Taxes And Spending
“In this world, nothing is certain
but death and taxes”
-Benjamin Franklin
1
What are Taxes?
• Taxes are payments people are required
to pay to local, state and national
governments.
• Taxes are used to pay for services
provided by government:
–
–
–
–
Schools
Police
Defense
Etc.
2
Taxes and the Constitution
• Article 1, Section 8, Clause 1 of the
Constitution grants Congress the power
to tax.
• The Sixteenth Amendment gives
Congress the power to levy an income
tax.
3
Limits on the Power to Tax
Certain taxes are prohibited or limited in
the Constitution:
• The purpose of the tax must be for “the
common defense and general welfare”
• Federal taxes must be the same in every
state
• The government may not tax exports
4
Impact of Taxes
• Types of taxes affect people differently,
depending on their income. 3 forms of
taxes are:
Progressive Tax
Regressive Tax
Proportional Tax
5
Progressive Tax
• - Tax designed to take a larger
percentage of income from the wealthy
than the poor.
• Argument for: the wealthy can afford a
higher tax and should pay more of the
tax burden.
• Argument against: why should the
hardest working and most successful pay
more taxes? Wealthy are penalized for
their success.
• Ex. Income Tax with Tax Brackets
6
Progressive Tax (cont.)
• A person making $20,000 pays 10%
income tax ($2000). Their after tax
income is $18,000.
• A person making $200,000 pays 30% tax
($60,000). Their after tax income is
$140,000.
7
Regressive Tax
• - Tax which takes a higher percentage of
income from the poor than from the rich.
• Ex. Sales Tax
• Argument for: Tax levied on what is
bought. If you cannot afford the tax, do
not buy the item.
• Argument against: Tax harms those who
can least afford it.
8
Regressive Tax (cont.)
• Two people buy a $20,000 car. They both
pay $1600 in sales tax.
• The first person makes $30,000. The
sales tax is 5.3% of his income. He has
$28,400 left after paying the tax.
• The second person makes $100,000. The
sales tax is 1.6% of his income. He has
$98,000 left after paying the tax.
9
Proportional Tax
• - Tax that takes the same percentage of
income from the wealthy and poor.
• Argument for: Everyone is equal- pay
same % of income.
• Argument against: The poor need their
income more than the wealthy. They need
every penny and cannot afford as much of
a tax as the wealthy.
• Ex. “Flat Tax” Income Tax, (does not exist
in our country, but some political
10
parties support the idea)
Proportional Tax (cont.)
• On a “Flat” Income tax of 20%:
• A person making $20,000 pays $4000,
after tax income= $16,000
• A person making $200,000 pays $40,000,
after tax income= $160,000
11
Federal Income Taxes
• “Pay-as-You-Earn” Taxation
– Federal income taxes are collected
throughout the course of the year as
individuals earn income
• Tax Withholding
– The process by which employers take tax
payments out of an employees pay before
he or she receives it.
12
Federal Income Taxes (cont.)
• Tax Brackets
– The federal income tax is a progressive tax.
13
Federal Income Taxes (cont.)
• Tax Returns:
– At the end of the year, an employer gives
employees a report showing how much they
withheld in taxes.
– Individuals file a tax return with information
regarding exemptions and deductions that
adjust the amount of tax that should have
been paid.
– If you paid too much, you get a refund. If you
paid too little, you must pay the balance.
– All tax returns must be filed by April 15th.
14
Social Security Taxes
• Provides funds for older Americans, their
survivors, and disability insurance.
• Program funded by the Federal Insurance
Contributions Act (FICA) – a U.S. law
requiring a deduction from paychecks and
income that goes toward the Social Security
program and Medicare. Both employees and
employers are responsible for sharing the FICA
payments.
15
Medicare
• Funds a national health
insurance for people over 65
and with certain disabilities.
• Paid through FICA.
12.4% of earned income up to an annual limit must be paid into
Social Security, and an additional 2.9% must be paid into
Medicare. If you are a waged or salaried employee, half of the
payroll tax - 6.2% for Social Security and 1.45% for Medicare - is
automatically withheld from each paycheck, and your employer
contributes the other half. There is no income cap (or wage base
limit) for the Medicare portion of the tax, meaning you continue to
owe your half of the 2.9% tax on all wages earned for the year.
The Social Security tax, however, has a wage base limit - the
16
maximum wage that is subject to the tax for that year.
Unemployment Taxes
• Paid for by employers, provides
“unemployment compensation” for
workers laid off through no fault of their
own and are actively looking for work.
