Taxes and Spending

1. Why are we Taxed? Taxes and Spending

2. Lesson 8.1: Understanding Taxes

3. What Are Taxes? • Taxes are required payments to either local, state, or the national government • Revenue is the income received by a government from taxes and other nontax sources • Needed so the government can operate andprovide the public with goods and services • Example: • Building a Highway • Police and Fire departments • National Defense • Fixing roads • Cleaning sewer systems • Maintaining powerlines

4. The Power to Tax • First power granted to Congress in the Constitution • Article 1, Section 8, Clause 1 The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States • This clause is the basis for federal tax laws.

5. Limits on the Power to Tax • The purpose of a tax must be for the “common defense and general welfare” • Taxes cannot go towards individual interests • Taxes must be the same in every state • The Federal Government cannot charge each state different types of taxes • Constitution limits the kinds of taxes Congress can impose • Ex: It cannot tax church services because it violates freedom of religion in the first amendment in the Bill of Rights • The constitution prohibits the taxation of exports • Can prohibit the export of certain goods such as weaponry or technology • Allows the taxation of imports • Article 1, Section 9, Clause 4: prohibits congress from levying or imposing, taxes unless they are divided among the states according to population

6. Direct taxes - levied directly on individuals and paid directly to • the government. • Ex: Federal income tax and Medicare tax • Indirect taxes – levied on certain products rather than directly • on individuals (sales and excise taxes). • Thegovernment gets the tax indirectly.

7. Tax Structures • Proportional Tax – • Imposes same percentage on every taxpayer • Example: Flat Tax • Progressive Tax – • Higher percentage on persons with higher income • Example: Current Income Tax • Regressive Tax – • Higher percentage on persons with lower income • Example: Sales Tax

8. Tax Structures

9. Our Progressive Tax System: A Layered Cake 39.6% $415,050 and up 35% $413,350-$415,050 33% $190,150-$413,350 28% $91,150-$190,150 25% $37,650-$91,150 15% $9,275-$37,650 10% $0-$9,275 (for someone filing SINGLE on their Tax forms)

11. This graph of a 2013 study shows the share of income paid in state sales and excise taxes at different income levels.

12. Tax Bases • A Tax base is the income, property, good, or service that is subject to a tax. • Income, Wealth and Consumption What Taxes are taken: • Individual income: tax on a person’s earnings • Sales tax: a tax on the dollar value of a good or service being sold • Property tax: a tax on the value of a property • Corporate income tax: a tax on the value of a company’s profits

13. The Tax Burden Government tax policies have a real impact on millions of individuals and businesses. These impacts can affect the entire economy. Thus, it is important to think about who actually bears the burden of a tax. This is not necessarily the person who sends in the money to pay the tax bill. How can we know who is actually bearing the burden of a tax? The answer lies in supply-and-demand analysis.

14. Elasticity of demand for a product affects whether consumers or businesses bear the burden of a tax on it. Why does the burden shift to businesses if demand is elastic?

15. This graph shows the effect of a tax when the demand for the good being taxed is inelastic. Do you think consumers or businesses will pay the larger share of the tax? Explain.

16. Determining fairness • Benefits-received principle: • a person should pay taxes based on the level of benefits they expect to receive • Ability-to-pay principle: • pay taxes according to ability to pay, people who earn more pay more taxes • Incidence of tax- final burden of the tax (who is actually paying) • Producers can pass a tax on their products to consumers by raising their prices

17. Key Characteristics of a Tax • Although it is sometimes difficult to decide whether a specific tax is proportional, progressive, or regressive, economists do generally agree on the qualities a tax ought to have. A tax should have four characteristics: • Simplicity: easy for everyone to understand • Efficiency: collecting and paying in a timely manner • Certainty: no miscommunications in when and how much money is due • Equity: Should be fair so no one bears too much or too little of the tax burden

18. Key Characteristics of a Tax The government’s Internal Revenue Service (IRS) has a “long form” and a simpler “short form” for filing taxes. What does this cartoon suggest about the tax system?

19. Key Characteristics of a Tax In addition to the taxes graphed here, governments may also collect sales and other taxes.

20. Lesson 8.2: Federal Taxes

21. Individual Income Taxes: a tax that governments impose on financial income generated by all individuals within their jurisdiction. • Individual Tax Brackets: a range of incomes taxed at a given rate (The Layer Cake) • Tax Withholding: the amount of an employee's pay withheld by the employer and sent directly to the government as partial payment of income tax. • Filing a Tax Return: By law, businesses and individuals must file an income tax return every year to determine whether they owe any taxes or are eligible for a tax refund. • Corporate Income Taxes: An assessment levied by a government on the profits of a company.

22. Individual and Corporate Income Taxes Based on this graph, what effect would an economic downturn, with lower corporate and individual earnings, have on government receipts? Explain.

