Chapter 14:
Government
Revenue and
Spending
“The art of taxation is the art of plucking the goose so as to
get the largest possible amount of feathers with the least
possible squealing.”
- Seventeenth-century French statesman Jean-Baptiste Colbert
“Taxes are what we pay for civilized society”
Oliver Wendell Holmes Jr., 1904
• 1. What is a tax?
• 2. Define revenue.
• 3. From what 2
sources may
government
revenue come?
Taxes, Taxes, Taxes
•
Definition: System of raising money to
finance the government
• Cooking Oil, Foreigners,
• Slaves (Ancient Egypt)
• Sales, Inheritance, Imports, Exports
(Ancient Rome)
• Beards, Beehives, Boots, (Russia, 1702)
• Bachelors (England,1695; Missouri, 1820)
Taxes Fund Public Goods and
Services
Health Care for Elderly
National Defense
Social Services
State and
Local Police
Public Education
Financial Aid
Taxes in US History
• American Revolution
caused debt
• Tax was necessary to pay
debt
• Article 1, Section 8 of the
U.S. Constitution granted
Congress power to tax
Protective Tariff
4. THINK: What is a tariff?
War of 1812
Civil War Income Tax
• Raise revenue
• Increase productivity
• Economic prosperity
Conflicting
Goals of
Taxation
• Be fair
• Influence behavior
1913 Sixteenth Amendment
• 5. Under what 2
principles are US
taxes assigned?
• 6. Identify the
“benefits-received
principle.”
• 7. Identify the
“ability-to-pay
principle.”
How to Measure
Tax Fairness
• Ability to Pay
• Benefits
Received
Ability to Pay
Principle
Those who can
afford it
PAY
Benefits Received
Principle
Those who receive the benefits
PAY
Tax
Reform
Criteria for Taxation
Read page 411
8. Which criteria
establishes fairness
by uniformly
applying the tax?
Taxes
and
Equity
• Horizontal Equity:
“Equals should be
taxed equally.”
• Vertical Equity:
“Unequals should
be taxed unequally.”
Simplicity
9. Which criteria
assesses how
easy it is for the
taxpayer to
understand and
how easy for the
government to
collect?
10. What other two
criteria are
established for
this standard?
Efficiency
• Efficiency differs for
the government and
the tax payer.
– 11. How is it judged
by the government?
– 12. By the tax
payer?
– 13. Which tax do we
have today which
meets both criteria?
The Federal Government
Dollar- Where It Comes From
Social Security, Medicare,
and Unemployment and other
Retirement Taxes
35%
Personal
Income Taxes
43%
Excise, Customs,
Estate, Gift, and
Miscellaneous Taxes
7%
Borrowing to
Cover Deficit 8%
Corporate
Income Taxes
7%
Chief Sources of Revenue
Tax Bases and Structures
14. Which tax is based on an
individual’s income from all
sources?
15. What are the 4 primary
sources for income?
16. Which tax is based on the
value of designated goods
or services at the TIME OF
THE SALE?
17. Which tax is based on the
value of an individual’s or
business’s assets?
• What Can Be Taxed?
Wealth and
Income
The Federal Government DollarWhere It Goes
Resource allocation – THINK!
