Government Revenue
and Spending
How Taxes Work
• Principles of Taxation
• Benefits Received Principle
• Ability-to-Pay Principle
• Criteria for Taxation
• Equity
• Simplicity
• Efficiency
Government Revenue
• Revenue—government income from tax and non-tax
sources
• Tax Bases
• Individual income tax—on income from all sources
• Corporate income tax—on corporation’s profits
• Sales tax—on value of product; a percentage of sale
price
• Property tax—on value of assets, generally real
estate; part of rent
• Growing, shrinking tax base means changes in
amount of taxable wealth
Tax Bases and Structures
• Proportional tax—flat tax—all taxpayers pay same
percentage of income
• Progressive tax—higher income earners pay higher
percentage of income (ability to pay)
• most closely linked to ability-to-pay principle
• Regressive tax—lower income earners pay higher
percentage of income
• examples: sales tax, property tax
Impact of Taxes on the Economy
• Tax on a good or service increases cost of production
• Productivity and Growth
• When taxes on interest and dividends high, people save less
• impacts amount of money available to producers to invest in
businesses
• Some economists think high taxes reduce incentives to work
• Others think high taxes promote underground economy
• Economic Behavior
• Tax incentive—use of taxes to influence economic behavior
• Tax credits, rebates encourage behavior good for society,
economy
• Sin taxes imposed on unhealthful, damaging products, activities
Individual Income Tax
• Federal government gets about $2.5 trillion in revenue
yearly
• Taxes important sources of revenue
• largest source is individual income tax
• second largest source is social insurance taxes
• Paying Your Taxes
• Withholding—payroll tax taken before worker gets paycheck
• Internal Revenue Service (IRS) collects money, administers tax
system
• Taxable income—taxable portion; exemptions, deductions reduce
it
• Tax returns—forms used to report income, taxes owed to
government
• if too much withheld, taxpayer gets refund; if not enough, taxpayer
pays rest
Types of Spending
• Mandatory Spending
• Entitlements—social welfare programs with specific
requirements
• Social Security restrictions: former worker, age,
extra income limit
• Medicare provides hospital, other medical
insurance; means tested
• Medicaid is federal-state insurance program for
low-income people
• Other programs’ funding based on number of people
eligible
Types of Spending cont.
• Discretionary Spending
• Defense includes salaries, weapons, military
bases, homeland security
• Interstate highway system and other
transportation
• Natural resources, environment; includes:
parks, pollution clean up
• Education; science, space, technology; other
research
• Justice administration includes enforcement
agencies, federal courts
The Federal Budget and
Spending
• Federal budget—plan for spending federal revenue
• Fiscal year—12-month period for which expenditures are
planned
• Congressional Budget Office helps develop
appropriations guidelines
• appropriations are specific amounts set aside for
specific purposes
State Revenues
• Sales and Excise Taxes
• Almost all states
have sales tax on
most goods, services
• Income Tax and Other
Revenue Sources
• estate, property
taxes; user, business
registration, license
fees
Should Online Sales Be Taxed?
Background
• In 1992, the Supreme Court upheld a law making
Internet retailers exempt from collecting most
sales taxes because rules varied widely among
states.
• Today, tax collection is simpler, and Internet
purchases are commonplace. Most states have
made tax on Internet sales voluntary, with poor
results.
• What’s the Issue?
• Should there be sales tax on Internet purchases?
•
Should Online Sales Be Taxed?
{continued}
• Thinking Economically
• Summarize the arguments for and against
an Internet sales tax as presented in the
documents.
• Who is most likely to benefit from Internet
sales tax revenue? Explain your answer,
using information from the documents.
• How has government responded to ecommerce—the selling of goods and
services online? Use information from the
documents in your answer.