Welcome to Presentation Plus! Making It Relevant 20 Chapter Focus 4

Making It Relevant 20

• In a recent year the national government took in almost $1.5 trillion in revenues.

• The two major sources of all this money are taxing and borrowing.

Introduction• Collecting taxes is one way the federal government

plays a role in the United States economy.

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Taxes as a Source of Revenue

• Article I, Section 8, of the Constitution gives Congress the power to levy and collect taxes.

• Today taxes are the chief way the federal government raises money.

• Taxes are payments by individuals and businesses to support the activities of government.


Individual Income Tax

• About 44 cents of every dollar the government collects comes from income taxes.

• The federal income tax is levied on a person’s taxable income, or the total income of an individual minus certain deductions and personal exemptions.

• The individual income tax is the federal government’s biggest single source of revenue.


Individual Income Tax (cont.)

– contributions made to charity.

– state and local income taxes paid.

– home mortgage interest.

– other expenses.

• People may elect to take deductions for…

• The government also permits personal exemptions that are based on the number of people who are dependent on the wage earner who pays the income tax.


• The income tax is a progressive tax, one based on a taxpayer’s ability to pay. The higher a person’s taxable income, the higher the tax rate.

• People with higher incomes, however, can often take advantage of certain deductions not as available to those in lower tax brackets, making the tax system less progressive.

• A dependent is one who depends primarily on another person for such things as food, clothing, and shelter.



• During the year employers withhold a certain amount of money from the workers’ wages. • This withholding pays the anticipated taxes ahead of the April 15 filing date.

• Self-employed people–including business owners, tradespeople, and professionals– are expected to file estimates of their income four times a year and make payments with each estimate.

• The deadline for filing income tax returns each year is April 15.



• The IRS audits, or checks more closely, a small percentage of tax returns each year.

• The IRS also investigates many suspected criminal violations of the tax laws each year.

• The Internal Revenue Service (IRS), a bureau of the United States Treasury Department, collects these taxes through its regional centers.



Corporate Income Tax

• The federal government taxes all the earned income of a corporation beyond its expenses and deductions.

• Corporate income taxes represent about 12 percent of federal government revenues.

• Nonprofit organizations such as colleges, labor unions, and churches are exempt from this tax.

• Corporations, as well as individuals, must pay income taxes.


Social Insurance Taxes

• The taxes collected to pay for these major social programs are called social insurance taxes.

• Employees and employers share equally in paying the tax for Social Security and Medicare.

• The federal government collects huge sums of money each year to pay for Social Security, Medicare, and unemployment compensation programs.


• These taxes are regressive taxes because people with lower incomes usually pay a larger portion of their income for these taxes than do people with higher incomes.

Social Insurance Taxes (cont.)


Excise Taxes

• The government imposes excise taxes on gasoline, oil, tires, cigars, cigarettes, liquor, airline tickets, long-distance telephone service, and many other things.

• Taxes on the manufacture, transportation, sale, or consumption of goods and the performance of services are called excise taxes.


Excise Taxes (cont.)

• Excise taxes contribute about $50 billion a year to the federal government.

• Some excise taxes are called luxury taxes because they are levied on goods such as cigarettes and liquor not considered to be necessities.


Customs Duties

• The federal government imposes customs duties to raise revenue or to help protect the nation’s industries, businesses, and agriculture from foreign competition.

• Many business, labor, and farm groups support protective tariffs, or high customs duties, because they raise the price of foreign goods, making them less competitive to American goods.

• Taxes levied on goods imported into the United States are called customs duties, tariffs, or import duties.


Taxes and the Economy

• Groups affected by tax increases have sometimes influenced Congress to pass special exemptions in order to reduce the taxes they have to pay.

• The result is that the tax system contains many special provisions designed to benefit certain groups.

• The federal government sometimes uses taxes to influence economic decisions.


Borrowing for Revenue

• In 1996, borrowing amounted to about $146 billion, or about 10 cents for every dollar the government raised.

• In addition to collecting taxes, the federal government borrows money.

• The government borrows by selling federal securities–financial instruments that include bonds, notes, and certificates.


Bonds and Other Securities

• Federal government securities are popular with investors because they are safe and interest may not be taxable.


Bonds and Other Securities (cont.)

• In return for lending the government money, investors earn interest on their bonds.

• The most popular bonds for small investors are savings bonds.


The National Debt

• Government borrowing to fund annual budget deficits over time creates the national debt.

