Economics Ch 14
What is Medicare and Medicaid?
- About 42 million people receive Medicare benefits. -It pays for hospital care and for the costs of physicians and medical services. -Medicare costs have been rising as a result of expensive technology and people living longer. It faces the same problem as Social Security. - Medicaid benefits help low-income families pay for their medical expenses -The federal government shares the cost of Medicaid with state governments.
Property tax
a tax based on real estate and other property
Regressive tax
a tax for which the percentage of income paid in taxes decreases as income increases Ex: although the sales tax rate remains constant, a sales tax is regressive. This is because higher-income households spend a lower proportion of their incomes on taxable goods and services.
Progressive tax
a tax for which the percentage of income paid in taxes increases as income increases - Economists describe taxes based on their structure and according to the tax base. - People with higher incomes pay a higher percentage of their income in taxes. People with very small incomes might pay no tax at all.
Proportional tax
a tax for which the percentage of income paid in taxes remains the same at all income levels - With a proportional income tax, whether income goes up or down, the percentage of income paid in taxes stays the same.
Tariff
a tax on imported goods - also called Import Taxes - Today, most tariffs are intended to protect American farmers and industries from foreign competitors rather than to generate revenue. - Tariffs raise the price of foreign items, which helps keep the price of American products competitive.
Gift tax
a tax on the money or property that one living person gives to another - The goal of the gift tax is to stop people from avoiding the estate tax by giving away property before they died.
Estate tax
a tax on the total value of the money and property of a person who has died. - Includes real estate, cars, furniture, investments, jewelry, paintings, and insurance. - As of 2008, if the total value of an estate is $2 million or less, there is no federal estate tax.
Tax credit
a variable amount that taxpayers may subtract from the total amount of their income tax
Tax deduction
a variable amount that taxpayers may subtract from their gross income
Budget
an estimate of future revenue and expenses
Tax assessor
an official who determines the value of property - Property taxes are levied on property owners in local communities to offset the expense of services such as street construction and maintenance.
Real property
land and any permanent structures on the land to which a person has legal title
Personal property
movable possessions or assets Ex: jewelry, furniture, and boats
Tax exempt
not subject to taxes
Entitlement
social welfare program that people are "entitled to" benefit from if they meet certain eligibility requirements - Most of the mandatory spending items are for entitlement programs, which fund social welfare programs. - The federal government guarantees assistance for all people who qualify for such programs. - Entitlements are a largely unchanging part of government spending. -Congress can only change the eligibility requirements or reduce benefits if there is a change in the law.
Discretionary spending
spending about which Congress is free to make choices Ex: defense and education
Mandatory spending
spending that Congress is required by existing law to do - is money that Congress is required by existing law to spend on certain programs or to use for interest payments on the national debt. Ex: Social Security and Medicare
Sales tax
a tax based on goods or services that are sold
What is Determining Fairness?
- Economists have proposed two different ideas about how to measure the fairness of a tax. -The benefits-received principle holds that a person should pay taxes based on the level of benefits he or she expects to receive from the government. -The gasoline tax is an example of the benefits-received principle. - The ability-to-pay principle holds that people should pay taxes according to their ability to pay..
What is Social Security Taxes and Medicare Taxes?
- Employees also withhold money to help fund Social Security, Medicare, and unemployment insurance under the Federal Insurance Coalition Act (FICA). -Most of the FICA taxes you pay go to Social Security benefits for retired people, surviving members of wage earners, and disabled people. -The Medicare tax helps pay for health insurance for people over 65.
What is Federal Aid to State and Local Governments?
- Federal taxes are sometimes used to help state and local governments. -State and federal governments share the cost of Medicaid, unemployment insurance, education, lower-income housing, highway construction, and dozens of other programs. -States also rely on federal aid for disaster relief.
What is Balancing Tax Revenues and Tax Rates?
- Good taxes generate enough, but not too much, revenue. Citizen's needs are met, but not to such an extensive degree that the tax discourages production. - If tax rates are lower, the company can use more of its income to stimulate production rather than to pay taxes. - Ultimately, many people argue, the economy benefits from lower, rather than higher, tax rates.
