CHAPTER 14--TAXES AND GOVERNMENT SPENDING

1. CHAPTER 14--TAXES AND GOVERNMENT SPENDING SECTION 1--WHAT ARE TAXES SECTION 2--FEDERAL TAXES SECTION 3--FEDERAL SPENDING SECTION 4--STATE AND LOCAL TAXES AND SPENDING

2. THE AMERICAN TAX SYSTEM • Tax- a required payment to various levels of government • Authority to levy taxes--given to federal, state and local government by the U.S. Constitution. • Article I Section 8 of U.S. Constitution • 16th amendment--Federal Income Tax • America is a “middle class” tax system. • Designed to draw largest amount from more populated middle class! • Creates “revenue” for U.S. Government. • Revenue used to fund government programs and services.

3. LIMITS ON THE POWER TO TAX • MUST BE FOR COMMON DEFENSE AND NOT FOR GENERAL INTERESTS • FEDERAL TAXES MUST BE THE SAME IN EVERY STATE • NO TAXES ON CHURCH SERVICES • NO TAXES ON EXPORTS

4. TAX STRUCTURE AND TAX BASE • TAX STRUCTURE--REFERS TO THE WAY THE TAX IS ASSESSED AND COLLECTED. • TAX BASE--THAT WHICH IS SUBJECT TO TAX. • INCOME TAX--PEOPLE’S EARNINGS • CORPORATE TAX--COMPANY PROFITS • PROPERTY TAX--VALUE OF OWNED LAND OR PROPERTY • SALES TAX--VALUE OF A PRODUCT SOLD

5. TAX STRUCTURE--PROGRESSIVE TAX STRUCTURE • AS INCOME INCREASES, SO DOES THE PERCENT PAID IN TAXES. • FEDERAL INCOME TAX STRUCTURE IS A PROGRESSIVE TAX

6. TAX STRUCTURE--PROPORTIONAL TAXES • ALSO CALLED A “FLAT TAX” • IT APPLIES THE SAME PROPORTION OR PERCENT ON ALL DESPITE THE VALUES OR SIZE OF THE TAX BASE. • MANY STATE TAXES ARE PROPORTIONAL.

7. TAX STRUCTURE--REGRESSIVE TAX • PERCENT OF INCOME IN TAXES DECREASES AS INCOME OR TAX BASE INCREASES. • EXAMPLE--SALES TAX • $35,000 YEARLY INCOME PAYS 5% SALES TAX ON $250 OF GROCERIES X 12 MONTHS--$150 • $35O,000 YEARLY INCOME PAYS 5% SALES TAX ON $250 OF GROCERIES X 12 MONTHS--$150 • http://www.youtube.com/watch?v=OsGd6FWnY_0&feature=related

8. WHO BEARS THE “BURDEN OF TAX” • “INCIDENCE OF TAX”. --IS WHO IS REALLY ASSIGNED THE PAYMENT OF TAX. • PRODUCERS LOOK TO “PASS ON” THE BURDEN OF A TAX RATE. • INELASTIC DEMAND PRODUCTS-- THE BURDEN OF TAX CAN BE SHIFTED TO THE CONSUMER. • http://www.youtube.com/watch?v=zjoNnxsfibU

9. WHAT ARE THE CHARACTERISTICS OF A GOOD TAX? • SIMPLICITY • EASY FOR TAXPAYERS TO UNDERSTAND, FILE AND PAY. • EFFICIENCY • EASY TO ADMINISTER AND COLLECT BY GOVERNMENT • CERTAINTY • CLEAR WHEN THE TAX IS DUE, HOW MUCH IS DUE, AND HOW TO PAY THE TAX • EQUITY • FAIR SO THAT THE “BURDEN” IS NOT TOO MUCH OR TOO LITTLE • APPLIED EQUALLY TO ALL PEOPLE!

10. MEASURING THE FAIRNESS OF A TAX. • BENEFITS RECEIVED PRINCIPLE • PAY TAXES IN PROPORTION TO BENEFITS RECEIVED FROM THE GOVERNMENT • Example--People who drive a lot on government roads pay more in gas tax. • ABILITY TO PAY PRINCIPLE • Pay more in tax based on your wealth status • Basis of the Progressive tax.

11. Section 2: FEDERAL TAXES • FEDERAL TAXES--SOURCES OF REVENUE • 5 CHIEFS SOURCES / TAXES • 1) FEDERAL INCOME TAXES--39-43% • 2) FICA--FEDERAL INSURANCE CONTRIBUTORY ACT--32% • SOCIAL SECURITY, MEDICARE, UNEMPLOYMENT • 3) CORPORATE INCOME TAX--10-13% • 4) BORROWING FOR FEDERAL DEFICIT--9% • 5) MISCELLANEOUS TAXES--7% • CUSTOMS DUTIES, EXCISE TAX, GIFT& INHERITANCE TAX