23. Government Revenue Revenue: Income of a government from taxation, or other sources • used to the pay public expenses • Individual Income Tax - #1 source of Government revenue, nearly 50% of total revenue • FICA Taxes – Social Security taxes, levied on both employee and employer to pay for Social Security and medicare. • Corporate Income Taxes – Tax corporation pays on its profits

24. Government Tax Revenue Income Taxes: $2.2 trillion Social Insurance Taxes: $1.1 trillion Business and other: $0.3 trillion

25. Other sources of Government Revenue • Excise Taxes – tax on selected items, liquor, tobacco, and gasoline (4th largest source of government income) • Estate and Gift Taxes – • Estate tax is a levied on transfer of property when person dies • Gift tax is levied on donations or wealth given to another person. (set up to close loophole of wealthy people giving away their money before death to keep from paying estate tax) • Tariffs- • Taxes on Imports

26. Tariffs today are mainly intended to protect American farms and businesses from foreign competition The Estate Tax

27. Social Security, Medicare, and Unemployment Taxes • Federal Insurance Contributions Act: FICA taxes that fund Social Security and Medicare • Social Security Taxes go towards Old-Age, Survivors, and Disability Insurance (OASDI) • Started after the Great Depression, originally to provide retired people with old-age pensions • Medicare a national health insurance program that helps pay for health care for people over age 65 or with certain disabilities

28. Social Security, Medicare and Unemployment Taxes • Unemployment Taxes issued by the government as an insurance policy for workers • When laid off one can file an “unemployment compensation” claim and collect benefits for a fixed number of weeks • Usually to collect benefits one must show that they are actively searching for another job • The unemployment program is funded by both federal and state taxes

29. The gap between what Medicare takes in and what it spends has been widening. What are two possible solutions to the problem presented by this graph? **Receipts: revenue coming in

30. Lesson 8.3: Federal Spending

31. Mandatory and Discretionary Spending • Mandatory Spending- spending on certain programs that are mandated, or required, by existing law • Discretionary spending- Government planners can make choices on where to spend money

32. What is the largest spending category in the budgets represented here?

33. Entitlement Programs • Entitlement- social welfare program that people are “entitled to” if they meet certain eligibility requirements • Social Security largest category of federal spending, serves more than 45 million • Medicare serves about 36 million people most of whom are 65 or older • Medicaid which is insurance that serves low-income families

34. Government Entitlements • Except for interest on the national debt, most of the mandatory spending items in the federal budget are for entitlement programs. • Entitlements are social welfare programs that people are “entitled to” and benefit from if they meet certain eligibility requirements, such as being at a particular income level or age. • The federal government guarantees assistance for all those who qualify. • As the number of people who qualify rises, mandatory spending rises as well. • As a result, managing the cost of entitlement programs has become a major concern.

35. Government Entitlements • Social Security • Medicare • Medicaid • Other Mandatory Spending Programs

36. Entitlement Programs • Other Mandatory Spending Programs such as means-tested entitlements benefits that help people and families whose incomes fall below a certain level • Such as food stamps, supplemental security income (SSI), and child nutrition (WIC) • The federal government also pays retirement benefits and insurance for federal workers, as well as veterans’ pensions and unemployment insurance

37. A growing share of the budget is devoted to mandatory spending. What does this graph show about the relationship between mandatory and discretionary spending?

38. As the nation gets older, the top of the population pyramid gets larger. Compared to 1980, how will the ratio of workers to Social Security recipients have changed by 2035?

39. Spending on Discretionary Programs • Defense Spending • Other Discretionary Spending • Federal Aid to State and Local Governments

41. Spending on Discretionary Programs Inspectors prepare to examine shipping containers for terrorist threats. Why is the share of the budget that funds such discretionary activities shrinking?

42. 8.4 State and Local Taxes and Spending

43. State and Local Taxes • The three most important state and local taxes are the salestax, propertytax, and the state individualincome tax. • Sales tax – an indirect regressive tax levied onmostproducts. • The sales tax in Houston is 8.25% percent of every dollar. Only 5 states, Alaska, Delaware, Montana, NewHampshire, and Oregon – do not have a sales tax. • On average, a family of four, pays about $1500 a yearon the sales tax. • Texas has a 6.25% sales tax and the city of Houston has 2%

44. State individual income tax – taxed by either the “graduated” or “flat-rate” • Texas is one of 7 states with no state individual income tax. • Americans pay about 29 cents of every dollar in taxes. • Tax breaks cost $400 billion in lost revenue each year. • Property Tax – tax on assets (mainly a tax on land and buildings). • Taxes are also on furniture, autos, farm animals, stocks, bonds, and bank accounts. • Used to finance education, police and fire protection. • Regressive Tax: if two people own separate $100,000 homes, they both pay the same tax.

47. *They tend to have more regressive tax systems.

48. Sources of State Revenue • Intergovernmental revenue – fund collected by one level of government and passed to another level of government (i.e. federal to state) • EXAMPLES: Education, Healthcare, Transportation and Community Development • Taxes and fees – a tax is levied on the sale of nearly all products (Sales, Excise, Property, Corporate) • FEE EXAMPLES: Licenses, Registrations (Fishing, Hunting, Vehicle, Anything with a motor) • Personal Income Taxes: Texas does not have State Income Taxes

49. Texas Tax Revenue [mainly regressive] Oil production2% Insurance Taxes 4% Natural Gas 5% Bus. franchise Tax 9% Sales Tax 61% Motor Fuels 11% (R) Alcoholic bev. 2% (R) Motor Vehicle Sales 10%(R) Texas gets most of itsrevenue from the salestax.

50. How much income goes to State and Local Taxes?? 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0 % of income of a family of 4 in state/local taxes (TX) 17.1% Excise Tax Sales Tax Property Tax 2.7 6.8 10.7% 1.5 8.4% 7.4% 5.0 1.1 6.4% 0.9 5.1% 7.6 4.0 3.5 2.9 3.1% 2.3 4.2 3.3 1.5 2.9 3.0 2.5 1.5 $10,812 $23,100 $35,300 $51,400 $80,400 $180,000 $945,500 Average Annual Income Taxes Per Year: $1,812 $2,472 $2,965 $3,804 $5,470 $9,180 $29,311