What are State Budgets?
- Governments plan their spending by creating a budget. - The federal government has one budget while state governments have two budgets. -An operating budget is a budget for day-to-day spending needs. -A capital budget is spending on major investments. - Unlike the federal government, 49 states require balanced budgets—budgets in which revenues are equal to spending.
What is Corporate Income Taxes?
- Like individual income taxes, corporate income taxes are progressive. - Determining corporate income taxes can be more difficult than determining an individual's because businesses can take many deductions. - Companies often deduct the cost of employee's health insurance as well as many other costs of doing business.
What is Local Government Taxes?
- Local governments levy property taxes, sales taxes, excise taxes, and income taxes. - Many local taxes affect visitors and are designed to raise revenue from nonresidents. -Wall-to-wall traffic jams, for example, are prompting a few cities to consider a congestion tax. - The local government would charge drivers a fee for entering a congested, or overcrowded, area of the city between certain hours.
How do local governments manage their money?
- Local governments manage their money in accordance with priorities set by elected local government officials. - Local governments create budgets and collect taxes just like the federal government.
What is Local Government Spending and Revenue?
- Local governments, including towns, cities, countries, and school districts, carry major responsibilities in the public school systems, law enforcement, and fire protection. -They also manage public facilities, parks, and recreation facilities. -They monitor public health, public transportation, elections, record keeping, and social services.
What are Other Mandatory Spending Programs?
- Other means-tested entitlements benefit people and families whose incomes fall below a certain level. These entitlements include: -Food stamps and child nutrition programs -Retirement benefits and insurance for federal workers -Veterans' pensions -Unemployment insurance - In recent years, there has been a debate over governmentally funded universal healthcare.
What is State Tax Revenue
- States receive most of their revenue through taxes. -Sales tax on goods and services is the main source of state revenue. - Some goods, like food and clothing, are tax exempt in certain states. - Even states without a sales tax impose excise taxes that apply to specific products and activities. - Many states also collect an individual income tax, which is paid in addition to the federal income tax. -Some states tax at a flat rate while other have progressive rates. - Corporate income tax: Most states collect income taxes from corporations that do business in the state. -These taxes make up a small amount of state tax revenues. - Other state taxes include: -Licensing fees on certain businesses -Transfer taxes on stock certificates -Inheritance taxes -Property taxes, including real property and personal property
What is "Pay-As-You-Earn" Taxation?
- The amount of federal income tax a person owes is determined on an annual basis. -To lessen the burden that one large yearly tax would place on an individual and to make it possible for the government to meet its regular expenses, federal income tax is collected in a "pay-as-you-earn" system. •This means that individuals usually pay most of their income tax throughout the year as they earn income.
What is Tax Brackets?
- The federal income tax is a progressive tax, which rises with the amount of taxable income. - Your range of income puts you in a specific tax bracket.
What are the Limits in the Power to Tax?
- There are also limits on the government's power to tax. -The purpose of a tax must be "for the common defense and general welfare." A tax cannot bring in money that goes to individual interests. -Federal taxes must be the same in every state. -The government cannot tax exports, only imports.
What is the government's authority to tax?
- We authorize the federal government, through the Constitution and our elected representatives in Congress, to raise money in the form of taxes. -Taxation is the primary way that the government collects money. Taxes give the government the money it needs to operate. -The first power granted to Congress is the power to tax, which is the basis of all federal laws.
What is Social Security?
- makes up a huge portion of all federal spending. - Beneficiaries: some are disabled workers, but the majority are retired workers - The money that you pay for Social Security today does not go into a fund for your own future retirement. It goes toward supporting people who have already retired. - baby boom threatens to undermine this kind of system - As the millions of baby boomers—people born after World War II—start to retire, the ratio of existing workers, who pay for Social Security, to retirees will fall.
Approximately how much of the federal government's discretionary spending goes toward defense?