12. PEOPLE FILE TAX RETURNS UNDER THE “PAY AS YOU EARN SYSTEM” MAKES IT EASIER THAN PAYING A LUMP SUM. GOVERNMENT HAS MONTHLY FINANCIAL NEEDS TAX RETURNS FILED BY APRIL 15 PROGRESSIVE TAX WITH 6 BRACKETS TAX SYSTEM IS A COOPERATIVE EFFORT BETWEEN EMPLOYER AND EMPLOYEE FEDERAL INCOME TAX

13. FILL OUT W-4 FORM LIST POSSIBLE EXEMPTIONS HAVE EMPLOYER “WITHHOLD” THE CORRECT AMOUNT FROM MONTHLY PAY BASED ON EXEMPTIONS AND SALARY. RECEIVE W-2 STATEMENT LIST PERSONAL EXEMPTIONS AND POSSIBLE DEDUCTIONS (TOTAL INCOME)- EXEMPTIONS AND DEDUCTIONS = TAXABLE INCOME TAX CREDITS--AMOUNT YOU CAN SUBTRACT FROM YOUR TAXABLE INCOME FILING A TAX RETURN

14. FICA TAX • http://www.youtube.com/watch?v=UP9xy2eVj7s

15. F.I.C.A. TAX • SOCIAL SECURITY(OASDI) • Provides retirement fund for people who reach a specific age. • Provides benefits for surviving members and to those with a disability. • MEDICARE • A Federally funded health care program for those over the age of 65. • UNEMPLOYMENT • Paid by employers and funded by state and federal government. • Provides an income for workers who lose their jobs through no fault of their own. Specific rules apply. • TAX STRUCTURE BEGINS AS PROGRESSIVE TILL A CERTAIN AMOUNT, THEN TURNS REGRESSIVE

16. CORPORATE INCOME TAXES • TAX ON THE PROFIT OF A CORPORATION. • DIFFICULT TO CALCULATE BECAUSE CORPORATIONS CAN HAVE MANY DEDUCTIONS AND “LOOPHOLES”. • LOOPHOLES ARE WAYS TO AVOID PAYING CERTAIN AMOUNTS OR TYPES OF TAXES. • PROGRESSIVE TAX • RATES BEGIN AT 15%….RISE TO 35-39%

17. OTHER FEDERAL TAXES! • EXCISE TAXES • TAX ON MANUFACTURE / SALE OF CERTAIN DOMESTIC PRODUCTS.(ALCOHOLIC BEVERAGES, TOBACCO, AUTOS, GAS,ETC.) • ESTATE TAX • TAX ON PROPERTY / ASSETS OF PERSON WHO HAS DIED. • LEVIES BEFORE HEIRS RECEIVE THEIR SHARE • PROGRESSIVE TAX-STARTS @ $2 MILLION • GIFT TAXES • TAX ON MONEY PROPERTY ONE LIVING PERSON GIVES ANOTHER. • STARTS AT $12000 • IMPORT TAXES • LEVIES TO PROTECT DOMESTIC PRODUCERS • CALLED “TARIFFS” OR CUSTOM “DUTIES”

18. TAXES ALSO INFLUENCE BEHAVIOR • TAX INCENTIVE. • A TAX THAT IS LEVIED THAT ALSO ENCOURAGES OR DISCOURAGES BEHAVIOR OR PURCHASING. • SOME PRODUCTS ARE IDENTIFIED AS OR WITH “SIN TAX”. • EXAMPLES OF SIN TAX PRODUCTS ARE CIGARETTES, ALCOHOLIC BEVERAGES, AND EVEN GASOLINE.

19. SECTION 3--FEDERAL SPENDING • FEDERAL SPENDING IS DIVIDED INTO 2 CATEGORIES: • MANDATORY SPENDING--MONEY THAT CONGRESS MUST,BY LAW, SPEND ON PROGRAMS OR AREAS! • DISCRETIONARY SPENDING--IS AREAS OF SPENDING THAT LAWMAKERS CAN VARY HOW MUCH THEY SPEND OR IF THEY SPEND ANY AT ALL!

20. MANDATORY SPENDING • INTEREST ON FEDERAL DEBT • ENTITLEMENT PROGRAMS • SOCIAL SECURITY • RETIREMENT FUND • RATIO OF PEOPLE PAYING TO COLLECTING IS CHANGING FROM 4:1 to soon 2:1 • AFFECTED BY THE BABY BOOMERS--STRAIN ON SOCIAL SECURITY • MEDICARE • FEDERALLY FUNDED HEALTH CARE (INSURANCE) AND DISABILITY PAYMENTS • MEDICAID • FEDERAL-STATE FUNDED HEALTH INSURANCE FOR LOW INCOME AND ELDERLY • SOCIAL WELFARE PROGRAMS • MEAN TESTED PROGRAMS (ELIGIBILITY BASED ON AGE, INCOME, HEALTH) • PROVIDE SOCIAL ASSISSTANCE