18. What happens to the cost of production?
19. What happens to the supply?
Law Enforcement
and General
Government
3%
Social Security, Medicare, and
other Retirement
38%
National Defense,
Veterans, and
Foreign Affairs
20%
Social Programs
21%
Physical, Human, and
Community Development
10%
Net Interest on
the Debt
8%
Economic Impact of Taxes
To stimulate the economy
Accounts Receivable Tax
Building Permit Tax
CDL license Tax
Cigarette Tax
Corporate Income Tax
Dog License Tax
Excise Taxes
Federal Income Tax
Federal Unemployment Tax
(FUTA)
Fishing License Tax
Food License Tax
Fuel Permit Tax
Gasoline Tax (currently 44.75
cents per gallon)
Gross Receipts Tax
Hunting License Tax
Inheritance Tax
Inventory Tax
IRS Interest Charges IRS
Penalties (tax on top of tax)
Liquor Tax
Luxury Taxes
Marriage License Tax
Medicare Tax
Personal Property Tax
Currently 47
Property Tax
Real Estate Tax
taxes listed
Service Charge T ax
Social Security Tax
Road Usage Tax
Sales Tax
Recreational Vehicle Tax
School Tax
State Income Tax
State Unemployment Tax (SUTA)
Telephone Federal Excise Tax
Telephone Federal Universal Service Fee Tax
Telephone Federal, State and Local Surcharge Taxes
Telephone Minimum Usage Surcharge=2 0Tax
Telephone Recurring and Non-recurring Charges Tax
Telephone State and Local Tax
Telephone Usage Charge Tax
Utility Taxes
Vehicle License Registration Tax
Vehicle Sales Tax
Watercraft Registration Tax
Well Permit Tax
Workers Compensation Tax
Tax Structures
• Define the
following
structures of taxes:
– 20. Proportional
Taxes
– 21. Progressive
– 22. Regressive
Proportional Tax
Taxes reflect the level of income
• 23. What else is a proportional tax called?
• 24. Why?
• 25. What famous college town collects a flat tax?
=
=
Progressive Taxes
• 26. Under a progressive
tax a high-income person
not only pays _____ in the
amount of taxes but also
pays a __________ on
income in taxes.
• 27. To what principle is
this type of tax closely
linked?
• 28. What is an example
of a progressive tax in
the US?
Higher Income = Higher Taxes
Personal Income Tax Brackets
• tax on the
income of
individuals or
families
• applied to
wages,
salaries, tips,
interest, and
dividends
• Also called
personal
income tax
Regressive Taxes
• 29. Why is sales tax
regressive?
• 30. What other type of
taxes is also regressive?
Everyone pays the
same fixed amount
Who Pays the Tax?
• 31. Define
incidence of a
tax.
• 32. What most
often happens to
taxes applied to
a business?
Circular Flow of Economy Including Taxes
Effect of Elasticity on
Taxes
• 33. THINK: If a product has an elastic demand, who pays most
of the tax?
• 34. WHY?
• 35. If the product has an inelastic demand, who pays most of
the tax?
• 36. WHY?
Tax on CD
Players
Tax Incidence
and Elasticity of Demand / Supply
• 37.
PerfectlyINELASTIC Demand: Buyer Pays Entire Tax
• 38. Perfectly
• 39. Perfectly
Tax
ELASTIC
Demand: Seller Pays Entire Tax
INELASTIC
• 40. Perfectly ELASTIC
Supply: Seller Pays Entire
Supply: Buyer Pays Entire Tax
Impact of Taxes on the
Economy
• 41. What happens to the
cost of production if a tax is
placed on a good or service?
• 42. Where will this shift the
supply curve?
• 43. Why will the producer
NOT pass the tax for luxury
yachts on to the consumer?
• 44. THINK – What will be
the short term and long
term effect of this tax on a
luxury good?
Increase Productivity and
Growth
• Taxes change incentives
to:
–
–
–
–
Save
Invest
Work
Spend
• 45. When taxes on interest
and dividends are high
what happens?
• 46. How will this affect
capital investment as well?
• 47. How do economists
believe high taxes affect
labor?
Effects
of Tax
on Labor
Income
Other Effects of Taxation
48. THINK: How is an
underground economy
affected by high taxes?
49. THINK: How will this affect
the collection of taxes by the
government?
50. THINK: What is a huge
example of this today?
Lowering taxes on labor will lead to more takehome pay, and also means that employers can
set wages lower because workers will be satisfied
by the higher percentage of money they take
home after taxes - Used by Bush against Reagan
Behavior Adjustment
• 51. What is a tax incentive?
