Econ Chapter 14

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14.2: How much money does the federal government take in through various sources of taxes each year?

$2.5 trillion

What are some areas that involve state expenses?

- Education - Public safety - Court system - Public welfare expenses - State government administration - Retirement funds for state employees - Natural resources - Economic development

What is FICA and what does it do?

- Federal Insurance Contributions Act - payroll tax that provides coverage for elderly, unemployed due to disability, surviving members of wage earners who died

What are some other mandatory spending programs?

- Food stamps - Veterans' benefits --> about $50 billion per year - federal portion of unemployment insurance - federal government pays workers retirement benefits

What are the four main types of tax base?

- Individual income tax - Corporate income tax - Sales tax - Property tax

What is the IRS? What does it do?

- Internal Revenue Service - collects money for federal government + administers the federal tax system

14.4: Where does state revenue come from?

- LARGEST SOURCE: intergovernmental revenue (grants-in-aid from federal government) - state sales tax - state income tax

What are the three main types of tax structure?

- Proportional tax - Progressive tax - Regressive tax

What areas do local governments spend?

- Public schools - Public safety - Public welfare - Other responsibilities

What are the three impacts of taxes on society?

- Resource Allocation - Productivity and Growth - Economic Behavior

What are the three ways that government spending influences the economy?

- Resource allocation - Income redistribution - Competition with the private sector

What other taxes do local governments use?

- Sales taxes - Sin taxes on gambling - Hospitality taxes on hotels + restaurants - Entertainment taxes on tickets/entrance fees - Payroll taxes (on people who work in city but live outside city)

What has happened to Social Security over the years?

- US has gotten older --> more people have retired --> costs of Social Security have increased - government has also raised the age of full retirement (max benefits)

Many state governments structure corporate tax rates to attract _____ to the state. They use tax cuts to promote __________.

- businesses - economic development

What are examples of Direct payment?

- buying goods it needs (military equipment) - paying salaries of government employees

Examples of Public School Expenses

- construction + maintenance - salaries - textbooks, computers, etc.

What is a regressive tax?

- demands larger % of income from people with low incomes - % of income paid in taxes decreases as income increases Ex: property taxes: lower-income homeowners pay higher % of income on housing

What is a proportional tax?

- demands the same % of income from all taxpayers - "flat tax"

States also raise revenue from...

- estate taxes - user fees - property taxes - fees related to business operations (registration fees for businesses & license fees for doctors, dentists, etc.)

Resource Allocation (govt. spending)

- government makes choices on where to spend money + on what to spend it --> influences how resources are allocated

Medicaid

- government medical insurance for low-income people - funds about 63% of costs of program (states pay 37%)

Competition w/ Private Sector

- government produces/provides goods/services that are also produced in the private sector (veterans' hostpitals

What is the positive tax incentive with the widest impact? What does it encourage?

- home mortgage interest deductions - encourages home ownership

How is demand elasticity and incidence of tax related?

- if demand = elastic ; seller pays more of tax b/c seller faces decreased quantity demand if prices rise - if demand = inelastic ; consumer pays more tax in form of higher prices

Downside to Ability-to-Pay Principle

- income alone may not determine a person's ability to pay - question: should everyone pay same % of income?

Where does local government revenue come from?

- intergovernmental revenue (transfers) from state + federal governments - property taxes

What are some of the categories of discretionary spending?

- interstate highway system - transportation programs (Amtrak) - natural resources + environment (conservation programs, national parks) - education (college tuition assitance) - science, space, technology, other research programs - justice administration (FBI + court system)

Examples of Public Welfare Expenses

- maintaining public health departments - owning and operating hospitals - immunization programs - environmental health - making sure restaurants meet health standards

How has Medicare changed since its beginning?

- originally provided hospital insurance funded by payroll tax & optional medical coverage for doctor bills funded by premiums + general tax revenues - as costs rose, the government made reforms that forced Medicare to compete with private health insurance providers: means testing is added for all but lowest-income group & some coverage is added for prescription drugs

What is a withholding?

- payroll tax: tax taken from worker's paychecks + collected and sent to government by employers - this makes it easier for people to pay their taxes along the way and for the government to receive revenue throughout the year

Examples of Public Safety Expenses

- police + fire protection - maintaining 911 emergency telephone # system - animal control - consumer protection - preparation for + response to natural disasters

Examples of Other Responsibilities

- providing public utilities: water, public transit, sewage, trash removal - maintaining local highways, roads, streets: traffic control, snow removal, pothole repair - recreational + cultural facilities: parks, recreation centers, swimming pools, libraries

Equity

- requires people in similar situations to pay similar amounts of taxes - QUESTION: some people believe everyone should pay same amount of taxes & some believe that people with higher incomes should pay more taxes

Economic Behavior

- tax incentive: use of taxes to influence economic behavior - government encourages behavior that makes people believe that taxes are good for the economy & society by providing tax credits/rebates

Productivity and Growth

- taxes impact the amount of $ available for producers to invest in their businesses - high taxes may reduce incentives to work if workers know that large % of their income goes to taxes - underground economy has been created = jobs, services, business transactions are completed by word of mouth + mostly paid in cash to avoid paying taxes (no records of business transactions)

What are sin taxes and how are they used?