21. INTERGOVERNMENTAL TRANSFERS OF REVENUE • MONEY COLLECTED BY FEDERAL GOVERNMENT RETURNED TO STATE GOVERNMENTS. • APPROXIMATELY $400 BILLION ANNUALLY DIVIDED AMONG 50 STATES AND WASHINGTON D.C. • MONEY RETURNED MUST BE SPENT ACCORDING TO SPECIFIC GUIDELINES

22. DISCRETIONARY SPENDING • SPENDING THAT VARIES ACCORDING TO NEEDS OR SITUATIONS • LARGEST DISCRETIONARY SPENDING INCLUDES: • DEFENSE • EDUCATION • ENVIRONMENT • SCIENTIFIC RESEARCH (SPACE PROGRAM)

23. Sect. 4 STATE AND LOCAL TAXES • States collect over $500 bilion on taxes each year. • TWO LARGEST SOURCES OF STATE REVENUE ARE: • INTERGOVERNMENTAL TRANSFERS OF REVENUE.--25% • MONEY TRANSFERRED FROM FEDERAL TO STATE GOVERNMENTS • INSURANCE TRUST REVENUE.--22% • MONEY PAID TO THE STATE BY TAXPAYERS SIMILAR TO SOCIAL SECURITY.

24. OTHER STATE TAXES • SALES TAX & EXCISE TAX--19% • 2.9% to 7.25% rate (varies state to state) • Can act as a “Sin Tax” • INCOME TAXES--13% • Like most state taxes, they tend to be proportional ! • CORPORATE TAXES--2.5% • Low corporate taxes tend to encourage industrial development.

25. OTHER STATE TAXES--16% • LICENSING FEES • TRANSFER FEES • STOCK VALUE FEE • SEVERANCE TAX • INHERITANCE TAX • A TAX ON VALUE OF PROPERTY THE FAMILIES OF THE DECEASED. A STATE TAX SIMILAR TO FEDERAL ESTATE TAX.

26. LIMITATIONS ON STATE TAXES • CANNOT TAX FEDERAL PROPERTY • CANNOT TAX INTERSTATE COMMERCE--TAX SALE OF PRODUCTS BETWEEN STATES • CANNOT TAX NON PROFIT GROUPS. • CHURCHES, SCHOOLS ETC. • TAX EXEMPT STATUS--NOT SUBJECT TO TAXES

27. STATE SPENDING • STATES HAVE 2 CATEGORIES OF SPENDING: • OPERATING BUDGET--DAY TO DAY SPENDING NEEDS.(SALARIES, RESOURCES, ETC). • MANY STATE BY LAW MUST HAVE A BALANCED OPERATING BUDGET. • CAPITAL BUDGET--SPENDINGON LONG TERM AND MAJOR INVESTMENTS

28. WHERE ARE STATE TAXES SPENT? • EDUCATION • FUNDING OF STATE UNIVESITIES • EVERY STATE HAS AT LEAST ONE UNIVERSITY • FUNDING PUBLIC LOCAL SCHOOL SYSTEMS. • SCHOOLS RECEIVE APPROXIMATELY $8701 PER STUDENT IN STATE AID. (BASED ON ATTENDANCE) • PUBLIC SAFETY • STATE POLICE, STATE CRIME LABS, CORRECTIONS DEPT, FIRE DEPTS.

29. WHERE ARE STATE TAXES SPENT? (Continued) • PUBLIC WELFARE • HOSPITALS --SOME UNEMPLOYMENT • TEST FOR POLLUTION • MEDICAL CLINICS • INSPECT WATER SUPPLIES • HIGHWAYS AND TRANSPORTATION • CONSTRUCTION AND MAINTENANCE OF ROADS • ARTS AND RECREATION • STATE FORESTS & PARKS, MUSEUMS • ADMINISTRATION. • PAY SALARIES OF STATE OFFICIALS

30. LOCAL GOVERNMENT FORMS OF REVENUE • 87,000 LOCAL GOVERNMNET UNITS • COLLECT ALMOST $484 BILLION IN TAX REVENUE. • THREE LARGEST SOURCES OF REVENUE ARE: • INTERGOVERNMENTAL FORMS OF REVENUE • PROPERTY TAXES • OTHER TAXES

31. PROPERTY TAXES • TAX ON VALUE OF ASSESSED PROPERTY. • REAL PROPERTY--TAX ON REAL ESTATE & STRUCTURES ON LAND • PERSONAL PROPERTY--MOVABLE POSSESSIONS OR ASSETS • VALUE DETERMINED BY TAX ASSESSORS • 1) TAX VALUES HARD TO COMPARE • 2) ASSESSORS HARD TO TRAIN • 3) DISCOURAGES PROPERTY IMPROVEMENT

32. OTHER TAXES INCLUDE: • HOTEL / MOTEL TAXES • OCCUPATIONAL TAXES(LIKE INCOME) • EXCISE TAXES • LICENSING FEES

33. LOCAL SPENDING • LARGEST CATEGORIES OF SPENDING ARE: • 1) EDUCATION 40% • 2) UTILITES • 3) GENERAL WELFARE (POLICE AND FIRE)