• 52. What types of tax
incentives may be used by the
government?
• 53. What is the largest tax
credit given by the
government today?
• 54. What are sin taxes?
• 55. What are some examples
today of sin taxes?
• 56. How does the elasticity
for an item which carries a sin
tax change as the tax
increases?
Tax Incidence
and the
Elasticities of
Demand
and Supply:
Elastic Demand
Tax Incidence
and the
Elasticities of
Demand
and Supply:
Inelastic
Demand
Understanding the IRS
• 57. How much revenue
does the federal
government take in
from taxes each year?
Congress has
set a goal that
80% of all tax
returns be
filed
electronically
by the year
2007.
Voluntary Compliance
Requires Record Keeping
Each person is responsible for
filing a tax return.
•Keep necessary records
•Report income accurately
•Correctly calculate tax liability
• File returns on time
•SAVE
•Paycheck stubs
•Bank statements
•Completed tax returns and forms
•Warranty information
•Receipts
•Credit card statements
•Three methods for tax preparation?
•Electronically
•Tax Preparation Software
•Manually
Withholding on Form W-4
• 58. Why would it be difficult for the government to only collect
taxes one time during the year?
• 59. What is the type of tax taken from a worker’s paycheck
called?
Form W-2
• Shows how much employees earn
• Copy must be attached to tax return
• 60. The federal income
tax is a ? Tax.
• 61. This means people
with ? Incomes not only
pay ? In total taxes, but
also pay a higher ? Of
their income in taxes.
• 62. On what is the
amount owed based?
Factors Affecting Tax
Liability
• 63. How can taxpayers
reduce their tax
burden?
• Deductions: Expenses
that can be deducted
before determining
taxable income
– 64. How does family size
make a difference in
deductions?
– 65. What are some other
examples of items which
may be deducted?
Tax Breaks
66. What is a tax return?
Deductions:
Reduce income
subject to tax
Tax Exemptions:
Part of income
that isn’t taxed
Tax Credits:
Dollar for dollar
reduction in tax
67. What is a requirement for a tax return?
68. Why might you have to pay additional taxes?
Tax Avoidance
versus
Tax Evasion
• Tax Evasion: Failure to pay legally due taxes
• Tax Avoidance: Legal means of decreasing your tax bill
Indexing
• 69. What is a tax bracket?
• 70. What is the purpose of indexing?
71. What does FICA stand for?
Federal Insurance Contributions Act
–
–
–
–
–
Known as ‘Social Security’ or Payroll tax
2009 FICA Tax and Social Security Limits.
FICA Tax Rate = 7.65%;
Social Security Limit = $106800;
Maximum Social Security Contribution = $6621.60 ...
Medicare and
Unemployment
72. What group benefits from Medicare
73. What is different about the collection of social
security and Medicare?
74. How are unemployment taxes funded?
75. THINK: Why is this an example of federalism?
76. Who pays the majority of unemployment tax?
77. THINK: What is the effect of unemployment tax on
businesses?
Tax Lesson 101
•
Suppose that every day, ten
men go out for dinner. The bill
for all ten comes to $100.
If they paid their bill the way
we pay our taxes, it would go
something like this:
The first four men (the
poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh $7.
The eighth $12.
The ninth $18.
The tenth man (the richest)
would pay $59.
So, that's what they decided to
do.
What Happens When the
Owner Reduces the Cost?
•
The ten men ate dinner in the restaurant every day and seemed
quite happy with the arrangement, until one day, the owner
threw them a curve.
"Since you are all such good customers," he said, "I'm going to
reduce the cost of your daily meal by $20."
So, now dinner for the ten only cost $80. The group still wanted
to pay their bill the way we pay our taxes.
So, the first four men were unaffected. They would still eat for
free. But what about the other six, the paying customers? How
could they divvy up the $20 windfall so that everyone would get
his 'fair share'?
