3. Government’s Authority to Tax
We authorize the federal government, through
the Constitution and our elected
representatives in Congress, to raise money in
the form of taxes.
Taxation is the primary way that the government
collects money.
Taxes give the government the money it needs to
operate.
The first power granted to Congress is the power
to tax, which is the basis of all federal laws.
4. Limits on the Government
There are also limits on the government’s
power to tax.
The purpose of a tax must be “for the common
defense and general welfare.”
A tax cannot bring in money that goes to individual
interests.
Federal taxes must be the same in every state.
The government cannot tax exports, only imports.
5. Progressive Taxation
Economists describe taxes based on their
structure and according to the tax base.
A progressive tax is a tax for which the
percentage of income paid in taxes
increases as income increases.
6. Other Types of Taxation
A proportional tax is a tax for which the
percentage of income paid in taxes remains the
same at all income levels.
A regressive tax is a tax for which the
percentage of income paid in taxes decreases
as income increases.
A sales tax is regressive because higher income
households spend a lower proportion of their incomes
on taxable goods and services.
7. Tax Bases
Different taxes have different tax bases.
The individual income tax is based on a
person’s earnings.
The corporate income tax is based on a
company’s profits.
The property tax is based on real estate and
other property.
The sales tax is based on goods and services
that are sold.
8. Elasticities of Demand and Tax
Effects
Taxes affect more than just the people who pay them.
Producers often pass on a portion of tax to consumers.
Generally, the more inelastic the demand, the more easily
the seller can shift the tax to consumers.
9.
10. Characteristics of a Good Tax
Simplicity—tax law should be easy to
understand
Efficiency—the tax should be able to be
collected without spending too much time or
money
Certainty—it should be clear when the tax is
due, how much is due, and how to pay the tax
Equity—the tax system should ensure that no
one bears too much or too little of the tax
11. Determining Fairness
Economists have proposed two different ideas
about how to measure the fairness of a tax.
The benefits-received
principle holds that a
person should pay taxes
based on the level of
benefits he or she
expects to receive
from the government.
The gasoline tax is an
example of the benefits-
received principle.
12. Determining Fairness, cont.
The ability-to-pay principle holds that people
should pay taxes according to their ability to
pay.
Good taxes generate enough, but not too
much, revenue. Citizens needs are met, but
not to such an extensive degree that the tax
discourages production.
14. Types of Federal Taxes
Individual income taxes
Corporate income taxes
Social Security, Medicare, and unemployment
taxes
Excise taxes and tariffs
Estate and gift taxes
15. Individual Income Taxes
The government’s
main source of
revenue comes from
the federal tax on
individuals’ taxable
income.
What percentage of
federal revenues do
not come from
individual and
corporate income
taxes?
16. “Pay-As-You-Earn” Taxation
The amount of federal income tax a person
owes is determined on an annual basis.
To lessen the burden that one large yearly tax
would place on an individual and to make it
possible for the government to meet its regular
expenses, federal income tax is collected in a
“pay-as-you-earn” system.
This means that individuals usually pay most of their
income tax throughout the year as they earn income.
17. Tax Brackets
The federal income tax is a progressive tax, which rises
with the amount of taxable income.
Your range of income puts you in a specific tax bracket.
If you are single, at what rate would you pay taxes on
income over $29,500 and less than $71,950?
18. Withholdings and Tax Returns
Employers help collect taxes by withholding
money from your paycheck based on an
estimate of how much you will owe in federal
income tax for that year.
After the calendar year ends, employers give
their employees a report of how much income
tax has already been paid.
Employees then fill out a tax return to send to the
federal government.
19. Tax Returns, cont.
On your tax return,
you figure out how
much of your income
is taxable.
Taxable income is a
person’s total income
minus exemptions and
deductions.
Tax returns are due
to the Internal
Revenue Service by
April 15.
20. Corporate Income Taxes
Like individual income taxes, corporate income
taxes are progressive.
Determining corporate income taxes can be
more difficult than determining an individual’s
because businesses can take many
deductions.
Companies often deduct the cost of employee’s
health insurance as well as many other costs of doing
business.
21. Social Security and Medicare
Employees also withhold money to help fund
Social Security, Medicare, and unemployment
insurance under the Federal Insurance
Coalition Act (FICA).
Most of the FICA taxes you pay go to Social
Security benefits for retired people, surviving
members of wage earners, and disabled people.
The Medicare tax helps pay for health insurance
for people over 65.
23. Other Types of Taxes
Excise taxes—a general revenue tax on the
sale or manufacture of a good or service such
as gasoline, cigarettes, and other items
Estate taxes—a tax on the total value of the
money and property of a person who has died
As of 2008, if the total value of an estate is $2
million or less, there is no federal estate tax.
24. Other Types of Taxes, cont.
Gift taxes—a tax on the money or property
that one living person gives to another
The goal of the gift tax is to stop people from
avoiding the estate tax by giving away property
before they died.
Import taxes—Tariffs, or import taxes, are
taxes placed on imported goods.
