Econ Chapter 14
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