The six men realized that $20 divided by six is $3.33. But if they
subtracted that from everybody's share, then the fifth man and
the sixth man would each end up being 'PAID' to eat their meal.
•
To Reduce Each Man’s
Bill
So, the restaurant owner suggested that it would be fair to reduce each
man's bill by roughly the same amount, and he proceeded to work out
the amounts each should pay.
And
The
The
The
The
The
The
so:
fifth man, like the first four, now paid nothing (100%savings).
sixth now paid $2 instead of $3 (33% savings).
seventh now paid $5 instead of $7 (28% savings).
eighth now paid $9 instead of $12 (25% savings).
ninth now paid $14 instead of $18 (22% savings).
tenth now paid $49 instead of $59 (16% savings).
Each of the six was better off than before. And the first four continued
to eat for free. But once outside the restaurant, the men began to
compare their savings.
"I only got a dollar out of the $20," declared the sixth man. He pointed
to the tenth man "but he got $10!"
"Yeah, that's right," exclaimed the fifth man. "I only saved a dollar, too.
It's unfair that he got ten times more than me!"
"That's true!!" shouted the seventh man. "Why should he get $10 back
when I got only $2? The wealthy get all the breaks!"
And that, boys and girls, journalists and college
professors, is how our tax system works.
• "Wait a minute," yelled the first four men in unison. "We
didn't get anything at all. The system exploits the poor!"
The nine men surrounded the tenth and beat him up.
The next night the tenth man didn't show up for dinner, so
the nine sat down and ate without him. But when it came
time to pay the bill, they discovered something important.
They didn't have enough money between all of them for
even half of the bill!
The people who pay the highest taxes get the most
benefit from a tax reduction. Tax them too much, attack
them for being wealthy, and they just may not show up at
the table anymore. There are lots of good restaurants in
Europe and the Caribbean.
Direct Tax
Burden falls directly on the
person or thing being taxed
• Cannot be shifted to another person or
thing.
– Includes personal income tax or
– property tax on a residence
Indirect Taxes
tax imposed on one person or thing but
whose burden is borne indirectly by another
Indirect Tax:
• Can be recovered by
charging higher prices
or paying lower
wages
• Sales tax, business
property tax, and
payroll tax can
be shifted
Corporate Income and Other Taxes
•
A tax on the profits, or
net income of
corporations.
78. What is an Estate tax?
–
known as ‘death tax’
• What was supposed to
happen to the estate tax in
2010?
• Why will this not happen
now?
79. What is taxed by the Gift
tax?
–
on gifts received in excess of set sum
What is an Excise Tax
A user tax that generates revenue to build and maintain
roadways
80. Why is gasoline a good source for an excise tax?
81. How can an excise tax be used as a sin tax?
Customs Duty and User
Fees
82. What is a Customs
duty?
83. What is a user fee?
84. What is an example of
a user fee?
Property Taxes
• Levied on property, especially real estate
• Can also be
levied on boats,
RVs,
business
inventories
• Fund schools,
local services,
welfare programs
Transaction
Taxes
(Consumption
Taxes)
•Levied on economic
transactions
• Set on percentages or
physical quantities
• Support state and local services
85. What is an example on the state level of a transaction
tax?
The U.S. Constitution
Divides Government
Powers
Federal Responsibilities
State Responsibilities
Local Responsibilities
Tax Freedom Day
How Taxes Evolve
House Ways and Means Committee
Full House
Senate Finance Committee
Full Senate
Joint Conference Committee
Senate/House Compromise bill
President vetoes bill
Veto override fails
Veto override passes
President signs bill
Tax law enacted
Taxation
Around the
World
A recession is when your neighbor loses his job.
A depression is when you lose your job.
History of Taxation in the United States
Trouble Brewing with Tax Reform
• Value-added tax
A percentage tax on the
value added to goods or services at each
stage of production and distribution. As with
general sales taxes, consumers bear the final
burden of value-added taxes
“The income tax
law is a lot of
bunk. The
government can’t
collect legal
taxes from illegal
money.”