- taxes imposed on products/activities considered unhealthful/damaging to society + have relatively inelastic demand - imposed on gambling, alcohol, cigarettes, etc.

Resource Allocation

- taxes on goods/services increases the costs of production - if the demand remains the same then the prices of that good/service will go up - if the supplier cannot pass increased costs along to consumers as higher prices, may shift to production of another good that will be more profitable

Income Redistribution

- transfer payments can provide income support for many low-income earners - how government awards work contracts can influence distribution of income --> shipyard in NE instead of CA building submarines

What are examples of transfer payments?

- transfer payments: money distributed to individuals who don't provide anything in return - grant-in-aid: transfer payment from federal government to state/local govt.'s - social security retirement - disability benefits - healthcare benefits from Medicare

Individual income tax rates

0.36% --> 9.5%

Corporate income tax rates

1% --> 9.99% avg. --> 6.8%

Mandatory spending makes up how much of all federal spending?

1/2

How much of spending is made up by discretionary spending?

1/3

What is a fiscal year?

12-month period for which organization plans its expenditures

What started this type of direct taxation on individuals?

16th Amendment to the Constitution - ratified 1913

What types of organizations are normally exempt from paying sales taxes?

Charitable, Religious, Educational

What are the two methods of federal spending?

Direct Payment Transfer Payments

What are the three criteria for tax systems?

Equity Simplicity Efficiency

Sales taxes are usually applied to all goods and service except for...?

Food + prescription drugs - some states tax these but at a lower rate

What is the largest source of federal government revenue?

Individual income tax

What is the largest category of discretionary spending?

National defense --> about 50% of total discretionary budget

Most states have _____ on individuals + _____ on corporate income.

Progressive tax rates --> individuals Flat tax rates --> corporate income

What does FICA include?

Social Security Medicare

14.1: What is a tax?

a mandatory payment to local, state, national government

Income taxes account for how much of states' total revenue?

about 16%

What does it mean to say that mandatory spending is not "means tested"?

anyone who meets the eligibility requirements receives the benefits

What are estate taxes?

are on prop. transferred to others on the owner

What is a corporate income tax?

based on a corporation's profits

What is an individual income tax?

based on individual's income from all sources (wages, interest, dividends, tips)

What is a sales tax?

based on the value of a designated good/service at sale

What is a property tax?

based on the value of individual's/business's assets

What is the 3rd largest source of tax revenue?

corporate income taxes

What is a tax base?

each type of wealth subject to taxes

All states have _____ on cigarettes, alcohol, gasoline, diesel fuel.

excise taxes

Social Security

federal program started during Great Depression to aid retired older citizens, children who've lost parent/parents, people with disabilities

What is a tax return?

form used to report income and taxes owed to government; must be completed each year

What is government revenue?

government income from taxes + nontax sources (borrowing + lotteries)

discretionary spending

has to be authorized each year

How do they provide all these services?

hiring 3X amount of workers as state governments

Efficiency

how well the tax achieves the goal of raising revenue for the government

What is a tax assessor and how is it used?

it determines the value of property for a local government - then the government enacts a property tax based on the percentage of the property's value

Downside to Benefits-Received Principle

it's difficult for governments to assess how much different taxpayers benefit from public services like national defense

What is a user fee?

money charged for the use of a good/service

What do local governments provide?

most of the direct services of citizens

Medicare

national health insurance program introduced for citizens over 64 and certain other groups of people

What is a gift tax?

on assets ($ or property) given by one living person to anther

What are the two types of state budgets?

operating budget capital budget

Ability-to-Pay Principle

people should be taxed on their ability to pay, no matter the level of benefits received

Benefits-Received Principle

people who benefit directly from public goods should pay for them in proportion to the amount of benefits received

What is a progressive tax?

places higher % rate of taxation on higher-income earners

operating budget

plan for day-to-day expenses - usually subject to balanced-budget requirements Ex: salaries of state government employees, payment for health + welfare benefits, funds for education systems

capital budget

plan for major expenses/investments - usually funded through borrowing - often run at deficit (more spent than collected in revenues) Ex: funds for large constructions + maintenance projects on state buildings, roads, bridges / land acquisition for state construction needs + state parks

What is the federal budget?

plan for spending federal tax money

Describe the federal income tax.

progressive tax based on ability-to-pay principle (people with higher incomes pay higher percentage of income in taxes)

14.3: Mandatory spending

required by law

balanced budget

requires that total government revenue is equal to total government spending

What is indexing and why do people do it?

reviewing tax brackets to prevent workers from paying more taxes due to inflation; keeps rate of taxation relatively constant

entitlements

social welfare programs with specific requirements

What is appropriation?

specific amounts of money being set aside for specific reasons

Simplicity

tax must be easy for taxpayer to understand and for the government to collect

What is a customs duty?

tax on goods imported into US

What is an excise tax?

tax on production/sale of specific good/services

What is the incidence of a tax?

the final burden of that tax (the impact of that tax on the taxpayer)

What is taxable income?

the portion of income that is subject to taxation

What are unemployment taxes?

they provide for unemployment compensation (benefits for certain period after employees lose their jobs through no fault of theirs -> pays for 1st $7000 earned by employee + paid only by employers

Many states has special sales taxes that mostly affect _____.

tourists - car rentals - hotel/motel room rates

Does the government have the right to tax?

yes, rights laid out in Constitution


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