The amount of an employer's FUTA tax liability determines when the
tax must be paid; the form for reporting the tax is due in the first
quarter of the year. For 2016, the FUTA tax rate is 6% of the first
$7,000 paid to each employee annually. This means that if a
company had 10 employees who each earned wages of at least
$7,000 for the year, the company's annual FUTA tax would be 0.06
x $70,000 = $4,200. Only employers, not employees, pay the
FUTA tax.
Many states collect an additional unemployment tax from
employers.
17
Other Taxes
1. Excise Tax: tax on the sale or production of
a good. Often used to discourage use of the
item, called a “Luxuary” or “Sin” tax. Ex.
Cigarettes, Alcohol, Gas, Telephone
2. Estate Tax: Tax on the total value of money
and property of a person who has died. A
filing is required for estates with combined
gross assets and prior taxable gifts
exceeding $5,450,000 in 2016. Opponents
labeled it as the “Death Tax” because they
believe it is unfair to wealthy, successful
people.
18
Other Taxes (cont.)
3. Gift Tax: Tax on money or property
given as gift over $14,000 per year in
2015 (very complicated, varies)
4. Import Taxes: known as Tariffs, taxes
on goods entering the U.S. Used to
raise price of foreign goods and help
American companies.
19
Taxes on monetary and non-monetary
benefits
A fringe benefit is a form of pay for the performance of
services. Fringe benefits are benefits or compensation
given to employees in addition to wages or salaries.
Ex. 1: to allow the employee to use a business vehicle to
commute to and from work.
Ex.2: accident and health benefits, group term life coverage,
education reimbursement, childcare and assistance
reimbursement, employee discounts, employee stock
options,...
All fringe benefits are taxable and must be included
in the recipient's pay unless the law specifically
excludes it (certain conditions are met).
The benefits in Ex. 2 are not subject to federal income tax
withholding.
20
Entitlement Programs
- Social welfare programs that people
are “entitled to” if they meet certain
requirements. Congress must fund these
programs.
* Entitlements are very expensive because
Congress cannot control how many
people receive the benefits.
– Ex. Social Security (#1spending), Medicare,
Medicaid, Food Stamps, etc.
21
Discretionary Spending
- Spending category where government
can choose how to fund.
Ex. Defense (#1 discretionary spending),
education, research, student loans,
technology, law enforcement, national parks
and monuments, the environment, housing,
transportation, disaster aid, foreign aid,
farm subsidies, etc.
22
Surplus/Deficits
• Balanced Budget: when the government
collects the same in revenue (taxes) as it
spends.
• Budget Surplus: When the government
takes in more revenue than it spends.
• Budget Deficit: When the government
spends more than it takes in.
23
State Taxes
• Sales Tax: Taxes on goods sold within
the state. Not levied on food.
• Excise Tax: “Sin Tax” on sale of certain
items ex. cigarettes, alcohol, gasoline.
• State Income Taxes (Seven U.S. states
currently don't have an income tax:
Alaska, Florida, Nevada, South Dakota,
Texas, Washington and Wyoming.)
• Corporate Income Taxes: Taxes on
corporations in the state
24
State Spending
• Education: SUNY colleges, funding to
public schools
• Public Safety: State police, prisons
• Highways and transportation
• Public Welfare: Hospitals,
unemployment
• Arts and Recreation: Parks, museums,
historic sites
• State employees
25
Local Taxes
• Property Tax: a tax levied on the value of
property (real estate) owned. The main
source of public school funding.
• Sales Tax: additional taxes above state
sales tax.
– NY City Sales Tax rate is 4.5%, NY State Sales
and Use Tax is 4% and the Metropolitan
Commuter Transportation District surcharge
of 0.375% for a total Sales and Use Tax of
8.875 percent.
26
Local Spending
•
•
•
•
Public Schools
Law enforcement/Fire Protection
Local Parks/Recreation
Public Health (hospitals, sewers, food
inspectors)
• Public Transportation
• Social Services (food stamps, welfare,
etc.)
• Records (Birth/Death certificates,
marriage licenses)
27
Garnishment
A legal process whereby payments towards a debt owed
by an individual can be paid by a third party - which holds
money or property that is due to the individual - directly to
the creditor. The third party in such a case is generally the
individual's employer and is known as the garnishee.
Garnishments are typically used for debts such as unpaid
taxes, monetary fines and child support payments.
Ex.: if John Smith owes $10,000 in unpaid taxes that have been
overdue, the IRS can resort to garnishment of his wages.
The IRS would then direct Smith's employer to remit a
portion of his salary for a certain amount of time, until Smith
has paid off his taxes in full.
Garnishments can have a negative impact on one’s
credit rating.
28