Chapter 14

Government Revenue and Spending

Chapter 14

Mandatory payments known as taxes make up the vast majority of government revenue.Principles of Taxes:

- Benefits Received: The idea that people benefitting from a public good should pay into that benefit

- Ability-to-Pay Principle: The idea that people should be taxed on their ability to pay.Requirements of Taxes:

- Equity (Fairness)- Simplicity (Low Difficulty)- Efficiency (Effectiveness)

The Principles of Taxes

Tax Bases:- Individual Income Tax, Corporate Income Tax, Sales Tax, and Property Tax

Tax Structures (Types)- Proportional Tax (flat tax): The tax is the same across the board.- Progressive Tax: Higher percentage

taxes are placed on higher income earners.- Regressive Tax: Higher percentage taxes from low-income earners.

Tax Bases and Structures

The Progressive TaxIncome Bracket

Marginal Tax Rate

$0-$10,000 10%$10,001-$30,000

15%

$30,001-$50,000

25%Income in Each Bracket

Tax Bracket

$10,000 10%$20,000 15%$10,00 25%

Income in Bracket

Marginal Tax Rate

Marginal Tax

$10,000 10% $1,000$20,000 15% $3,000$10,000 25% $2,500

If an individual had an income of $40,000, the second table shows how much of that income would fit in each bracket. To add up the total tax, you must multiply the income in each bracket by the tax rate for that bracket, and then finally take a total.

Total of $6500 in taxes based on a $40,000 income at these rates.

#1 Resource Allocation: Taxes impact supply because producers who are seeking efficiency are looking at how to maximize profits.#2: Productivity and Growth: Too high can slow growth, too low can decrease the ability of the government.#3 Economic Behavior: Used to encourage or discourage certain economic behavior.

Impact of Taxes on the Economy

Federal Taxes

Withholding is money taken from pay before the worker receives it.Taxable Income is the portion of income subject to taxation.A Tax Return is a form used to report income and taxes owed to government.

Federal Tax Terms

FICA is the Federal Insurance Contributions Act.Social Security is a federal program to aid older citizens, children who have lost a parent, and the disabled.Medicare is a national health insurance program mainly for citizens over 65.

FICA: Taxes That Help

Corporate Income TaxThe estate tax is a tax on property transferred to others on the death of the owner.The gift tax is a tax on assets given by one living person to another.The excise tax is a tax on the production or sale of a specific good or service.Customs duty is a tax on goods imported to the U.S.A user fee is money charged for the use of a good or service.

Corporate Taxes

Federal Government Spending

#1 Mandatory Spending (Required by Law): The majority of this is done through entitlements (welfare programs).#2 Discretionary Spending (Authorized by Government): Areas include infrastructure, education, the environment, technology, and the justice system.

2 Types of Federal Spending

The federal budget is the government’s plan for spending government income over a year.The year long budget period is known as the fiscal year and runs from October 1st to September 30thAppropriations are specific amounts of money set aside for specific purposes (this is done by congress and sent to the President for approval).

The Federal Budget

#1 Directly#2 Transfer Payments (nothing received in return)#3 Grant-In-Aid (transfer payment to a state from the federal government)Impacts of Federal Spending#1 Resource Allocation#2 Income Redistribution#3 Competition in Private Sector

How is money paid out?

State and Local Taxes

#1 Sales and Excise Taxes: Taxes on items sold within the state (5 states do not). Excise taxes are on specific items such as cigarettes, alcohol, gasoline, etc..#2 Income Taxes: All but 5 sates levy a state income tax (Texas is one that does not). Most states also have a state corporation tax on businesses operating there.

2 Types of State Taxes

All states except Vermont are required to have balanced budgets where revenue equals spending.An operating budget is a plan for day to day expenses.A capital budget is a plan for major expenses and investments.

State Budget

The majority of local revenue comes from property taxes that are assessed on a yearly basis.Local money goes to public education, public safety, and local health.

Local Taxes