Understanding Types of Taxes and Tax Structures

1. Government’sTaxing and Spending(Fiscal Policy)

2. TaxesPart I

3. Taxes Objectives: In this lesson, students will be able to identify the types of taxes that exist and difference between, proportional, progressive, and regressive income taxation. Students will be able to identify and/or define the following terms: Taxes Tax Rate Revenue Expenditures Level of Government Tax Freedom Day Types of Taxes Tax Base

4. Taxes We Didn’t Have 100 Years Ago Road Usage TaxRecreational Vehicle TaxSales TaxSchool TaxState Income TaxState Unemployment Tax (SUTA)Telephone Federal Excise TaxTelephone Federal UniversalService Fee T axTelephone Federal, State andLocal Surcharge TaxesTelephone Minimum UsageSurcharge TaxTelephone Recurring andNonrecurring Charges TaxTelephone State andLocal TaxTelephone Usage Charge TaxUtility TaxesVehicle LicenseRegistration TaxVehicle Sales TaxWatercraft Registration TaxWell Permit TaxWorkers Compensation Tax • Once again, none of these taxes existed 100 years ago. Then, America was the world's wealthiest nation. Then, we had no national debt. Then, we had a thriving economy that was the envy of the free and developed world. Accounts Receivable TaxBuilding Permit TaxCDL license TaxCigarette TaxCorporate Income TaxDog License TaxExcise TaxesFederal Income TaxFederal Unemployment Tax (FUTA)Fishing License TaxFood License TaxFuel Permit TaxGasoline Tax (currently 44.75cents per gallon)Gross Receipts TaxHunting License TaxInheritance TaxInventory TaxIRS Interest Charges IRSPenalties (tax on top of tax)Liquor TaxLuxury TaxesMarriage License TaxMedicare TaxPersonal Property TaxProperty TaxReal Estate TaxService Charge TaxSocial Security Tax

5. Taxes Ataxis arequired payment to the government. Taxation is the primary way that the government collects money. Taxes give the government the money it needs to operate. Tax Rate (in tax brackets) is the percent of income taken by the government (as taxes). Theincome received by the government from taxesand other nontax sources is revenue. Without revenue from taxes, the government would not be able to provide the goods and services that we not only benefit from , but that we expect the government to provide (highways, education, national defense, law enforcement, etc.). All of these goods/services cost money – in worker’s salaries, in materials, in land and labor. All members of our society share these costs through the payment of taxes. 1

6. Tax Structures The government decides how to structure the tax on a particular tax base (such as, based on income, property, good, or servicethat is subject to a tax). Economists describe three different tax structures: Proportional, Progressive, and Regressive Taxes. 2

7. 3 Three Tax Structures 3. Regressive 2. Progressive 1. Proportional Proportional Everyone pays taxes at the same rate (%), whatever the income level. Sometimes it is called a flat tax (on income).Examples: Social Ins. (FICA), Medicare Tax, & Customs Duties. Progressive People pay a higher % rate as their income levels rise. Examples: Personal Income, Corporate Income, Estate Tax, & Gift Tax. Regressive Takes a larger % of income paid in taxes from low income groups (and less % of income when income increases).Flat Tax on Products. Examples: Property, Excise and Sales Tax. Flat Tax -applies the same tax rate to every taxpayer regardless of income bracket..

8. Who Pays What Percentage of Federal Income Taxes ? Most people in the United States think that wealthy people do not pay their fair share of taxes. Do you think this is the case? Before you answer, you need to get some idea of what wealthy Americans pay in taxes compared to what they earn in income. (p. 373)

9. Do the rich pay their fair share of the taxes?And why is it the rich whoalways benefit from tax cuts?

10. Ave. Tax Rate Top 1%[1,286,000] ($603,000+) paid 37%of all taxes–average 24% Top 5%[6,430,000] ($137,000+) paid 57% - average 21% Top 10%[12,861,000] ($99,000+) paid 68% – average 18.5% Top 25%[32,152,000] ($60,000+) paid 85% – average 15% Top 50%[64,305,000] ($30,000+) paid 97% – average 14% Bottom50%[64,305,000] (<$30,000) paid only 3.3% of all taxes. There are 469 billionaires, [793 in world]. There are 9.2 million millionaires. There are 40 millionaires in the U.S. Senate. Who Pays What In Federal Income Taxes Tax Rate is the percent of income taken by the Government. 4

