Chapter 14 Government Revenue & Spending
SEC 1. HOW TAXES WORK
Government Revenueâ—¦Street lighting, highways, law
enforcement, & the court systemâ—¦Government also provides aid for
people in need
Government Revenue
Where does the money come from to pay for such goods and services?
Government Revenue
â—¦Borrowing & lotteriesRights to tax are set in the U.S.
Constitution and in state constitutions
Principles of Taxationâ—¦Benefits taxpayers receive from
taxesâ—¦Their ability to pay
Question 1Can you explain why a worker
earns $264 but receives a paycheck for less than $264?
Question 2What happens to the amount
earned not received by the employee? Meaning where did the $30.84 that the employee go to?
Benefits-Received Principleâ—¦Financing of road construction &
maintenance through gasoline
â—¦Difficult for governments to asses exactly how much different taxpayers benefit from services like national defense, national parks, local police, fire protection, and public education
Ability-to-Pay Principleâ—¦People with higher incomes will pay
more than people of lower incomes
â—¦The level of benefits is not a consideration
Ability-to-Pay Principle
Questions to Considerâ—¦Should everyone pay the same
percentage of income?
â—¦Should those with higher incomes pay a higher percentage of their income in taxes?
Criteria for Taxationâ—¦Equity, Simplicity, & Efficiency
Equityâ—¦Requires people in similar situations
pay a similar amount of taxesExample
â—¦Everyone pays the same price for taxSome believe
â—¦Equity requires that people with higher incomes pay more than people with lower incomes
Simplicity
â—¦Should be NO confusion bout the time the tax is due and the amount to be paid
â—¦Sales tax meets the criterion of simplicity
Efficiency
Taxpayers’ view◦Tax efficiency can be judged by the
amount of effort and expense it takes to pay the tax
â—¦Individual income tax best meets the criterion efficiency
Tax Base & Structures
Tax base, each type of wealth is subject to taxesâ—¦Individual income, corporate income,
sales, and property
Individual Income Taxâ—¦Wages, interests, dividends, and tips
All taxes are ultimately paid from Income, but using income as a tax base means that the amount of tax is directly linked to a person’s earnings
Corporate Income Taxâ—¦From savings & investment in the
form of interests & dividends
Sales Taxâ—¦Generally imposed on a wide range of
goods or servicesâ—¦Percentage of the posted price of the
good or serviceâ—¦Included in the final price the buyer
paysThe seller then passes the tax
revenue collected from customers on to the government that has imposed the tax
Property Taxâ—¦Generally real estateâ—¦Pay on the values of their buildings and
the landâ—¦Property tax is generally included in
rent chargesâ—¦Can be imposed on other assets like
automobiles
If overall personal income rises, the individual income tax base grows
If there are fewer homes or businesses in a certain locality or if the value declines, the property tax base shrinks
Tax StructuresThe way in which taxes are
imposed on the different tax bases gives rise to three different tax structures
These tax structures are distinguished from one another
Proportional Taxâ—¦Flat tax, rate of the tax is the same for
all taxpayersExample
â—¦All taxpayers in a given state might be charged a flat 15% tax on the income
◦No matter a person’s income is
Progressive Taxâ—¦Income increases so does your tax
rate
United States â—¦Federal income tax = progressive taxâ—¦Tax rate increases as income
increases
Taxable income of $40,000Page 413
Income Bracket
Marginal Tax Rate
$0-10,000 10 %
$10,000-$30,000
15%
$30,000-$50,000
25%
Income in each bracket
Tax Bracket
$ 10,000 10%
$ 20,000 15%
$10,000 25%
Income in Bracket X Marginal
Tax Rate = Marginal Tax
$ 10,000 X 10 % = $1,000
$ 20,000 X 15% = $3,000
$10,000 X 25% = $2,500
Total Tax $6,500
Regressive Taxâ—¦Income paid in taxes decreases as
income increasesâ—¦Sales tax
Incidence of a Tax
Resource Allocation
Productivity & Growth
Economic Behavior
FEDERAL TAXESSection 2
Individual Income TaxThe federal government takes in
around $2.5 trillion in revenue each yearâ—¦Individual income tax , Social
insurance taxes, Corporate income taxes, Estate taxes, Gift taxes, Excise taxes, & Customs taxes
â—¦Largest source of taxes = individual income tax
Government uses income taxâ—¦16 Amendment to the US Constitution
in 1913
Withholding
Taxable Income
Tax Return
Indexing
Federal Insurance Contribution Act
Social Secuity
Medicare
Unemployment Taxes
Corporate Income Taxes
Estate Tax
Gift Tax
Excise Tax
Customs Duty
User Fee