Purpose of Taxation

1. 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.

2. The growth of federal taxation

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. Tax Rate-The 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.

9. Federal Government Spending *Together, national defense and programs that assist individuals claim about ¾ of each federal dollar.

10. Federal Government income

11. State and Local Spending • 1/3 on education • The rest goes to public assistance, transportation, public safety and health care.