Purpose of Taxation
 A Tax is required payment to local, state, or national
government. Government uses taxes to:
 To fund public goods and services—Taxes are the main sources
of income for the government. Most of the Federal
Government’s revenues come from your taxes.
 To influence behavior (tobacco)—Taxes on alcohol and
cigarettes are to discourage people from using them.
 To stabilize the economy. –The government uses the raising and
lowering of taxes to help stabilize the business cycle.
 To redistribute income—taxes taken from the wealthy can be
used to help the needy.
The growth of federal taxation
Date
Event
1789
The Constitution gives Congress the power to levy taxes for the first time. The first
taxes are tariffs and excise taxes.
1794
President George Washington orders troops to put down a rebellion by corn and rye
farmers who oppose the whiskey tax because it cuts their profits.
1863
To finance the Civil War, the federal government collects income taxes for the first
time.
1872
Income tax ends
1895
An attempt to impose an income tax fails when the Supreme Court rules it
unconstitutional.
1913
The Sixteenth Amendment to the Constitution allow the government to collect income
taxes
1930’s
During an after the Great Depression, the government increases taxes to pay for social
programs.
The taxes people pay
 Income tax- The SIXTEENTH Amendment to the
Constitution authorizes Congress to tax business and
personal incomes. Income from jobs and investments you
earn are subject to income taxes. The federal income tax is
collected by the Internal Revenue Service. These
personal income taxes are the main source of income for the
federal government.
--Some state and local governments also collect income tax.
taxes
 Social Security Tax—(FICA—Federal Income
Contribution Act)
 Employers and employees pay equal amounts of social security
taxes.
 Self-employed persons pay the entire tax amount.
 Sales Tax– In most states, including Illinois a consumer pays
a sales tax in the value of the goods and services they buy.
This tax is the leading source of income for the state
government.
Taxes
 Excise tax—is a tax on manufacture or sale of certain goods
and services. These taxes fund federal, state, and local
governments, and include taxes on motor vehicles, alcohol,
tobacco, telephone, air services and fire arms.
 Property tax—Property taxes are based on the value of the
land and buildings one owns. They are the main source of
revenues for local governments.
Taxes
 Estate and gift taxes.
 This tax is based on the value of a person’s property after
death.
 Gift taxes may be imposed if a person gives a gift over a
certain amount.
 A law passed in 2001 provides for the gradual phasing out
of the federal estate tax.
 Business or license taxes—people pay licenses fees to
own a car, hunt or fish or to operate certain businesses.
 Customs duties and tariffs—The federal government
places taxes on goods brought from other countries.
Principles of tax fairness—Taxes are
administered based on several principles in
an attempt to ensure equality.
 Benefit Principle—This principle holds that those who
benefit from a public service should pay for it.
 Ability-to-pay Principle—According to this principle, more
taxes should be paid by those who can afford to pay more.
Tax RateThe tax rate is the percentage that is
charges in taxes
 Flat Tax– takes the same percentage out of everyone’s
income.
 Progressive tax—takes a larger percentage of the income
of high-income people than of low income people.(Federal
Income Tax)
 Proportional Tax—takes the same percentage from
everyone’s income.
 Regressive Tax—takes a larger percentage of the income of
low- income people than of high-income people.
Federal Government Spending
Function
Amount
Percentage
Social Security
$519 Billion
21%
Defense
$473 Billion
19%
Medicare
$294 Billion
12%
Medicaid
$187 Billion
8%
Homeland Security
$30 Billion
1%
Net interest and national debt
$184 Billion
7%
Other Payments
$785 Billion
32%
Total:
$2, 472 Billion
100%
*Together, national defense and programs that assist individuals claim about ¾ of each
federal dollar.
Federal Government income
Revenue Sources
Individual incom tax 43%
Social Security and retirement
revenue 37%
Corporate income taxes 13%
Excise Tax 3%
Estate and gift taxes, customs
duties, and other revenue 4%
State and Local Spending
 1/3 on education
 The rest goes to public assistance, transportation,
public safety and health care.