxes and Spending How can