TAXES

1. TAXES

2. I. Funding Government Programs A. Primary way the government collects money- TAXES!!! B. Constitution & elected officials authorized to raise money through taxes EXTRA CREDIT- What Article gives the government power to tax? Which amendment gives Congress the right to collect income taxes? C. With this money from taxes, government would provides goods/services.

3. What can Government Tax? 1. Purpose of the tax must be for “the common defense and general welfare.” 2. Federal taxes must be the same in every state. 3. The government may not tax exports.

4. II. Characteristics of a “Good” Tax • Simplicity- 1. people are more willing to pay a tax that is easy to understand B. Efficiency- C. Equity- The tax system should be fair, so that no one bears too much or too little of the tax burden. What is the problem with fairness?

5. Benefits Principle (based on 2 ideas) 1. People that benefit most from govt. services should be the ones to pay for them. 2. People should pay taxes in proportion to the amount of services or benefits they receive (gas taxes, national park fees, turnpike tolls) B. Two limitations of the Benefits Principle: 1. Many gov’t services provide benefits to those who can least afford to pay for them. (welfare) 2. Benefits are hard to measure. III. Principles of TaxationAttempts to determine the “fairness” of taxes

6. C. Ability to pay principle-People should be taxed according to their ability to pay, regardless of the benefits they receive. 1. Society cant always measure the benefits of government spending. 2. People with higher incomes suffer less discomfort paying taxes than people with lower incomes

7. IV. Impact of Taxes • Productive resources allocation 1. Taxes raise the cost of production. 2. Prices go up 3. People buy less. B. Change Behavior 1. Sin tax C. Growth of the Economy 1. Taxes may cause people to work less b/c they feel taxes are too high.

8. V. Three Broad Types of Taxes A. Progressive Taxes 1. percent of income paid in taxes increases as income increases. B. Proportional Taxes 1. the percentage of income paid in taxes remains the same for all income levels C. Regressive Taxes 1. the percentage of income paid in taxes decreases as income increases.

9. VI. Federal Taxes A. Pay-as-You-Earn” Taxation 1.Federal income taxes are collected throughout the course of the year as individuals earn income. B. Tax Withholding 1.Withholding is the process by which employers take tax payments out of an employee’s pay before he or she receives it. C. Tax Brackets • The federal income tax is a progressive tax. Federal Tax Brackets - Edward Jones: Making Sense of Investing

10. VII. Filing a Tax Return A. A tax return is a form on which you declare your income to the government and determine your taxable income. B. Taxable income is a person’s total (or gross) income minus exemptions and deductions.

11. C. Exemptionsare set amounts that you subtract from your gross income for yourself, your spouse, and any dependents. D. Deductions are variable amounts that you can subtract from your gross income. 1. Standard- set amount the government allows you to reduce your taxable income a. $5150 in 2006 2. Itemized- listing of deductions

12. b. Had large uninsured medical and dental expenses during the year. Paid interest and taxes on your home. Had large un-reimbursed employee business expenses or other miscellaneous deductions. Had large uninsured casualty or theft losses. Made large contributions to qualified charities. Or Have total itemized deductions that are more than the standard deduction to which you otherwise are entitled DON’T WRITE ALL OF THIS!!!!

13. VII. Other Federal Taxes • FICA- Federal Insurance Contribution Act 1. Tax for Social Security- retirement & disability as well as Medicare- Universal Healthcare for senior citizens. • Corporate Income Tax- A progressive tax on the income of corporations. The higher the income= the higher the tax.

14. C. Excise Tax D. Gift Tax E. Custom’s Duties F. Estate Tax 2 views-a.http://www.faireconomy.org/reports/2006/estate_tax_share_falls.pdf b.REASONS THE DEATH TAX DOES NOT WORK, Policy and Taxation Group

15. Tax Project • You have been chosen to become a member of the H.H.H. Office of Management & Budget. The O.M.B. is given the job of raising $$ for seniors to attend all senior functions & participate in all senior activities. You must raise $$ through taxation to cover the remaining costs of the Senior Activities….

16. Steps: • List all senior activities & costs 1. Homecoming- 2. Prom- 3. Senior Pictures.. (average)- 4. Yearbook- 5. Cap/Gown/Grad Bash- B. Multiply the total cost for the 5 activities by the number of Senior Students (400)= Budget Estimate.