-Defense spending accounts for about half of the government's discretionary spending. -The Department of Defense uses this money to pay salaries of enlisted men and women as well as its civilian employees. -This money also buys weapons, missiles, ships, tanks, airplanes, and equipment. - The remaining discretionary funds goes to pay for the following: -Education and training -Scientific research -Student loans -Law enforcement -Environmental cleanup -Disaster aid
What are the features of a tax system?
-Fairness -Simplicity -Efficiency -Certainty -Balance between tax revenue and tax rates
How does the federal government spend its income?
-Federal spending is divided up into mandatory and discretionary spending. - Mandatory spending pays for Social Security, Medicare, Medicaid, and other entitlements. - Discretionary spending pays for everything else, including defense, education, law enforcement, environmental cleanup, and disaster aid.
What taxes does the federal government collect?
-Individual income taxes -Corporate income taxes -Social Security, Medicare, and unemployment taxes -Excise taxes and tariffs -Estate and gift taxes *The government's main source of revenue comes from the federal tax on individual's taxable income.
Where Are State Taxes Spent?
Education -Every state spends taxpayer money to support at least one public state university. -They also provide financial help to local governments for public elementary and secondary schools. Public Safety -State police enforce traffic laws and help motorists in an emergency. -State governments build and run corrections systems. Public Welfare -State funds support hospitals and clinics and unemployment benefits. Highway and Transportation -State crews resurface roads and repair bridges. -States pay some of the cost of facilities like waterways and airports. Arts and Recreation -States fund parks, nature reserves, museums, and art and music programs. Administration -State governments spend money to keep the government running. -Revenues pay for state workers' salaries.
What is Excise Taxes?
Excise taxes—a general revenue tax on the sale or manufacture of a good or service such as gasoline, cigarettes, and other items
What are the four characteristics of a good tax?
Simplicity: tax law should be easy to understand Efficiency: the tax should be able to be collected without spending too much time or money Certainty: it should be clear when the tax is due, how much is due, and how to pay the tax Equity: the tax system should ensure that no one bears too much or too little of the tax
What is Unemployment Taxes?
The unemployment tax pays for "unemployment compensation" that people can receive when they are laid off. - In order to collect unemployment benefits, an unemployed person usually must show that he or she is actively looking for another job. The unemployment program us financed by both state and federal unemployment taxes.
Operating budget
a budget for day-to-day spending needs Ex: salaries of state employers, supplies such as computers and paper, and maintenance of state facilities, such as recreation areas and roadside parks
Capital budget
a budget for spending on major investments Ex: a new bridge
Balanced budget
a budget in which revenue and spending are equal - apply only to the operating budget, not the capital budget
Tax return
a form used to file income taxes - After the calendar year ends, employers give their employees a report of how much income tax has already been paid. - Employees then fill out a tax return to send to the federal government. - On your tax return, you figure out how much of your income is taxable. -Taxable income is a person's total income minus exemptions and deductions. - Tax returns are due to the Internal Revenue Service by April 15.
Tax
a required payment to a local, state, or national government
Personal exemption
a set amount that taxpayers may subtract from their gross income for themselves, their spouse, and any dependents
Corporate income tax
a tax based on a company's profits
Individual income tax
a tax based on a person's earnings
Withholding
taking tax payments out of an employee's pay before he or she receives it - Employers help collect taxes by withholding money from your paycheck based on an estimate of how much you will owe in federal income tax for that year - After withholding the money, the employer forwards it to the federal government as an installment payment" on your upcoming annual income tax bill
Taxable income
the earnings on which tax must be paid; total income minus exemptions and deductions
Incidence of tax
the final burden of a tax - Taxes affect more than just the people who pay them. - Producers often pass on a portion of tax to consumers. -Generally, the more inelastic the demand, the more easily the seller can shift the tax to consumers.
Revenue
the income received by a government from taxes and other non-tax sources - 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. Ex: We authorize the government to provide national defense, highways, education, and law enforcement
tax base
the income, property, good, or service that is subject to a tax - different taxes have different bases
Tax incentive
the use of taxation to discourage or encourage certain types of behavior - The government sometimes uses taxes to encourage good behavior, which is known as a tax incentive. -Tax credits are often used as an incentive. -For example, people who use solar power receive an income tax credit.
