This document provides an overview of financing government in the United States. It discusses several key topics: 1) Taxes are the largest source of federal revenue and include individual income tax, corporate income tax, and social insurance taxes like Social Security and Medicare. Congress has the power to tax according to the Constitution. 2) Nontax revenues and borrowing also contribute to financing government. Nontax revenues include fees and interest, while borrowing occurs through deficit spending and adding to the public debt. 3) The federal budget is created through a process involving the President, Congress, and the Office of Management and Budget. Spending priorities in the budget include entitlement programs, interest on the debt, and defense spending.

1. Magruder’s
American Government
C H A P T E R 16
Financing Government

2. C H A P T E R 16
Financing
Government
SECTION 1 Taxes
SECTION 2 Nontax Revenues and Borrowing
SECTION 3 Spending and the Budget
SECTION 4 Fiscal and Monetary Policy

21. http://www.usdebtclock.org/ Paying your taxes is considered a civic duty, although
doing so is also a requirement of the law. If you do not
pay your taxes, the government agency that oversees
taxes — the Internal Revenue Service or IRS — will
require you to pay your taxes or else face penalties,
such as fines or going to jail.

28. • Article I, Section 8, Clause 1 of the Constitution grants Congress the power to tax.
• The Sixteenth Amendment gives Congress the power to levy an income tax.

32. Withholding

33. A corporation is an
artificial being under
the law.
It pays income tax,
can own property,
can sue and be sued,
etc.
Each corporation
must pay a tax on its
net income, its
profits, that is, on the
earnings above the
costs of doing
business.

35. Certain
things are
taxed
and heavily
as an
attempt to
dissuade
such
behavior.

38. Other Types of Taxes
Excise Taxes
•An excise tax is a tax laid on the
manufacture, sale, or consumption of goods
and/or the performance of services.
Custom Duties
•A custom duty is a tax laid on goods brought
into the U.S. from abroad.
Estate and Gift Taxes
•An estate tax is a levy imposed on the assets
(estate) of one who dies. A gift tax is one
imposed on the making of a gift by a living
person.

49. #1 Building Permit Taxes
#2 Capital Gains Taxes
#3 Cigarette Taxes
#4 Court Fines (indirect taxes)
#5 Dog License Taxes
#6 Federal Unemployment Taxes
#7 Fishing License Taxes
#8 Food License Taxes
#9 Gasoline Taxes
#10 Gift Taxes
#11 Hunting License Taxes
#12 Inheritance Taxes
#13 Inventory Taxes
#14 IRS Interest Charges (tax on top of
tax)
#15 IRS Penalties (tax on top of tax)
#16 Liquor Taxes
#17 Luxury Taxes
#18 Marriage License Taxes
#19 Medicare Taxes
#20 Property Taxes
#21 Recreational Vehicle Taxes
#22 Toll Booth Taxes
#23 Sales Taxes
#24 Self-Employment Taxes
#25 School Taxes
#26 Septic Permit Taxes
#27 Service Charge Taxes
#28 Social Security Taxes
#29 State Unemployment Taxes (SUTA)
#30 Telephone Federal Excise Taxes
#31 Telephone Federal Universal Service
Fee Taxes
#32 Telephone Minimum Usage Surcharge
Taxes
#33 Telephone State And Local Taxes
#34 Tire Taxes
#35 Toll Bridge Taxes
#36 Toll Tunnel Taxes
#37 Traffic Fines (indirect taxation)
#38 Utility Taxes
#39 Vehicle License Registration Taxes
#40 Vehicle Sales Taxes
#41 Workers Compensation Taxes

50. Flat Taxes
Flat taxes charge everyone the same rate, regardless of income. In practice, there are
not many flat taxes in the United States. Even some of the flat tax proposals put forward
are not truly flat.
Example: Although the United States may not have many flat taxes, other countries do.
In fact, during the last ten years, many countries in Eastern Europe (including Russia,
Ukraine, Romania, and Georgia) have adopted flat taxes ranging between roughly 10
and 30 percent of income. The governments of these countries instituted the flat tax
with the hope that a simpler tax system with fewer loopholes and opportunities for tax
shelters would actually increase the amount of taxes they collected from wealthier
individuals and corporations.
Tax Credits
Governments use tax credits to alleviate the income tax burden for some
activities. A tax credit is deducted from the amount of taxes a person owes.
A good example is the Earned Income Tax Credit program in the United
States. The EITC gives lower-income workers back some of the money they
paid in payroll taxes. Tax credits are also known as tax expenditures.

51. Employers also report to the IRS how much they paid each
worker. The IRS compares all these numbers to make sure that
each person pays the correct amount of taxes.
If you haven’t had enough tax money withheld from your checks
throughout the year to cover the amount of tax you owe, you will
have to send more money (“pay in”) to the government. If,
however, too much tax money was withheld from your
paychecks, you will receive a check (get a “refund”) from the
government.
So it’s your overpaid amount of $$$ you get back!

54. The Power To Tax
• Article I, Section 8, Clause 1 of the Constitution grants Congress the
power to tax.
• The Sixteenth Amendment gives Congress the power to levy an
income tax.
Limits on the Power to Tax
The power to tax is also limited through the
Constitution. According to the Constitution:
1. Taxes must be used for public purposes only.
2. Federal taxes must be the same in every State.
3. The government may not tax exports.

