Harcourt Brace & Company Chapter 12 The Design of the Tax System (pp. 243-250)

Harcourt Brace & Company

Chapter 12

The Design of the Tax System(pp. 243-250)


“In this world nothing is certain but death and taxes.” (Benjamin Franklin)

020

4060

80100

1789

Taxes paid in 1789accounted for 5% of personal income


“In this world nothing is certain but death and taxes.” (Benjamin Franklin)

020

4060

80100

1789 Today

Today, taxes accountfor about 35 % of personal income!


The Tax System

When the government addresses the problem of externalities, provides public goods, or regulates the use of common resources, it can raise economic well-being.

For the government to perform these and its other many functions, it needs to raise revenue.


A Financial Overview of the U.S. Government

Where does the government get its income from?

Who contributes the most to the U.S. Government in the form of taxes?

What does the government spend its income on?


The U.S. Economy may be divided into two major sectors:

The Private Sector– About two-thirds of all economic activity

in the U.S. takes place within the private sector.

The Public Sector– About one-third of all economic activity in

the U.S. involves the government sector.


The Government Sector: Federal, State and Local

The Federal Government collects about two-thirds of the taxes in our economy. (Figure 12-1)

– Individual Income Taxes

– Social Insurance Taxes

– Corporate Income Taxes

– Excise Taxes

– Other


Table 12-2 1999 Fed. Receipts

Tax Amount (bil) Percent (%)

Ind. Income 869 48

Soc. Ins. 609 34

Corp. Inc. 182 10

Other 146 8

Total 1806 100


Individual Income Taxes... The largest source of government revenue

Tax Liability is how much taxes a family owes and is based upon total income.

Marginal Tax Rate is the tax rate applied to each dollar of income. (Table 12-3)

Higher-income families pay a larger percentage of their income in taxes.


Tax Relief Act of 2001

Passed in May 2001 Tax rebate checks of between $300-

$600 were issued in Summer 2001 Marginal Tax rates in 2006 will be lower

(15% to 10%, 28% to 25%, 31% to 28%, 36% to 33% and 39.6% to 35%)

Rate changes will be phased in


Social Insurance Taxes

Established in 1935 (part of New Deal) . Based on wages only (payroll tax). Employee (and employer) each pay

7.65% of wages. Social Security tax (6.2%) applies to

first $80,400 in earnings (2001 limits). Medicare rate (1.45%) applies to all

earnings.


Federal Government Spending

Spending of government revenues (taxes) includes transfer payments and the purchase of public goods and services. (Table 12-4)

Transfer Payments is a government payment not made in exchange for a good or a service.– Transfer payments accounts for the

largest expenses of the government.


Spending of the Federal Government

Expense Category:Social Security

National Defense

Income Security

Net Interest

Medicare

Health

Other


Financial Conditions of the Federal Budget

Budget Deficit– Situation where the expenses of the

budget are greater than the revenues.

– Government finances the deficit by borrowing from the public

Budget Surplus– Situation where the revenues are greater

than the expenses. Used to pay outstanding debts.


State and Local Governments: Collect about one-third of taxes paid

Expenses– Education

– Public Welfare

– Highways

– Other

Receipts– Sales Taxes– Property Taxes– Individual Income

Taxes– Corporate Income

Taxes– Federal Government– Other


Table 12-5 1996 S&L Receipts

Tax Amount (bil) Percent (%)

Sales Tax 249 20

Property 209 17

Ind. Inc. 147 12

Corp Inc 32 3

From Fed 235 19


Tax Revenue by Source in Georgia

Individual Income Tax (47.1%) General Sales Tax (34.3%) Corporate Tax (5.3%) Motor Fuel (4.7%) Georgia State Government Tax (2000)


Spending in Georgia (1999) by Function (% of total)

Education (42.7%) Public Welfare (20.8%) Highways (6.8%) Corrections (4.1%)


Local Government in Georgia

Main Tax Sources: Property Tax (71%) and Sales Tax (17%)

Main Spending Categories: Education (35%), Health (18%) and Public Safety (8%)

Documents

Harcourt Brace & Company Chapter 12 The Design of the Tax System (pp. 243-250)