Download Chapter 16 Section 1 - Mr.Montano US Government Class

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Magruder’s
American Government
C H A P T E R 16
Financing Government
© 2001 by Prentice Hall, Inc.
C H A P T E R 16
Financing Government
SECTION 1
Taxes
SECTION 2
Nontax Revenues and Borrowing
SECTION 3
Spending and the Budget
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Chapter 16
SECTION 1
Taxes
• How and why does the Constitution give
Congress the power to tax?
• What are the most significant federal taxes
collected today?
• Why does the Federal Government impose
taxes for nonrevenue purposes?
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Chapter 16 Section 1
The Power To Tax
•
•
Article I, Section 8, Clause 1 of the Constitution grants
Congress the power to tax.
The Sixteenth Amendment gives Congress the power to
levy an income tax.
Limits on the Power to Tax
•
The power to tax is also limited through the Constitution.
According to the Constitution:
1. Taxes must be used for public purposes only.
2. Federal taxes must be the same in every State.
3. The government may not tax exports.
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Chapter 16, Section 1
Progressive Tax vs. Regressive Tax
•
Progressive Taxes – make individuals with a larger income spend a
larger percentage of their income paying the tax.
•
Regressive Taxes – are those which take an equal or greater
percentage from those with lower incomes as opposed to those with
higher incomes.
•
•
•
Rational - Progressive taxes are defended because people with smaller
incomes must spend a larger percentage of their income on basic
necessities so they cannot afford to pay as much.
Examples
The U.S. federal income tax is a progressive tax because it charges a
higher percentage rate as your income increases. The sales tax is a
regressive tax because the expense represents a larger percentage of
poorer individual's incomes.
Source ehow.com
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Current Federal Taxes
The Income Tax
•
The income tax is the largest source of federal revenue
today. The tax is also a progressive tax, that is, the higher
the income and the ability to pay, the higher the tax rate.
Individual Income Tax
•
•
Individual income taxes
regularly provide the largest
source of federal revenue
The tax is levied on each
person’s taxable income.
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Corporation Income Tax
•
Each corporation must pay a
tax on its net income, that is,
on the earnings above the
costs of doing business.
Chapter 16, Section 1
Historical Income Tax Rates
•
Major Tax Cuts: 1921-1922 & 1924-1925 (Harding & Coolidge), 1963-1965 (Johnson), 1981-1982 & 1986-1988 (Reagan)
•
Major Tax Increases: 1916-1917 (Wilson), 1931-1932 (Hoover) & 1935-1936 (Roosevelt),
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Historical Cooperate Tax Rates
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What are Marginal Tax Rates
Definition of 'Marginal Tax Rate’
The amount of tax paid on an additional dollar of income. The
marginal tax rate for an individual will increase as income rises. This
method of taxation aims to fairly tax individuals based upon their
earnings, with low income earners being taxed at a lower rate than
higher income earners.
Investopedia explains 'Marginal Tax Rate’
Under a marginal tax rate, tax payers are most often divided into tax
brackets or ranges, which determine which rate taxable income is
taxed at. As income increases, what is earned will be taxed at a
higher rate than your first dollar earned. While many believe this is
the most equitable method of taxation, many others believe this
discourages business investment by removing the incentive to work
harder.
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Marginal Tax Rates
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Social Insurance Taxes
There are three main types of social insurance taxes levied:
OASDI
• The Old-Age, Survivors, and Disability program is the basic Social Security
program.
Medicare
• Medicare is health insurance for the elderly and part of the Social Security
program.
Unemployment Compensation
• The unemployment compensation program pays benefits to jobless workers
and is also part of the overall Social Security program.
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Chapter 16, Section 1
Other Types of Taxes
Excise Taxes
• An excise tax is a tax laid on the manufacture, sale, or
consumption of goods and/or the performance of services.
Custom Duties
• A custom duty is a tax laid on goods brought into the U.S.
from abroad.
Estate and Gift Taxes
• An estate tax is a levy imposed on the assets (estate) of one
who dies. A gift tax is one imposed on the making of a gift by
a living person.
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Chapter 16, Section 1
Individual Income Tax vs. Payroll Tax
Income taxes are withheld from an employee's wages and go into a general fund.
Payroll taxes are comprised of Medicare and Social Security taxes--also withheld from
an employee's paycheck. However, the employer also pays payroll taxes to the federal
government for these programs (in addition to the amount an employee pays).
Federal income tax and the Medicare tax have no limit, but the Social Security payroll
tax always carries a cap. In 2008, Social Security tax topped out at 6.2 percent on an
earnings maximum of $102,000.
Generally, income tax is considered a progressive tax--higher incomes are taxed at a
greater percentage than lower incomes--and payroll tax is regressive---that is, it makes
up a larger percentage of income as earnings fall.
Source: /www.ehow.com
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The Federal Government’s Income
Federal revenue comes from several different sources:
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Chapter 16, Section 1
Taxing for Nonrevenue Purposes
• Besides taxing for
revenue purposes, the
Federal Government
sometimes taxes for the
purpose of regulating
and even discouraging
some activity that
Congress thinks is
harmful or dangerous to
the public.
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• The Supreme Court
has upheld Congress’s
taxing for nonrevenue
purposes.