• The size of the national debt effects the federal budget and the economy.

• When the government’s spending is greater than its income, it goes into debt.

How does the income tax compare with other sources of federal revenue in terms of the amount collected?

It is the greatest single source of revenues.

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How does the federal government use tax laws to affect economic decisions?

Example: Income tax deductions for home mortgage interest are meant to encourage home buying and thus help the construction industry. Exemptions are used to encourage activities, such as exploring for oil.


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End of Section 1


• The law requires the president to propose to Congress the budget for the entire federal government each fiscal year.

Drawing Up the President’s Budget (cont.)

• This budget must be delivered within 15 days after Congress convenes each January.

• The actual day-to-day preparation of the budget is the responsibility of the Office of Management and Budget (OMB).


Uncontrollables

• About 70 percent of the federal budget consists of what are called uncontrollables–expenditures required by law or resulting from previous budgetary commitments.

• A large portion of the uncontrollables are called entitlements–benefits that Congress has provided by law to individuals.

• Despite having a key role in the budget process, the president does not have complete freedom in making budgetary decisions.


Uncontrollables (cont.)

– Social Security

– pensions for retired government employees

– Medicare

– Medicaid

– veterans’ benefits

• Entitlements include:


• In fiscal 1996, interest on the national debt amounted to more than 15 percent of the federal government’s total expenses.

• Another largely uncontrollable item in the budget is the interest that must be paid on the national debt.

Uncontrollables (cont.)


Congressional Budget Action

• No money may be spent and no taxes may be collected until Congress approves.

• Congress may revise the president’s budget proposals as it sees fit.

• The president draws up budget proposals, but only Congress has the power to raise revenue and pass appropriations.

• In 1985 Congress enacted the Balanced Budget and Emergency Deficit Control Act, known as the Gramm-Rudman-Hollings Act (GRH) after the senators who designed it.


Gramm-Rudman-Hollings Act

• This law was aimed at forcing the president and Congress to work together to reduce budget deficits.

How do the executive and legislative branches work together to produce an annual budget for the federal government?

The executive branch draws up a proposed budget; Congress uses the president’s budget in preparing a tax and spending program to submit to the president.


Why is it so difficult for the federal government to reduce spending or raise taxes in order to balance the budget?

Reducing spending is difficult because so much of the budget goes for uncontrollables. Reducing spending in other areas may be unpopular with the public, as is raising taxes.


What is the deadline for filing individual income tax returns?

April 15 is the deadline for filing individual income tax returns.



Any nonprofit organizations–such as churches, colleges, and labor unions–are exempt from federal income tax.

What are three institutions that are exempt from the federal income tax?


The IRS collects taxes, checks tax returns, and investigates suspected criminal tax law violations.

What are three responsibilities of the Internal Revenue Service?


1. income taxes2. excise taxes3. customs duties4. estate and gift taxes

What are four types of taxes that the federal government collects?


The Office of Management and Budget (OMB) prepares the federal budget.

What executive agency is charged with preparing the federal budget?


They are safe, and interest on some is tax exempt.

Why are federal securities such as bonds popular with investors?


Its goal is to force the president and Congress to work together to reduce federal budget deficits.

What is the goal of the Gramm-Rudman-Hollings Act?


Much of the budget consists of uncontrollables such as entitlements and interest on the national debt; each special-interest group wants the cuts in someone else’s area.

What factors make it difficult for Congress to cut spending?


Protective tariffs raise the prices of foreign goods, making them less competitive compared to American goods on the domestic market.

Why would business or labor groups support protective tariffs?

Section Focus Transparency 20-1 (1 of 2)

Section Focus Transparency 20-1 (2 of 2)

1. excise taxes in 1940; individual income taxes in 1990

2. consistently decreasing after 1950

3. Answers will vary but may include that Social Security was fairly new in 1940 and had few beneficiaries receiving payments.

In the past few years, the federal government’s annual expenses have exceeded $1 trillion. If you were able to spend $1 million every day, you would need nearly 3,000 years to spend $1 trillion.

Before 1998 the last fiscal year the federal budget was balanced was 1969, when it ran a small surplus. That was during the last three months of the Lyndon Johnson administration and the first nine months of the Richard Nixon administration. The last president to pay off the national debt was Andrew Jackson, who served from 1829 to 1837.

A River of Red Ink

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Welcome to Presentation Plus! Making It Relevant 20 Chapter Focus 4