11. Let's Demonstrate Our Tax System In The Real World • Suppose that every day, ten men go out for drink and the bill for all ten comes • to $100. If they paid their bill the way we pay our taxes, it would go like this: • The first four men (the poorest) would pay nothing. • The fifth would pay $1. • The sixth would pay $3. • The seventh would pay $7. • The eighth would pay $12. • The ninth would pay $18. • The tenth man (the richest) would pay $59. So, that's what they decided to do. The ten men drank every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. 'Since you are all such good customers, he said, “I'm going to reduce the cost of your daily drink by $20. Drinksfor the ten nowcost just $80.” The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his'fair share?' They realized that $20 divided by six is $3.33. But if they subtracted that from everybody's share, then the fifth man and the sixth man would each end up being paid to drink his drink.

12. So, the owner suggested that it would be fair to reduce each man's bill by roughly the same amount, and he proceeded to work out the amounts each should pay.!  And so:The fifth man, like the first four, now paid nothing (100% savings). • The sixth now paid $2instead of $3 (33%savings). • The seventh now pay $5 instead of $7 (28%savings). • The eighth now paid $9 instead of $12 (25% savings) • The ninth now paid $14 instead of $18 (22% savings) • The tenth now paid $49 instead of $59 (16% savings). • Each of the 6 was better off than before. And the first 4 continued to drink for free. • But once outside the restaurant, the men began to compare their savings.'I only got a dollar out of the $20,'declared the sixth man. He pointed to the tenth • man,' but he got $10!‘ • 'Yeah, that's right,' exclaimed the fifth man. 'I only saved a dollar, too. It's unfair that • he got ten times more than I!‘ • 'That's true!!' shouted the 7th man. 'Why should he get $10 back when I got only two? • The wealthy get all the breaks!''Wait a minute,' yelled the first four men in unison. 'We • didn't get anything. The system exploits the poor!'The nine men surrounded the tenth and beat him up. • The next night the tenth man didn't show up for drinks, so the nine sat down and had • drinks without him. When it was time to pay the bill, they discovered something important. • They didn't have enough money between all of them for even half of the bill!And that is how our tax system works. • The people who pay the highest taxes get the most benefit from a tax reduction. Tax them • too much, attack them for being wealthy, and they just may not show up anymore. In fact, • they might start drinking overseas where the atmosphere is somewhat friendlier.

13. What is a Fair Share? Most people believe that everyone should pay his or her fair share of taxes. The two following Principles of Taxation are used to judge fairness. :

14. Two Principles of Taxation • Benefits-received Principlesays that people who benefit bear its cost. The more they use, the more they pay. (gasoline taxes, tolls, cigarettes, alcohol) This is a consumption tax. • EXP: Government spends money to maintain and take care of our roads and highways. Gas tax revenues (excise taxes) are used to take care of roads. The more some one uses roads and highways, the more that person pays in gas tax revenues. So, the major users of roads and highways pay most of the cost of keeping up roads and highways. 5

15. Two Principles of Taxation • Ability-to-Pay Principle says that people with more income or wealth should pay more taxes because they have the ability to “bear the burden.” It doesn’t make any difference what benefits or services they receive. • Ability-to-Pay Principle based on INCOME – wages & salary, or any other payments. Will pay based on their total dollar amount. EX: Fed Income Tax • Ability-to-Pay principle based on WEALTH–people with more assets (houses, stocks, bonds) would pay taxes based on the total value. • EX: Inheritance and estate taxes, property taxes, and capital gains. 6

16. Taxes There are three level of government: Federal State Local 7

17. Taxes- Federal There are four tax categories at the Federal level. • Personal Income Tax – 45% of federal revenue. This U.S. had no individual income tax until 1913. This is a progressive tax on an individual’stotal income based on ability-to-pay. (Tax Rate: 10%, 15%, 28%, 33% and 35%).Dependents living with parents pay no tax up to $5, 700. Some individuals pay both federal and state income tax because their state has as a personal income tax – Thankfully, Texas does not! 8