55. Current Federal Taxes
Individual Income Tax
• Individual income taxes
regularly provide the largest
source of federal revenue.
• The tax is levied on each
person’s taxable income.
Corporation Income Tax
• Each corporation must pay a
tax on its net income, that is,
on the earnings above the
costs of doing business.
The Income Tax
The income tax is the largest source of federal
revenue today. The tax is also a progressive tax,
that is, the higher the income and the ability to
pay, the higher the tax rate.

56. Social Insurance Taxes
There are three main types of social insurance taxes
levied:
OASDI
•The Old-Age, Survivors, and Disability program is the basic Social
Security program.
Medicare
•Medicare is health insurance for the elderly and part of the
Social Security program.
•The unemployment compensation program pays benefits to
jobless workers and is also part of the overall Social Security
program.

57. The Federal Government’s Income
Federal revenue comes from several different sources:

58. Section 1 Review
1. Most of the Federal Government’s income comes from
(a) custom duties.
(b) licenses.
(c) estate taxes.
(d) income taxes.
2. OASDI, Medicare, and unemployment compensation program
taxes are all types of
(a) social insurance taxes.
(b) progressive taxes.
(c) nonrevenue taxes.
(d) freedom taxes.

63. Al Capone v. IRS
While for 10 years the
Chicago police had been
unable, if not unwilling, to
put the most notorious and
murderous of mobsters
behind bars, the federal
authorities found a way to jail
him: through the tax laws.
Thus the head of the
country's most powerful
syndicate providing
Americans with bootleg
liquor, gambling and
prostitution wound up in
Alcatraz.
The jury found Al Capone not
guilty of tax evasion in 1924,
but guilty on the counts for
1925 through 1927, and
guilty of failing to file returns
for 1928 and 1929.
On St. Valentine's
Day, 1929, Capone
ordered his men to
kill "Bugs" Moran,
head of the gang
that had machine-
gunned the Capone
headquarters.
Masquerading as
police officers,
Capone's men
massacred seven
opponents in a
downtown
warehouse

73. $18 Trillion?

77. Nontax Revenues and Borrowing
Nontax Revenues
•Nontax revenues come from a variety of sources, including
canal tolls; fees for passports, copyrights, and patents;
interest earned; and selling philatelic stamps.
Borrowing
•Congress has the power “[t]o borrow Money on the credit of
the United States.” (Article I, Section 8, Clause 2).
•A deficit is the shortfall between income and spending.
•A surplus is more income than spending.
•Congress must authorize all federal borrowing.

78. The Public Debt
The public debt is the government’s total outstanding indebtedness. It
includes all of the money borrowed and not yet repaid, plus the
accrued, or accumulated, interest.

79. Causes and Effects of the Public Debt
Causes:
• Deficit financing
• Failure to repay the debt
over time
• Interest accruing on the
existing debt
Effects:
• Increased revenue needed
to pay off the debt
• Fears of financial obligations
for tomorrow’s taxpayers

80. Section 2 Review
1. Examples of nontax revenues include all of the following EXCEPT
(a) profits made by the U.S. Mint.
(b) customs duties.
(c) the sale of philatelic stamps.
(d) passport fees.
2. Deficit spending means that the government
(a) spends more money than it gains in revenue and borrows the rest.
(b) spends less money than it gains in revenue.
(c) balances the budget every year.
(d) spends an amount of money that is equal to the amount of money it
gains in revenue.

94. Creating the
Federal Budget

99. House Budget Committee
Chairman Paul Ryan (R-WI)

100. Singer and
songwriter John
Legend testifies
before
a House
Appropriations
hearing on funding
for the arts.

103. Federal Spending
Spending by the Federal Government accounts for billions of
dollars and has effects on the economy as a whole.
Spending Priorities
•Entitlements are benefits that federal law says must be paid to all
those who meet the eligibility requirements. Entitlements are the
largest sector of government spending.
•Interest on the public debt has grown to be the second largest
category of federal spending.
•Outlays for defense spending account for another large section of
the federal budget.

106. Section 3 Review1. Uncontrollable spending refers to
(a) the monies required to ensure military readiness.
(b) spending that Congress and the President cannot change.
(c) the government’s accounting system.
(d) what the government does with our tax money.
2. Which of the following sequence of groups most closely
resembles the federal budget creation process?
(a) Federal agencies > the President > Congress > Office of Management
and Budget
(b) the President > Congress > Office of Management and Budget > federal
agencies
(c) Federal agencies > Office of Management and Budget > Congress > the
President
(d) Office of Management and Budget > federal agencies > the President >
Congress

111. Recovery

114. Credit is
paying for the
privilege of
using
someone
else’s money
when you
don’t have
enough
money now—
but you pay
back more!

122. Adam Smith Was Right!

125. Janet L. Yellen took office as Chair of the Board of
Governors of the Federal Reserve System on February 3,
2014, for a four-year term ending February 3, 2018. Dr.
Yellen also serves as Chairman of the Federal Open
Market Committee, the System's principal monetary
policymaking body. Prior to her appointment as Chair, Dr.
Yellen served as Vice Chair of the Board of Governors,
taking office in October 2010, when she simultaneously
began a 14-year term as a member of the Board that will
expire January 31, 2024.
Incumbent Janet Yellen
since February 1, 2014
In 2014 a new detailed level of Fed
communication was dubbed Fedspeak 3.0