Ch 14 Taxes and Government Spending Section 1

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% 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 Sales tax percent 6% 6% Sales tax $600 Tax as % of income . 006% . 012%

Tax Web Types 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 Web Types of Collection: Recipient: Income Tax Federal Sales Tax Property Tax Capital Gains Tax Social Security Spent On: Social Security Medicare/Medicaid Education State Local Military/National Defense Roads/Infrastructure Estate (Inheritance) Tax