18. Taxes- Federal • Corporate Income Tax– (12%) • The taxes levied on a business corporation's profits. This is a progressivefederal tax . (Some may pay both Federal & State tax.) Corporate Tax Rates: Under $50,000 15% $75,001- $100,000 25% 100,001 - $335,000 39% $335,001 - $10,000,000 34% $10,000,001 - $15,000,000 35% $15,000,001 – $18,333,333 38% $18,333,334 + 35% (Most pay 35% 9

19. Taxes- Federal 3. Social Security Tax– (36%) FICA - Federal Insurance Contribution Act (7.65% for both Social Security and Medicare)- this is a tax on employment income. Half the tax the placed on the employer and the other half on the employee. • (A) Social Security Tax (6.2%). It is proportionalup to $106,800, then it becomes regressivebecause no tax after $106,800. (A person making $106,800 pays 6.2%; a person making $312,600 only pays 3.1 of income.) • (B) Medicare Tax (1.45) – on every dollar earned. This is proportional tax up to $200,000, then 2.35% above $200,000. 10

20. Taxes- Federal 4. Other Taxes– (7%) of Federal Budget. (A). Excise Tax –a specific tax on the production of particular products (not levied on the individual’s income). Excise taxes are regressive because they take a larger % from low income groups. Excise taxes are levied on specific products like: gasoline, liquor, telephone services, tires, legal betting, and coal. (B). Estate Tax-tax levied on the assets of a person who dies and has assets in excess of $3.5 million dollars. Estate taxes range from 18-50% of the value of the estate which makes this tax a progressive one. This tax is supposed to disappear in 2010 but reappeared in 2011. continued 11

21. Taxes- Federal 4. Other Taxes– (7%) (C). Gift Tax–tax placed on the transfer of certain gifts of value, such as money ($13,000 or more) or other personal property. The person who gives the gift pays the gift tax. It also is progressiveup to 50%. (D). Customs duties (tariffs)-tax on imported goods. It is proportional. Although they produced most of government revenues prior to 1913, they produce very little revenue today due to free trade. During George Washington’s time, tariffs brought in over 99% of the government’s revenue. 12

22. Federal Revenue is from Four Major Taxes Personal Income Tax Corporate Income Tax Social Security Tax Other Taxes Other Taxes 7% Largest sector is Personal Income Tax 45% Personal Income Tax 36 % Social Security Tax Revenue for 3 Major Taxes $2,524 Billion All Other 12% Health 24% Interest 9% 12 % Corporate Tax 13 Source: U.S. Bureau of Census

23. State and Local Taxes • The three most important state and local taxes are the sales tax, property tax, and individual income tax. • Sales Tax– a regressive tax levied or added to the price of most products (books/cars). The sales tax is not levied on baby clothing, food, and medicine. Example: Sales tax is Dallas is 8 ¼ % of every dollar. Only 5 states, Alaska, Delaware, Montana, New Hampshire, and Oregon – do not have sales tax. Texas has a 6 ¼ % sales tax. EXP: Palestine 6.25 + City Tax 1.50 + County Tax .50 = 8.25% within the Palestine City Limits. (On average, a family of four, pays about $800 a year on sales tax.) 14

24. State and Local Taxes • Property Tax-taxes on the value of property (mainly on houses and buildings). There taxes are also on furniture, autos, farm animals, stock, bonds, and bank accounts. They finance education, police and fire protection. This tax is a regressive one because if two people own separate $100,000 homes , they both pay the same tax. Major state/local revenue. 3. State Individual Income Tax – tax on an individual’stotal income. Texas is one of 7 states with no state individual income tax! (States use different methods for figuring their state tax.) 2 15

25. The Seven States With No StateIncome Tax *They tend to have more regressive tax systems.

26. Texas Tax Revenue [mainly regressive] Oil production2% Insur. Taxes 4% Natural Gas 5% Bus. franchise Tax 9% Sales Tax (R) 61% Motor Fuels 11% (R) Alcoholic bev. 2% (R) Motor Vehicle Sales 10%(R) *Texas gets most of its revenue from the sales tax. 16

