Taxes and Government Spending Power Point Notes - Phillipsburg ...

Chapter 14 Taxes and
Government Spending
1. What are Taxes?
2. Federal Taxes
3. Federal Spending
4. State and Local
Taxes and
Spending
How can taxation meet the needs of government and the people?

1. What are Taxes
‣ Required payments to a local, state, or national government

The Government’s s Authority to Tax
‣ The Purpose of Taxation -
gives the government
money to function
‣ reserves - the income
received by a government
for taxes and other non
tax sources
‣ The Constitution grants
the government the power
to tax, , but it spells out
specific conditions on the
limits of taxation

Tax Structures
‣ Progressive Taxes - a tax for which the percentage of income
paid in taxes increases as income increases
‣ Proportional Taxes - a tax for which the percentage of income
paid in taxes remains the same at all income levels
‣ Regressive Taxes - a tax for which the percentage of income
paid in taxes decreases as income increases

Tax Bases
‣ The income, property, good or service that is subject to a tax
‣ individual income tax - tax based on personal earnings
‣ corporate income tax - tax based on company’s s profits
‣ property tax - real estate tax
‣ sales tax - goods and services sold
What is the sales tax for New Jersey?
Who was the highest? How about second highest?

Characteristics of a Good Tax
‣ Simplicity - simple and easy
‣ Efficiency - not wasting time and money
‣ Certainty - clear to a tax payer
‣ Equity - should be fair

Taxes around the World
Mexico
Korea
Ireland
Japan
United States
Canada
United Kingdom
Percent of
Earnings Paid in
Income and
Social Security
Taxes
Sweden
Denmark
Germany
0 5 10 15 20 25 30 35 40 45 50

2. Federal Taxes
‣ Taxes imposed by the federal government
•The main sources
of government
revenue are the
taxes shown on this
graph.
•What are the
largest sources of
federal revenue?
•What percentage
of federal
revenues do not
come from
individual and
corporate income
taxes?
Federal Revenue
7%
13%
39%
9%
32%
Personal Income Tax
Social Security,
Medicare and
Unemployment
Borrowing to Cover
Deficit
Corportate Income Tax
Excise, Custom, Gift
and Misc Taxes

Individual Income Taxes
‣ Pay as you Earn Taxation
‣ Tax Brackets
‣ Withholdings - taking payments out of your check before you
receive it
‣ tax return - form used to file income taxes
‣ Taxable income - earnings on which taxes must be paid
• Personal exemptions - amount that a taxpayer may subtract
from gross income for themselves, their spouse, and
dependents
• Tax deductions - amount taxpayers can subtract from their
amount of their income
• tax credit - amount taxpayers can subtract from their
amount of their income tax

Federal Income Tax Rates, 2008
Schedule
If Your
taxable
income is over
-
But not
over -
The tax is
Of the
amount over -
Schedule X –
use if your
filing status
is single
$0
$8,025
$32,550
$78,850
$164,550
$357,700
$8,025
$32,550
$78,850
$164,550
$357,700
NO LIMIT
10%
$802.50 + 15%
$4,481.25 +25%
$16,056.25 +28%
$40,052.25 +33%
$103,791.00 +35%
$0
$8,025
$32,550
$78,850
$164,550
$357,700
Schedule Y –
use if your
status is
married filing
jointly
$0
$16,050
$65,100
$131,450
$200,300
$357,700
$16,050
$65,100
$131,450
$200,300
$357,700
NO LIMIT
10%
$1,605.00 +15%
$8,962.50 +25%
$25,550.00 +28%
$44,828.00 +33%
$96,770.00 +35%
$0
$16,050
$65,100
$131,450
$200,300
$357,700

Corporate Income Taxes
‣ Must pay federal income tax on their taxable income

Social Security, Medicare, and
Unemployment Taxes
‣ Social Security taxes - fund old age and
disabled
‣ Medicare - national healthcare for people
over 65
‣ Unemployment - file for unemployment
compensation

Other types of Taxes
‣ Excise Tax - revenue tax on the sale of manufactured goods
‣ Estate Tax - tax on total value of the property of a person who
has died
‣ Gift Tax - tax on the money or property that one living person
gives to another
‣ Import Tax - tariff - items coming into the country
Government receives 2.8 trillion dollars in the form of taxes,
But what could it possibly do with all this money!
Ironically, only one third of that money remains to be spent!

3. Federal Spending
‣ How much can the federal government spend? What should the
government spend its money on?
‣ Source: The Internal Revenue Service, U.S. Department of Treasury. Because of
rounding, totals may be greater or less than 100 percent
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?
On which does it
spend the least?
19%
21%
8%
3%
19%
32%
Department of
Defense, Military
Medicare, and
other retirement
Homeland Security
Social Security
Other
Net Interest on
the debt

Mandatory and Discretionary
Spending
‣ Mandatory Spending - Congress is required to spend on certain programs
‣ Discretionary Spending - spending about which lawmakers are free to
make choices
Mandatory
Social Security
National Debt
Discretionary
Defense
Defense Spending
Medicare
Education

Entitlement Programs
‣ Social welfare programs that people are “entitled” to benefit if
they meet certain eligibility requirements
‣ Social Security – about 50 million Americans receive monthly
benefits from the federal government (Social Security
Administration)
‣ Medicare – serves about 42 million people; 65 or over – covers
hospital care and for the costs of physicians and medical
services
‣ Medicaid – low – income families, some people with disabilities,
and elderly in nursing homes; the largest service for the poor!
‣ The Average Expenditure for healthcare rose from $891 per
person in 1960 to $5,670 in 2003! As a result, 47 million people
are left without healthcare!

