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Taxes and
Spending
Chapter 14
SECTION 1
Taxes
Three Major Federal Taxes
The government collects three major federal taxes: personal
income tax, corporate income tax, and Social Security tax.
• Personal income tax is a tax people pay on their income.
Personal income tax is paid to both the federal government
and most state governments.
• Corporate income tax is a tax corporations pay on their
profits. Corporate income tax is also paid to both the federal
government and most state governments.
• Social Security tax is a tax paid to the federal government
on income generated from employment. Half is paid by
employers, and the other half is paid by employees.
Personal Income Taxes
Federal Income - 2008
($2.524 Trillion)
6%
Social Security, Medicare
and Unemployment and other
Retirement Taxes
10%
39%
Borrowing to Cover the Deficit
15%
Corporate Income Taxes
Excise, Customs, Estate,
Gift and Miscellaneous Taxes
30%
Three Other Taxes
Sales tax is applied to the purchase of many goods. Sales tax is
collected by states, not by the federal government. Sales taxes
vary among states.
Excise taxes are placed on the purchase of certain goods, such
as tobacco and gasoline. The federal government, as well as
many states, collects excise taxes.
Property owners, such as homeowners, pay a property tax on
the value of their property. This is a major revenue source for
state and local governments.
The Alternative Minimum Tax
The alternative minimum tax (AMT) is a tax that some people
have to pay on top of their regular income tax.
Here is how the AMT works: For a given income, a minimum
tax is computed. If you make that income and are paying at
least that amount of taxes, you don’t pay the alternative
minimum tax. If you are paying less than that amount in taxes,
you pay the difference in addition to your regular income tax.
When the AMT was first put into place in 1969, fewer than 1
percent of all taxpayers were affected by it. Today, more than 3
percent pay AMT.
The number of people affected by AMT has increased because
of two factors: inflation and tax cuts.
• Inflation has caused people’s dollar income to rise, although
the AMT has not been adjusted for inflation.
• The income tax cuts of 2001 and 2003 reduced the amount
of regular income tax that people were responsible for in
those years, exposing many to the AMT amount.
Proportional, Progressive, and Regressive Income Taxes
Income taxes can be proportional, progressive, or regressive.
• With a proportional income tax, everyone pays at
the same rate, whatever their income level. A flat
tax is the same as a proportional tax.
• With progressive income tax, people pay higher
rates as their incomes rise. Progressive income tax
structures are usually capped at some rate. The
United States has a progressive income tax
structure. In 2005, the tax rates were 10, 15, 25, 28,
33, and 35 percent.
• A regressive income tax is a tax rate that decreases
as income levels rise.
Income Taxes
Three income tax structures
Countries with a flat tax structure
How Long Do You Have to Work to Pay All Your Taxes?
It has been calculated that the average person works from
January 1 to April 17 before earning enough to pay all taxes
owed.
Who Pays What Percentage of Federal Income Taxes?
Some polls show that most people think wealthy Americans do
not pay their fair share of taxes.
We need to consider several issues when we talk about the
share of taxes paid by different income groups.
1.What do we mean by “wealthy
Americans”?
2.What do we mean by “fair share” of
taxes?
3.What do wealthy Americans pay in taxes
compared with what they earn?
Let’s compare tax data for people in different income groups.
• How does each income group’s share of
income compare with its share of taxes?
• Do you notice a pattern with regard to
the average tax rates for the different
groups?
• Do you think the wealthy pay a fair
share of their taxes?
Who Pays the Most Tax in the United States?
SECTION 2
The Budget: Deficits and Debt
How Does the Federal Government Spend Money?
In 2005, the federal government spent about $2,451 billion.
The following areas account for 75.8 percent of that amount:
• 21.5 percent on national defense
• 14 percent on income security, retirement, and
disability
• 21 percent on Social Security
• 12.1 percent on Medicare
• 7.2 percent on paying interest on the national debt
(The national debt is the sum total of what the
federal government owes its creditors.)
The Costs and Benefits of Government Spending Programs
According to economists, a government spending program is
not worth pursuing unless the benefits of that program
outweigh the costs.
Spending programs that have greater costs than benefits
sometimes get passed in Congress.
The Budget Process
The president of the United States prepares the budget. The
budget recommends to Congress how much should be spent for
such things as national defense and income security programs.
The Congressional Budget Office advises the members of the
committees and subcommittees that review the president’s
budget. Estimates are used to determine tax revenues. In the
end, many details of the president’s budget are changed to
reflect compromise between the president and Congress.
When the president submits the budget to Congress, the public
gets a chance to hear about the budget proposal. The American
people can write to or call their congresspersons and express
their preferences on the president’s budget.
Congress must pass a budget by the beginning of the fiscal
year. The fiscal year for the federal government begins on
October 1 and runs through September 30.
Once Congress passes the budget, the details of spending
outlined in the budget become law for that fiscal year.
What Is a Fair Share?
The benefits-received principle holds that a person should pay
in taxes an amount equal to the benefits she or he receives from
government expenditures. Excise taxes help achieve this goal.
The ability-to-pay principle states that people should pay
taxes according to their abilities to pay. The more money you
have, the more taxes you should pay.
Budgets: Balanced and in Deficit
A budget deficit is a situation in which federal government
expenditures are greater than federal government tax revenues.
A budget surplus occurs when federal government
expenditures are less than federal government revenues.
The Great Depression (1929–1933) changed the way people
felt about budget deficits. Until then, many people felt that a
balanced budget was the best way for the government to
operate.
After the Depression, people began to accept budget deficits as
a way of reducing unemployment.
Expansionary fiscal policy was necessary to increase
government spending without increasing tax revenues,
allowing employment to rise.
Many people felt that it was better to balance the economy than
to balance the budget.
Every time the federal government runs a deficit, it is
increasing the national debt. On October 24, 2005, the national
debt was $8.009 trillion, or $25,950 per citizen.
Economists argue that increased national debt will lead to
higher tax rates in the future.