27. What is AMT Tax Alternative Minimum Tax an alternative tax system designed so everyonepays at least a minimum tax. It is a tax that some people have to pay on top of their regular income tax. The only people who are subject to AMT tax are those who are above a certain income. Example: In 2014, that income was $70,950 for a married couple filing jointly. Recently more people are falling under this tax due to increased inflation. 17

28. What is Value-Added Tax? VAT Tax is a multistage tax collected from firms at each stage of the production and distribution process. (Example below showing 10% VAT at each stage) 18

29. The lottery is a “regressive tax on morons.”

30. How Long Do You Have to Work to Pay All Your Taxes ? In 2014, the average person had to work from Jan. 1 to April 21, before earning enough to pay all taxes owed-assuming that all income went toward taxes. (Not the same for all states because taxes are different.) This year the Tax Freedom Day was 3 days longer than the year before(April 23rd ). See Text, page 372 for more Information, if needed. Tax Freedom Day 19

31. Don’t Forget about Tax Breaks A tax break - is a term referring to any item which avoids taxes, including any tax exemption, tax deduction, tax credit, or even a "tax loophole“. Tax breaks are give in order to promote certain activities that deem beneficial to society. (Example: deduction for home mortgage interest when filing personal income tax. Promotes home ownership.) Americans pay about 29 cents of every dollar in taxes. When government issues a tax break, it chooses to give up tax revenue (functions as government expenditure). Both spending and tax breaks result in the same outcome – less money in the U.S. Treasury. Tax breaks in the 2015 budget are expected to cost the federal government $1.24 trillion (in discretionary spending). 20

32. Tax Cheating Tax cheating amounts to about $310 billion a year. Who cheats the most? Self-employedpeople who are in charge of their own taxes like gardeners, carpet layers, who get paid in cash. Others are auto dealers, barbers, telemarketers, restaurant owners, accountants, doctors, and lawyers. Many overstate deductions. Over 60% of corporationspaid zero taxesfrom 1996-2000. Mencheat more than women. In 1987, the IRS began requiring taxpayers to report the SSN of all dependents. The next year 7 millionchildren vanished(9%). People were listing their dogs, cats and birds as dependents. Only about 20% of the disappearing dependents represented children who had been claimed by both parents after a divorce. Informerson tax cheaters can get you 1% of what they collect or 10% if you provide paperwork. 21

33. Wrap Up

34. Review – True/False • There are 4 major taxes categories at the federal government level: federal, state, local, and, municipal. False –Personal Income, Corporate Income, SS Tax, Others • The federal government and some states apply an excise tax on some items. True • The AMT (alternative minimum tax) is a tax that everyone pays on top of their regular income tax. False (only applies to people above a certain income) • With a proportional income tax, everyone pays at the same rate. True

35. Review – True/False • Personal Income Tax is a federal government tax placed on income from employment. False – the is Social Security Tax • A Regressive Tax takes a larger percent of income paid in taxes from low income groups. True (sales tax and excise tax works this way) • Proportional Income Tax is a tax that everyone pays at the same rate, whatever the income level. True • A tax placed on the value added to each stage of production and distribution is called excise tax. False – Value-Add Tax (VAT)

36. Review – True/False • The money government receives from taxes is called “federal payments”. False – revenues • The VAT (Value-added Tax) is tax collected for the value of property, such as, homes and businesses. False (VAT is multistage tax collected from firm at each stage) • Texas gets most of its tax revenues from sales tax. True • Most of the federal revenues comes from corporate tax. False – from Personal Income Tax • A tax break is any item that avoids some taxes and reduces money going to the U.S. Treasury. True

37. Review – True/False • Corporations may be required to pay tax on their profits to both the federal and state government. True • Sales tax usually does not apply to baby clothing, food, and medicine. True (small tax on some foods in few states) • The average person spends one month our of each year working to pay his/her taxes for the year. False (usually 4-5 months – called: Tax Freedom Day) • A progressive tax is similar to a flat tax. False – Proportional tax- Flat Tax applies the same tax rate to every taxpayer regardless of income bracket. • All taxes are based on the benefits-received principle. False (either benefits-received or ability–to-pay) END

38. Government’s Spending (The Budget)Part 2

39. The Budget:Deficits and Debt Objectives: In this lesson, students will be able to describe how the federal government spends its tax revenues, and describe some of the issues connected with budget. Students will be able to identify and/or define the following terms: Revenue Mandatory Expenditures Discretionary Balanced Budget Budget Surplus Budget Deficit