Discretionary Spending
‣ Defense Spending - accounts for 19% of federal spending and
has dropped since the Cold War, but has increased after 2001.
Why?
‣ Education and training – more during recessions/depressions
‣ Scientific Research – if you don’t t produce, you lose money
‣ Student loans – at their lowest in history (MR. S pays 2.36%)
‣ Law Enforcement – varies, mostly to pay for millions of people
who work for the civilian branch of the federal government

Federal Aid to State and Local
‣ 404 billion dollars a year in federal monies divided among the
states; average of around $1,400 per person
‣ State and local governments rely on federal aid
‣ Hurricane Katrina – states were in ruin and Congress
appropriated $116 billion to help the states recover from the
disaster!

4. State and Local Taxes and
Spending
‣ Taxes imposed by local and state government
‣ U.S. Census Bureau
Individual Income
Individual income
taxes, sales, and
other taxes,
insurance
premiums, and
local and federal
funds are major
sources of state
revenue
2%
16%
25%
7%
13.4%
21.8%
2.4%
19%
Corporate Income
Sales and Excise
Insurance Trust
Revenue
Intergovernmental
Revenue
Interest Earning
Other
Property Tax

State Budgets
‣ Budget - an estimate of future revenue and expenses
‣ Operating - day to day spending needs
‣ Capital - spending on major investments
‣ Balancing - revenue is equal to spending
Other
11.4%
5%
Intergovernmental Revenue
5.1%
2.3%
5.4%
1.1%
2.6%
2.1%
2.9%
21.6%
27.4%
13%
Education
Public Welfare
Hospitals
Health
Corrections
Natural Resources
Governmental Administration
Interest on general debt
Highways
Insurance trust expenditures

Where are State Taxes Spent
‣ Education – every state spends taxpayer money to support at
least one public state university; national average per student is
$8, 701 per student from kindergarten till 12 th grade (every
year)
‣ Public Safety – state police along nation’s s highways
‣ Highways and Transportation – major state expense
‣ Public Welfare – support some hospitals and clinics; help pay
unemployment
‣ Arts and Recreation – state forests and state parks; museums
‣ Administration – need to spend money just to keep running;
administrative fees

State Tax Revenue
‣ Sales Tax – varies from state to state, major source of revenue
‣ Individual Income tax – paid in addition to federal income tax;
about 13 percent of state revenue
‣ Corporate Income tax – make up only a small portion, but can
influence a state’s s economy
‣ Other state taxes -
• real property - land and any permanent structures to which a
person has legal title to
• Personal property - movable possessions or assets

Local Government Spending and
Revenue
‣ Cities, Towns, townships, counties, and special districts
‣ Responsibilities - public buildings, fire stations, schools, law
enforcement
‣ Property Tax – levied on properties owned by individuals to
offset the expense of services such as street construction and
maintenance; major source of funding public schools
‣ Other local taxes – sales, excise, and income taxes

Local Revenue
2%
.88%
Utility Revenue
Property Taxes
35.5%
Individual Income Tax
34.3%
Sales and Excise Taxes
Other taxes and
charges
Intergovernmental
20%
5.5%
1.6%
revenue
Interest Earning

Education
Hospitals
2.7%
2.7%
3.7%
2.1%
3.5%
10.2%
37.9%
Health
Police Protection
Governmental Administration
Public Welfare
Fire Protection
Parks and Recreation
13.9%
Other
Interest on General Debt
Insurance Trust Expenditures
2.1%
2.3%
3.4%
3.3% 4.9%
2.7%
4.6%
Highways
Sewerage
Housing and Community Development
Utility
Local Spending

Three Types of Tax Structures
Type of Tax
Description
Example
Ron’s s Taxes
on a
$50,000
income
Mary’s
Taxes on a
$150,000
income
Proportional
A constant
percentage of
income is taken in
taxes as income
increases
Some State Taxes
$7,500 or 15
percent of income
$22,500 or 15
percent of income
Progressive
A larger percentage
of income is taken
in taxes as income
increases
Income Tax
$5,000 or 10
percent of income
$45,000 or 30
percent of income
Regressive
A smaller
percentage of
income is taken in
taxes as income
increases
Sales Tax
$2,000 or 5 percent
of total purchases
of $40,000, tax bill
is 4 percent of
income
$3,000 or 5 percent
of total purchases
of $60,000; tax bill
is 2 percent of
income