Taxation

Administration:

Like the federal government, state governments also require revenue to fund the administrative activities of the state, such as government-owned buildings and government salaries.

Local governments also use their revenue for....

Maintaining public parks, keeping birth and death records, conducting elections, collecting garbage, maintaining sewer and water systems, and providing fire protection and law enforcement.

regressive tax

a tax in which the tax rate increases as the taxable amount decreases

progressive tax

a tax in which the tax rate increases as the taxable amount increases

proportional tax

a tax in which the tax rate remains constant irrespective of income level or taxable income

federal income tax

a tax levied by the federal government on the earnings of individuals, corporations, and any other taxable institution

indirect taxes

a tax paid indirectly through the purchase of taxed goods and services

sales tax

a tax paid when buying retail goods

excise tax

an indirect tax levied on the production of certain goods and services

Property taxes fund

education and local services.

three levels of government—

federal,state, and local

Personal and corporate income taxes pay for...

government administration and government programs

Progressive taxes can redistribute income by collecting larger proportions of income from the.... .

higher-income groups

The federal government...

imposes payroll taxes on wages and salaries paid to employees, taxes corporate income.

revenue

income received

Direct taxes include

income tax, corporate income tax, and property tax.

Individuals pay indirect taxes in the form of...

increased prices of goods and services.

As savings increase... investment also increases.

investment also increases.

Generally, progressive taxes have a greater impact on higher-income groups and....

less of an effect on lower-incomegroups.

Local property taxes generally fund

local schools

The burden of regressive taxes is greater on

lower-income groups than on higher-income groups.

For local governments, property tax is a ....

major source of revenue.

Medicare taxes pay for the

medical expenses of people above the age of 65.

Congress also has the power to levy taxes on imports.

must apply uniformly to every state.

Deductions

nontaxable portions of income, usually income spent on items such as tuition fees, health insurance premiums, and retirement savings.

Excise taxes are—

often included in the products price

The federal government primarily uses the revenue generated through taxes to

pay for expenditures on defense equipment and the salaries of military personnel, fund administrative work at the federal level, such as paying the salaries of government employees.

Income tax

primary source of income for the federal government, tax imposed on an individual's income.

The main purpose of an indirect tax is to...

reduce the consumption of certain goods and reduce consumer and business spending and increase savings in an economy.

important reason for levying excise taxes

reduce the consumption of specific goods.

Social Security taxes fund payments to

retired workers and disabled people

the major sources of revenue for state governments are...

sales tax and property tax.

common indirect taxes

sales taxes and excise

Property tax

tax based on the taxpayer's property value, including land, homes, and office buildings as well as property rented out to others.

Direct taxes

taxes paid directly by an individual to the government.

debt

the amount owed by a borrower to a lender

expenditures

the amount spent on purchases

The government decides each individual's tax based on

the individual's taxable income

Congress should collect taxes only for two purposes—

to pay its debts and to pay for defense and the general welfare of its citizens.

Taxable income

total gross income minus deductions allowed by law, interest paid on certain loans, and health insurance premiums

levels of government that have the right to levy taxes on the citizens....

All three

Until ______, the federal government collected only excise taxes and duty (taxes) on imported goods.

1913

_____% of the total revenue from federal, state, and local governments comes from income taxes.

57%

The federal government had incurred heavy debt during the-

Civil War (1861-1865)

Sixteenth Amendment to the Constitution allowed

Congress to levy taxes on people's income

Article 1, section 8, of the Constitution

Gives the government the right to collect taxes. Also grants Congress the power to determine how to spend the taxes it collects.

Warm-Up Type your response in the box. As you read the following paragraph, think about the purpose and idea behind the taxes discussed. Then answer the question that follows. Ty just received a job offer in a new city. He is married with two small children. He and his wife go to visit the city and find a place to live. Their children will be in school in a few years. While on the trip, they visit a beautiful public park for the kids. They encounter one type of tax when they buy a few souvenir T-shirts: the shirts are on sale for $10, but Ty ends up paying $11.00 after the sales tax is added. Later, they encounter a second type of tax. When Ty and his wife meet with their real estate agent, the agent tells them that the property taxes they will pay on their new home are higher than the taxes on their old home. However, the agent says the government funds the schools in the area well, and the schools are high quality. What are the costs and benefits of the taxes that Ty and his wife experienced on this trip?

SAMPLE ANSWER: Ty and his wife paid a sales tax on the T-shirts they bought. That money probably helps fund the public park they visited. Similarly, they will pay money to the government in the form of property taxes, and some of that money will fund the local schools.

Type your response in the box. Read this scenario, and then answer the question that follows. Mark and Julia are two working individuals in their early 20s. They are each ready to furnish their first apartment after college and are excited to buy new televisions for their respective living rooms. Mark has saved money from his $25,000 annual salary to buy a new television, and Julia has saved money from her $100,000 annual salary for the same purpose. They both choose the same TV, which costs $1,000. Since they buy their TVs in the same town, they each pay 10 percent in sales tax, bringing the total cost for each TV to $1,100. Who feels a greater effect from the 10 percent sales tax, Mark or Julia? Why?

Sample Answer: While they both pay the same amount, the tax affects Mark more because he earns significantly less than Julia does.

two proportional taxes under the Federal Insurance Contributions Act (FICA):

Social Security tax and Medicare tax.

Education:

State governments fund state universities and colleges.

Public welfare:

State governments use the funds to maintain highways, roads, and bridges. They fund some public hospitals and clinics.