40. The Budget The basic tool of fiscal policy is the federal budget. It is made up of two fundamental parts: Revenue(income from taxes) and Expenditures (spending programs). When the federal government’s revenues equal its expenditures , the federal government has a balanced budget. In reality, the federal budget is almost never balanced. Usually, it is running a surplus or a deficit. 22

41. The Budget A budget surplus occurs in any year when revenues exceeds expenditures (more money going into the Treasure than coming out of it). A budget deficit occurs in any year when expenditures exceed revenues (there is more money coming out of the Treasury than going into it). 23

42. What Are the Federal Governments Expenditures? In 2016, the proposed federal government will spend $3.99 trillion. These trillions of dollars make up a considerable chunk – 21% of the GDP- of the economy. That means that expenditure, government spending , makes up a sizable share of all money spent in the U.S. each year> So, where does all the money go? 24

43. What Are the Federal Governments Expenditures? 3 Categories of Government Expenditures: 1. “Mandatory Spending” refers to money that lawmakers are required by existing laws to spend on certain programs - takes about 2/3 of the entire budget.(Must change law to change spending - may be politically hard to do.) 2 “Discretionary Spending” is the spending about which government planners can make a choice – 1/3 of the budget. 3. “Interest on Federal Debt” – Interest on accumulated debt, minus interest income from assets government owns. The “Fiscal Year” begins Oct. 1stof the year preceding and runs through Sept. 30 of current year. 25

44. Expenditures for 2016 – 3 Main Categories Fiscal Year: 2016 Mandatory Gov. planners are required by law to spend on specific items Discretionary Gov. planners can choose how to spend. 29% 65% 6% Interest Spending Interest on accumulated debt. $3.99 trillion (100% of Expenditures) Includes Mandatory, Discretionary, & Interest Spending 26

45. The U.S. Government’s Total Revenue Is Estimated To Be $3.525 Trillion for Fiscal Year 2016 OOPS! Gov. Revenue of $3.5T minus Spending $3.9 T = a Budget Deficit. It will be highest revenue ever received by the U.S. Government. It’s more than was collected in the first 180 years of our country’s history. 27

46. Expenditures for 2016- 3 Main Categories-ItemizedExpenditures for 2015 – 3 Main Categories- Fiscal Year: 2016 Itemized Budget - $3.99 trillion (100% of Expenditures) Itemized Categories of Mandatory, Discretionary, & Interest Spending

47. 2016 -MandatorySpending Only Fiscal Year: 2016 Most of the Mandatory Expenditures are for Entitlements 2016 - $2.54 trillion (65% or 2/3 of Budget) Mandatory Expenditures 28

48. Entitlement– Programs or benefits using established eligibility requirements to provide health, nutrition or income supplement's to individuals. Growth of Entitlements: This is the largest and fastest growing part of the deficit. Reduction cannot be accomplished unless law is changed or altered. Because millions of Americans are supported by entitlements, a change to reduce the deficit would be difficult. 29

49. 2016 – DiscretionarySpending Only 2015 Fiscal Year: 2016 2016 - $1.16 trillion (29% or about 1/3 of Budget) Discretionary Expenditures 30

50. The U.S. Government Has ABudget Deficitfor Fiscal Year 2016 of $474 Billion Budget Deficit: Government spending is greater than tax revenues. Look at previous years: • FY 2014 - $649 billion. • FY 2013 - $680 billion. • FY 2012 - $1.087 trillion. • FY 2011 - $1.299 trillion. • FY 2010 - $1.294 trillion. • FY 2009 - $1.413 trillion. • FY 2008 - $459 billion. • FY 2007 - $161 billion. Deficits • Notice what happened to the budget when the recession hit in 2009. Huge deficits were a result of 4 factors: • Economic stimulus package that cut taxes and extended unemployment benefits, and funded publics works projects to create jobs and kick-start the economy. • The recession reduced Federal income, the economy tanked. Gov. revenues down. • Attack on 9/11. Fed Gov. increased military spending “War on Terror”. • Mandatory spending increased. Programs exceeded $2 T in 2011. 31