25. Taxes that Affect Behavior
The government
sometimes uses taxes to
encourage good
behavior, which is known
as a tax incentive.
Tax credits are often used
as an incentive.
For example, people who
use solar power receive
an income tax credit.
27. Federal Spending
There are two types of government
spending.
Mandatory spending is money that Congress is
required by existing law to spend on certain
programs or to use for interest payments on the
national debt.
Discretionary spending is spending about which
lawmakers are free to make choices.
28. Federal Spending, cont.
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?
29. Entitlement Programs
Most of the mandatory spending items are for
entitlement programs, which fund social welfare
programs.
The federal government guarantees assistance
for all people who quality for such programs.
Entitlements are a largely unchanging part of
government spending.
Congress can only change the eligibility requirements
or reduce benefits if there is a change in the law.
30. Social Security
Social Security is a huge portion of federal spending.
About 50 million Americans receive monthly benefits from
the Social Security Administration.
The future of Social
Security is uncertain.
As the millions of baby
boomers—people born
after World War II—
start to retire, the ratio
of existing workers,
who pay for Social
Security, to retirees
will fall.
31. Medicare and Medicaid
About 42 million people receive Medicare benefits.
It pays for hospital care and for the costs of physicians and
medical services.
Medicare costs have been
rising as a result of expensive
technology and people
living longer. It faces the
same problem as Social
Security.
Medicaid benefits help low-
income families pay for their
medical expenses
The federal government
shares the cost of Medicaid
with state governments.
32. Other Mandatory Programs
Other means-tested entitlements benefit people
and families whose incomes fall below a certain
level. These entitlements include:
Food stamps and child nutrition programs
Retirement benefits and insurance for federal workers
Veterans’ pensions
Unemployment insurance
In recent years, there has been a debate over
governmentally funded universal healthcare.
33. Discretionary Spending
Defense spending accounts
for about half of the
government’s
discretionary spending.
The Department of Defense
uses this money to pay
salaries of enlisted men and
women as well as its civilian
employees.
This money also buys
weapons,
missiles, ships, tanks,
airplanes,
and equipment.
34. Discretionary Spending, cont.
The remaining discretionary funds go to pay
for the following:
Education and training
Scientific research
Student loans
Law enforcement
Environmental cleanup
Disaster relief
35. Federal Aid
Federal taxes are sometimes used to help state and
local governments.
State and federal governments share the cost of Medicaid,
unemployment insurance, education, lower-income
housing, highway construction, and dozens of other
programs.
States also rely on federal aid for disaster relief.
37. Local Governments
How do local governments manage their
money?
Local governments manage their money in
accordance with priorities set by elected local
government officials.
Local governments create budgets and collect
taxes just like the federal government.
38. State Budgets
Governments plan their spending by creating a budget.
The federal government has one budget while state
governments have two budgets.
An operating budget is a budget for day-to-day spending
needs.
A capital budget is spending on major investments.
Unlike the federal government, 49 states require
balanced budgets—budgets in which revenues are
equal to spending.
39. Where are State Taxes Spent?
Education
Every state spends taxpayer money to support at
least one public state university.
They also provide financial help to local governments
for public elementary and secondary schools.
Public Safety
State police enforce traffic laws and help motorists in
an emergency.
State governments build and run corrections systems.
Public Welfare
State funds support hospitals and clinics and
unemployment benefits.
40. Where are State Taxes Spent?
Highway and Transportation
State crews resurface roads and repair bridges.
States pay some of the cost of facilities like
waterways and airports.
Arts and Recreation
States fund parks, nature reserves, museums, and art
and music programs.
Administration
State governments spend money to keep the
government running.
Revenues pay for state workers’ salaries.
42. State Tax Revenue
States receive most of their revenue through
taxes.
Sales tax on goods and services is the main source
of state revenue.
Some goods, like food and clothing, are tax exempt in
certain states.
Even states without a sales tax impose excise taxes
that apply to specific products and activities.
Many states also collect an individual income tax,
which is paid in addition to the federal income tax.
Some states tax at a flat rate while other have
progressive rates.
43. State Tax Revenue, cont.
Corporate income tax—Most states collect
income taxes from corporations that do
business in the state.
These taxes make up a small amount of state tax
revenues.
Other state taxes include:
Licensing fees on certain businesses
Transfer taxes on stock certificates
Inheritance taxes
Property taxes, including real property and personal
property
44. Local Government
Local governments, including towns, cities,
countries, and school districts, carry major
responsibilities in the public school systems,
law enforcement, and fire protection.
They also manage public facilities, parks, and
recreation facilities.
They monitor public health, public transportation,
elections, record keeping, and social services.
46. Local Government Taxes
Local governments levy
property taxes, sales
taxes, excise taxes, and
income taxes.
Many local taxes affect
visitors and are
designed to raise
revenue from
nonresidents.
Wall-to-wall traffic jams,
for example, are
prompting a few cities to
consider a congestion
tax.
