CH. 9
Sources of Government Revenue
The Economics of Taxation
• An enormous amount of money is required to
run federal, state, and local governments
– Think of the amounts of money we looked at in
the last chapter for government spending
– Where does all this money come from?
• **Most local, state and federal government
revenues come from TAXES!!**
Two Principles of Taxation
• Benefit Principle of Taxation:
– Those who benefit from government goods and
services should pay in proportion to the amount of
benefits they receives
– Example: Taxes on gasoline
• Gas tax is built into price of gasoline at the pump,
people who drive more than others pay more gas taxes
and therefore pay for more of the upkeep of our
nation’s highways
Two Principles of Taxation
• Ability-to-Pay Principle:
– People should be taxed according to their ability to
pay regardless of the benefits they receive
– Example: individual income tax
• Requires individuals with higher incomes to pay more
than those with lower incomes
Types of Taxes
• Proportional Tax
• Progressive Tax
• Regressive Tax
Proportional Tax
• Charges the same percentage rate of taxation
on everyone, regardless of income
– If the income tax rate is 20%, a person with
$10,000 in taxable income pays $2,000 in taxes
while a person with $100,000 in taxable income
pays $20,000.
• Summary:
– As income goes up, the percent of income paid in
taxes stays the same
Progressive Tax
• Charges a higher percentage rate of taxation
on persons with higher incomes
– “the more you make, the more they take”
– Claims not only a larger dollar amount but also a
larger percentage of income as income increases
• If the tax system requires a person to pay $1,000 on
$10,000 of taxable income, $4,000 on $20,000 and
$30,000 on $100,000 percent of income 10, 20, and
30 percent rises as income rises
• Summary:
– As income goes up, the percent of income paid in
taxes goes up
Regressive Tax
• Charges a higher percentage rate of taxation
on low incomes than on high incomes
– If a person with a $10,000 income spends $5,000
on food and clothing, while a person with a
$100,000 income spends $20,000 on the same
essentials, if the state sales tax is 4%, the person
with the lower income is paying a higher
percentage of total income in taxes
• Summary:
– As income goes up, the percent of income paid in
taxes goes down
The Federal Tax System
• Where does the federal government get its
revenue?
• Individual Income Taxes
– Tax on people’s earnings automatically deducted
from your paychecks
• Corporate Income Taxes
– Tax a corporation pays on its profits
– Taxed separately from individuals because the
corporation is recognized as a separate legal entity
More Taxes….
• FICA Taxes (Social Insurance Payroll)
– Federal Insurance Contributions Act
– Paid by both employers and employees to pay for
Social Security and Medicare (federal health-care
program available to all senior citizens, regardless
of income)
– Also called payroll taxes because they are
deducted from your paycheck
Other Federal Taxes
• Excise Tax- tax on manufacture or sale of selected
items
– Alcohol, tobacco, gasoline, telephone services
• Estate Tax- tax on the transfer of property when a
person dies
• Gift Tax- tax on donations of money or wealth
and is paid by the person who makes the gift
– Used to make sure that wealthy people do not try to
avoid taxes by giving away their estates before their
deaths
• Customs Duty- charge on goods brought in from
other countries
• The government uses these taxes for highways
and airports, etc—and deposits others in the
general fund
• **One of the public goods that only the
federal government provides is national
defense**
• Only two things you can count on in life:
Death and Taxes!!!
Types of Taxes we Spend
State Government Revenues
• A significant source of revenue for state
governments comes from the sales tax
– General tax charged on consumer purchases of
nearly all products
– A percentage of the purchase price which is added
to the final price the consumer pays
– Collected at the time of sale
– Varies from state to state
• Alaska, Delaware, Montana, New Hampshire, and
Oregon do not have a general sales tax
Local Government Revenues
• A majority of revenues for local governments
comes from the property tax
– Tax on possessions such as real estate, buildings,
furniture, automobiles, farm animals, stocks,
bonds, and bank accounts
– Real estate raises the most revenue of all the
property taxes
– Taxes on other personal property (except
automobiles) is seldom collected because of the
problem of determining value
Examining Paychecks
• Many of the taxes you pay to federal, state,
and local governments are deducted directly
from your paycheck
• Payroll Withholding Statement
– Summary statement attached to a paycheck that
summarizes income, tax withholdings, and
deductions
• Gross Pay- amount you make prior to taxes
• Net Pay- amount you make after taxes have been taken
out
– This is how much you will receive when you cash your
paycheck
• To figure out how much was deducted from your
paycheck you:
**TOTAL TAXES TAKEN OUT= Gross Pay- Net Pay**