17. C. You may impose the following types of taxes on H.H.H. : a. Property b. Sales Tax c. Excise d. D. You must explain how your taxes will work, which principle of taxation are being utilized & why your plan is fair.

18. VIII. State Taxes • Intergovernmental Revenue - $ given from a high level of government to a lower level. 1. $ given by Federal to State or local 2. $ given by State to local 3. grants-in-aid- type of intergovernmental revenue that must be spent on a particular purpose (welfare, education, highways, healthcare) • Sales- tax on certain consumer goods 1. varies by state • Income Taxes-small % of income taken by some states • Tuition • Hospital fees • Corporate Income taxes

19. IX. Local Government • Grants-in-Aid • Property- Tax on real, tangible & intangible personal property. 1. Real property- buildings & land 2.Tangible personal -jewelry, furniture, clothing, cars, etc 3. Intangible personal - Stocks, bonds, checks 4. Personal property is rarely taxed C. Liquor & Cigarette Sales (SIN TAXES) D. Sales Taxes

20. X. Government Spending Facts! A. Federal government spent $2.56 trillion but only made $2.17 trillion.* B. Appx.400 billion deficit in 2006* C. 8.7 trillion national debt!* *According to: http://www.whitehouse.gov/omb/budget/fy2006/hist.html

21. Private Sector – Buying goods & services from private firms ad individuals B. Transfer Payments- 1. Used as Aid (social security, unemployment, welfare, medicare) 2. The government receives nothing in return. XI. Two Broad Areas of Spending

22. XII. Fiscal Policy and the Federal Budget • Fiscal policy is the federal government’s use of taxing and spending to keep the economy stable. 1. Decisions such as how much to spend on certain programs.

23. B. Federal Budget- A written financial plan document indicating the anticipated income & authorized spending for the Fiscal year (Oct. 1- Sept. 30th). 1. Surplus- more income than spending 2. Deficit – more spending than income 3. Balanced- spending= income

24. A. Congress and the White House work together to develop a federal budget.. 1.Federal agencies send requests for money to the Office of Management and Budget. 2 The Office of Management and Budget works with the President to create a budget. In January or February, the President sends this budget to Congress. 3. Congress makes changes to the budget and sends this new budget to the President. 4. The President signs the budget into law. OR The President vetoes the budget. If Congress cannot get a majority to override the President’s veto, Congress and the President must work together to create a new, compromise, budget. XIII. Establishing a Budget

25. Group Activity • National Defense • Health Care • Food for Starving people in foreign Nation at war. • Researching the Environment • Space Exploration • Homes for U.S. Homeless • Food Stamps • Scholarship for poor kids to go to school

26. XIV. Federal Deficit & Debt • Federal Deficit Historical Facts: 1. 42 of the past 50 years the U.S. has spent more $ than it earned. B. Appx. $27,000 per person in the U.S.A. C. During the presidency of G.W. Bush, federal deficit spending has added 2.8 trillion dollars to the federal debt. What do you think are some of the reasons for the large amount of deficit spending during the current presidency?

27. XV. Reasons for Debt Increase. • Wartime Policy 1.Spend whatever is necessary to win a War!! Post Civil War: 1 billion Post WW I: 27 billion Post WWII: 200 billion Current Conflicts: 8.5 Trillion

28. B. Fighting Recession or a general slowing of the economy 1. Government spending increases to help the needy while taxes collected decreases. a. Great Depression: 1930’s New Deal Programs b. Early 1980’s- 2 trillion dollar increase b/c of tax cuts & increased defense spending

30. XVI. Who is owed? A. Private Individuals & Businesses: 75 % (bonds) B. Itself: 25 %- Government agencies that are owed money but have yet to receive it. The $ is being held by the treasury dept.

31. XVII. Impact of debt • Crowding- out effect: Private $ spent on buying federal bonds or bills = less $ to spend investing in private businesses • Inflation • Higher Interest Rates- It costs consumers more to borrow money. • Future generations will have to go without government services & pay off the debt

32. Gram- Rudman Hollings Act (GRH)- Mandated a balanced budget but contained an emergency clause 1. Allowed for increased spending in case of emergencies, 2. Also allowed for Congress to pass spending bills for future years. B. Budget Enforcement Act of 1990 Set yearly spending limits . Forced cuts in certain programs and was eventually discontinued. XVIII. Failed Attempts at Budget Reduction

33. TEST friDAY 10/19!!!