Chapter 14
Taxes and Government Spending
Chapter 14
Section 1
What are taxes?
 Taxation is the primary way that the government
collects money
 Without revenue, or income from taxes, government
would not be able to provide goods and services
Taxes and the Government
 The constitution gives Congress the power to tax
 The 16th amendment gives Congress the power to levy
an income tax
Limits on the Power to Tax
 Taxes must be for “the common defense and general
welfare”
 Federal taxes must be the same in each state
 Government cannot tax exports
Tax Bases and Tax Structures
 A tax base is the income, property, good or service
that is subjected to a tax
 Proportional taxes are a tax for which the percentage
of income paid in taxes remains the same for all
income levels
Tax Bases and Tax Structures
 Progressive Taxes are taxes for which the percent of
income taxed increases as income increases
 Regressive Taxes are taxes for which the percentage
of income taxed decreases as income increases
Characteristics of a Good Tax
 1) Simple- easy to understand
 2) Economy- Government should be able to collect
taxes without spending too much time or money
 3) Certainty- Should know when the tax is due
 4) Equity- Should be fair
Who bears the burden of the tax?
 Incidence of a tax examines who bears the final
burden of a tax
 If a good is inelastic, the consumer will bear the
burden of the tax. If a good is elastic, the seller will
bear the burden of the tax.
Chapter 14
Section 2
Individual Income Taxes
 Federal Income taxes are collected throughout the
year as you earn income
 Withholding is the process by which employers take
tax payments from you before your receive your
paycheck
 The federal income tax is progressive
Filing a Tax Return
 A tax return is a form where you declare your income
to the government
 A taxable income is a person’s total income minus
exemptions and deductions
Filing a Tax Return
 Exemptions are set
amounts that you
subtract from your
income (spouse, kids)
 Deductions are variable
amounts that you can
subtract from your
income (school supplies
for students)
Corporate Income Taxes
 Corporations must pay a federal tax on their income
 This is a progressive tax i.e.
Profit =
taxes
Social Security, Medicare and
Unemployment Taxes
 Social Security Tax- Funded by Federal Insurance
Contributions Act (FICA). Go to those of old age,
survivors and disability insurance.
 Medicare Taxes- Funded by FICA. Health insurance for
those over 65 and some with disabilities.
 Unemployment Taxes- Collected by both the federal
and state government. You can collect
unemployment if you were laid off or are actively
seeking work
Other Types of Taxes
 Excise Tax- a tax on a production of a good (ex.
Cigarettes)
 Estate Tax- a tax on the total value of money and
property of a person that has died. Paid before
inheritors receive their share
 Gift Tax- a tax on the money or property one living
person gives to another
 Import tax- taxes on imported good are called tariffs
Chapter 14
Section 3
Mandatory and Discretionary
Spending
 Mandatory spending is money that lawmakers must
spend on certain programs or to use for interest
payments on the national debt
Mandatory and Discretionary
Spending
 Discretionary spending allows lawmakers to spend
money wherever they like
Discretionary Spending
 Defense spending- counts for about half of the
federal government’s discretionary spending
-includes military salaries, military equipment and
operating costs of military bases
Entitlements
 An entitlement program is a social welfare program
that people are “entitled” to if they meet certain
requirements (Social Security, Medicare)
 Medicaid- benefits low-income families, some people
with disabilities and elderly people in nursing homes.
Chapter 14
Section 4
State Budgets
 A state’s operating budget pays for everyday
expenses such as salaries, supplies and maintenance
of state facilities.
 A state’s capital budget pays for investment
spending.
Where are State Taxes Spent?
 Education- Help finance public state universities and
some aid to local governments for K-12.
 Public Safety- State police systems and prisons
 Highways and Transportation- States build and
maintain highways. Also pay some costs of waterways
and airports
Where are State Taxes Spent?
 Public Welfare- Support some public hospitals and
clinics. Help pay for and administer federal benefits
programs
 Arts and Recreation- State parks, some museums and
historical sites
 Administration- Help keep the state running
(Congressman)
State Tax Revenues
 Limits to State Taxation
-Since trade and commerce are considered
national enterprises, states cannot tax imports
or exports. They also cannot tax goods sent
between states.
State Tax Revenues
 Sales tax- sales taxes are the main source of revenue
for many states
 Other state taxes include state income tax, excise tax
and property tax
Local Government Spending and
Revenues
 Local government help assist with public school
systems, fire protection, public transportation, record
keeping (birth/death certificates) and law
enforcement
Local Government Spending and
Revenues
 Property taxes are the main source of local revenue
 Local governments can collect their own excise, sales
or income tax
 Some taxes, such as room and occupancy rates, are
aimed at nonresidents in order for local governments
to earn extra money