Al Capone
Failure to pay legally owed taxes can result in fines or imprisonment for
tax fraud or tax evasion.
Al Capone, a man remembered as one of the most notorious criminals of the
twentieth century, was imprisoned for tax evasion in June, 1930.
Spiro Agnew, our thirty–ninth vice president (1969–1973), resigned from
office after being fined for tax evasion.
Be smart: Pay all taxes owed to the government
Federal Government
Spending
86. Define mandatory
spending
87. Define
discretionary
spending
88. Define
entitlements
89. What are three
important types of
entitlements?
Federal Expenditures
90. What is discretionary
spending?
91. What are the 5 main
categories of this
spending?
92. Which part of this
budget is the largest?
Federal Budget
Discretionary 2009
•
•
•
•
•
•
•
•
•
•
•
•
•
$70.4 billion - United States
Department of Health and Human
Services
$45.4 billion - United States
Department of Education
$44.8 billion - United States
Department of Veterans Affairs
$38.5 billion - United States
Department of Housing and Urban
Development
$38.3 billion - State and Other
International Programs
$37.6 billion - United States
Department of Homeland Security
$25.0 billion - United States
Department of Energy
$20.8 billion - United States
Department of Agriculture
$20.3 billion - United States
Department of Justice
$17.6 billion - National Aeronautics
and Space Administration
$12.5 billion - United States
Department of the Treasury
$11.5 billion - United States
Department of Transportation
•
•
•
•
•
•
•
•
•
•
•
•
$10.6 billion - United States
Department of the Interior
$10.5 billion - United States
Department of Labor
$8.4 billion - Social Security
Administration
$7.1 billion - United States
Environmental Protection Agency
$6.9 billion - National Science
Foundation
$6.3 billion - Judicial branch (United
States federal courts)
$4.7 billion - Legislative branch (United
States Congress)
$4.7 billion - United States Army Corps
of Engineers
$0.4 billion - Executive Office of the
President
$0.7 billion - Small Business
Administration
$7.2 billion - Other agencies
$39.0 billion(2008*) - Other Off-budget
Discretionary Spending
The financial cost of the Iraq War and
the War in Afghanistan are not part of
the defense budget; they are
appropriations.
What does the Constitution say about Taxes?
• U.S. Constitution,
Article 1, Section 8:
• “The Congress shall
have power to lay
and collect taxes,
duties, imposts and
excises, to pay the
debts and provide
for the common
defense and
general welfare of
the United States …
Establishing the Budget
• The president presents
his budget proposal to
Congress in early
February.
• Congress is free to adopt
or reject any of the
president's
recommendations.
93. What is the fiscal year?
94. Who prepares the
President’s budget?
What Happens in Congress?
• Congress adopts a budget resolution establishing targets
• Thirteen appropriations subcommittees divide the funds
95. What are appropriations?
96. What must occur if Congress does not pass a budget by the
start of a new fiscal year?
Impact on our Economy
97. In what 3 ways does federal spending impact our
economy?
Federal Debt as Percent of
GDP
98. Explain
resource
allocation.
Myth: Today’s Debt is at Historic Levels.
Fact: Today’s Debt Burden is Not that Large
in Historical Context.
US Gross Federal Debt
• This chart reflects gross
federal debt from 19402007 in unadjusted
dollars.
• Note that for half of this
period, the debt
remained fairly stable.
• It is not until 1981, with
the tax cuts and military
spending that marked
the Reagan
Administration, that the
debt began its current
trajectory.
How big is the Debt?
The National Debt is $19 Trillion!
State and Local Taxes and
Spending
• When the federal
government shares it is
called Intergovernmental
Revenues – funds collected
by federal government and
distributed to states and
local
99. What is the primary tax for
most states?
100. What goods are often
exempt from these taxes?