• However, the Supreme
Court can still rule a
tax unlawful if it finds
that the tax was
imposed for improper
reasons.
Chapter 16, Section 1
What other Taxes Do You Pay?
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Progressive Taxes
•A progressive tax is a tax in which the tax rate increases as the taxable base amount increases.]
The term "progressive" describes a distribution effect on income or expenditure, referring to the way
the rate progresses from low to high, where the average tax rate is less than the marginal tax rate.
The term can be applied to individual taxes or to a tax system as a whole; a year, multi-year, or
lifetime. Progressive taxes are imposed in an attempt to reduce the tax incidence of people with a
lower ability-to-pay, as such taxes shift the incidence increasingly to those with a higher ability-topay. The opposite of a progressive tax is a regressive tax, where the relative tax rate or burden
increases as an individual's ability to pay it decreases.
•The term is frequently applied in reference to personal income taxes, where people with more
income pay a higher percentage of that income in tax than do those with less income. It can also
apply to adjustment of the tax base by using tax exemptions, tax credits, or selective taxation that
creates progressive distribution effects. For example, a sales tax on luxury goods or the exemption
of basic necessities may be described as having progressive effects as it increases a tax burden on
high end consumption or decreases a tax burden on low end consumption respectively.
Source: Wikipedia
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Consumption Taxes
A consumption tax is a tax on spending on goods and services. The tax base of such a tax is the
money spent on consumption. Consumption taxes are usually indirect, such as a sales tax or a
value added tax. However, a consumption tax can also be structured as a form of direct, personal
taxation, such as the Hall–Rabushka flat tax.
•Value-added tax
•A value added tax (VAT) applies to the market value added to a product or material at each stage
of its manufacture or distribution. For example, if a retailer buys a shirt for $20 and sells it for $30,
this tax would apply to the $10 difference between the two amounts. A simple VAT would be
proportional on consumption but also be regressive on income at higher income levels (as
consumption falls as a percentage of income). Savings and investment are tax-deferred until they
become consumption. A VAT may exclude certain goods, intent being creating progressive effects.
The tax is used in countries within the European Union.
Sales tax
•A sales tax typically applies to the sale of goods, less often to the sales of services. The tax is
applied at the point of sale.
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Consumption Taxes
•Excise tax
•An excise tax is a sales tax that applies to a specific class of goods, typically alcohol, gasoline
(petrol), or tourism. The tax rate varies according to the type of good and quantity purchased and is
typically unaffected by the person who purchases it.
•Expenditure tax
•A direct, personal consumption tax may take the form of an expenditure tax or an income tax that
deducts savings and investments, such as the Hall–Rabushka flat tax. A direct consumption tax
may be called an expenditure tax, a cash-flow tax, or a consumed-income tax and can be flat or
progressive. Expenditure taxes have been briefly implemented in the past in India and Sri Lanka.
•This form of tax applies to the difference between an individual's income and increase/decrease
savings. Like the other consumption taxes, simple personal consumption taxes are regressive with
respect to income. However, because this tax applies on an individual basis, it can be made as
progressive as a progressive personal income tax. Just as income tax rates increase with personal
income, consumption tax rates increase with personal consumption.
Source: Wikipedia
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What is the Fair Tax?
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SECTION 2
Nontax Revenues and Borrowing
• What are the nontax sources of government
revenues?
• How does the Federal Government borrow
money?
• What are the causes and effects of the
public debt?
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Chapter 16, Section 2
Nontax Revenues and Borrowing
Nontax Revenues
• Nontax revenues come from a variety of sources, including
canal tolls; fees for passports, copyrights, and patents; interest
earned; and selling philatelic stamps.
Borrowing
• Congress has the power “[t]o borrow Money on the credit of
the United States.” (Article I, Section 8, Clause 2).
• A deficit is the shortfall between income and spending.
• A surplus is more income than spending.
• Congress must authorize all federal borrowing.
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Chapter 16, Section 2
The Public Debt
The public debt is the government’s total outstanding
indebtedness. It includes all of the money borrowed and not yet
repaid, plus the accrued, or accumulated, interest.
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Chapter 16, Section 2
Causes and Effects of the Public Debt
Causes:
Effects:
• Deficit financing
• Increased revenue
needed to pay off
• Failure to repay the the debt
debt over time
• Interest accruing on
the existing debt
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• Fears of financial
obligations for
tomorrow’s
taxpayers
Chapter 16, Section 2
History of Public Debt
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Public Debt By Country
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SECTION 3
Spending and the Budget
• What are the key elements of federal
spending?
• How do the President and Congress work
together to create the federal budget?
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Chapter 16, Section 3
Federal Spending
Spending by the Federal Government accounts for billions of
dollars and has effects on the economy as a whole.
Spending Priorities
• Entitlements are benefits that federal law says must be paid to all
those who meet the eligibility requirements. Entitlements are the
largest sector of government spending.
• Interest on the public debt has grown to be the second largest
category of federal spending.
• Outlays for defense spending account for another large section of
the federal budget.
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Chapter 16, Section 3
Entitlement Spending
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Federal Spending
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Creating the Federal Budget
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Chapter 16, Section 3