Taxes and Government

5.3

HOW DOES IT WORK?

Government receives funds from taxes and borrowing (i.e. bonds issued)

LARGEST part of funds comes from income tax, the rest from Social Security and Medicare, corporate tax, and other various taxes and fees.

SOURCES OF REVENUE:Social Security taxed at a rate of 6.2%

collected based on gross income up to a certain amount

SOURCES OF REVENUE:Medicare taxed 1.45% on gross income

SOURCES OF REVENUE:Employer’s Contribution Your employer matches what you contribute to Social Security and Medicare.

For every dollar you earn, 15.3 cents of it must be paid to these programs.

Half of that 15.3 comes from you, the other half from your employer

Classifying TaxesTaxes can be separated in 3 ways:1) by principles 2) the share of income they take 3) their method of payment

Principles of Taxation benefit principle says those who use the good/service should pay for it.

Example? Toll roads.

ability-to-pay principle says those with more income should pay more.

Example? Federal taxes, which range from 10-35% of your income depending on how much you make.

Taxes and Income progressive tax means your income is taxed at a higher rate the more you make

regressive tax takes a smaller share of higher incomes. (i.e. depending on your income, the same purchase may be a smaller percentage of your overall income)

proportional tax means everybody pays the same percentage on their income

How Taxes Are Collected Direct taxes are paid directly to the government.

Example? Income or property tax.

Indirect taxes are included in the cost of a good/service.

Example? A portion of rent money is used to pay property taxes.

Pay-As-You-Earn taxes are paid when you make the money.

Example? The withholdings you see when you look at your paystub.

Types of TaxesThere are 7 types of taxes we will cover: income, sales, property, excise, estate/gift, business/license, customs/tariffs

Income Tax Paid to both federal and state government, sometimes even cities.

Withheld from your paycheck.

Information on W-4 tells employer how much to withhold, which means YOU are ultimately responsible for the accuracy of what is owed.

Typically state and local rates are much lower than federal tax rates.

Sales Tax These are added to the price of a good/service when you purchase it.

Some items are exempt from this.

Funds are divided by state and local governments.

Property Tax Taxed on the value of real property.

Estimated by government workers, tax is a percentage of that value.

Includes land, structure or other property.

Taxes used by local government and school districts.

Often added in to your mortgage payment.

Excise Tax Collected on sale of a specific good/service.

Included in the price of the item.

Goods include things like: tobacco, alcohol, gas, firearms, oil and air travel

Estate and Gift Tax Paid on property received through someone else’s estate (usually inherited upon someone’s death).

Estate tax only paid if higher than a certain amount.

Gift taxes must be paid by the person making the monetary gift.

Gift tax only applies to total amounts larger than $12,000 per year. (in 2008)

Business and License Tax Usually covers a certification and test.

Example? License to teach or practice medicine.

Customs Duties and Tariffs Helps control flow of products imported to the U.S.

Results in items from overseas being sold at higher prices.