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Chapter 12. The Design of the Tax System (pp. 243-250). “In this world nothing is certain but death and taxes.” (Benjamin Franklin). Taxes paid in 1789 accounted for 5% of personal income. 100. 80. 60. 40. 20. 0. 1789.

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Chapter 12 l.jpg

Chapter 12

The Design of the Tax System

(pp. 243-250)

In this world nothing is certain but death and taxes benjamin franklin l.jpg
“In this world nothing is certain but death and taxes.”(Benjamin Franklin)

Taxes paid in 1789

accounted for 5%

of personal income








In this world nothing is certain but death and taxes benjamin franklin3 l.jpg
“In this world nothing is certain but death and taxes.”(Benjamin Franklin)


Today, taxes account

for about 35 % of

personal income!








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The Tax System

  • When the government addresses the problem of externalities, provides public goods, or regulates the use of common resources, it can raise economic well-being.

  • For the government to perform these and its other many functions, it needs to raise revenue.

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A Financial Overview of the U.S. Government

  • Where does the government get its income from?

  • Who contributes the most to the U.S. Government in the form of taxes?

  • What does the government spend its income on?

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The U.S. Economy may be divided into two major sectors:

  • The Private Sector

    • About two-thirds of all economic activity in the U.S. takes place within the private sector.

  • The Public Sector

    • About one-third of all economic activity in the U.S. involves the government sector.

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The Government Sector: Federal, State and Local

  • The Federal Government collects about two-thirds of the taxes in our economy. (Figure 12-1)

    • Individual Income Taxes

    • Social Insurance Taxes

    • Corporate Income Taxes

    • Excise Taxes

    • Other

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Individual Income Taxes... The largest source of government revenue

  • Tax Liabilityis how much taxes a family owes and is based upon total income.

  • Marginal Tax Rateis the tax rate applied to each dollar of income. (Table 12-3)

  • Higher-income families pay a larger percentage of their income in taxes.

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Tax Relief Act of 2001

  • Passed in May 2001

  • Tax rebate checks of between $300-$600 were issued in Summer 2001

  • Marginal Tax rates in 2006 will be lower (15% to 10%, 28% to 25%, 31% to 28%, 36% to 33% and 39.6% to 35%)

  • Rate changes will be phased in

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Social Insurance Taxes

  • Established in 1935 (part of New Deal) .

  • Based on wages only (payroll tax).

  • Employee (and employer) each pay 7.65% of wages.

  • Social Security tax (6.2%) applies to first $80,400 in earnings (2001 limits).

  • Medicare rate (1.45%) applies to all earnings.

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Federal Government Spending

  • Spending of government revenues (taxes) includes transfer payments and the purchase of public goods and services. (Table 12-4)

  • Transfer Payments is a government payment not made in exchange for a good or a service.

    • Transfer payments accounts for the largest expenses of the government.

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Spending of the Federal Government

Expense Category:

Social Security

National Defense

Income Security

Net Interest




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Financial Conditions of the Federal Budget

  • Budget Deficit

    • Situation where the expenses of the budget are greater than the revenues.

    • Government finances the deficit by borrowing from the public

  • Budget Surplus

    • Situation where the revenues are greater than the expenses. Used to pay outstanding debts.

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Public Welfare




Sales Taxes

Property Taxes

Individual Income Taxes

Corporate Income Taxes

Federal Government


State and Local Governments: Collect about one-third of taxes paid

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Tax Revenue by Source in Georgia

  • Individual Income Tax (47.1%)

  • General Sales Tax (34.3%)

  • Corporate Tax (5.3%)

  • Motor Fuel (4.7%)

  • Georgia State Government Tax (2000)

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Spending in Georgia (1999) by Function (% of total)

  • Education (42.7%)

  • Public Welfare (20.8%)

  • Highways (6.8%)

  • Corrections (4.1%)

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Local Government in Georgia

  • Main Tax Sources: Property Tax (71%) and Sales Tax (17%)

  • Main Spending Categories: Education (35%), Health (18%) and Public Safety (8%)