Government Revenue and Spending
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 Rate
rate at which a person’s tax liability is determined
Tax Bases and Structures
 Tax 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
 Resource Allocation
 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 lowincome 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. Oregon does
not
 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
1. Summarize the arguments for and against an Internet sales tax
as presented in the documents.
2. Who is most likely to benefit from Internet sales tax revenue?
Explain your answer, using information from the documents.
3. How has government responded to e-commerce—the selling of
goods and services online? Use information from the
documents in your answer.