Chapter 9 - Taxation

“Nothing is certain but death and taxes”

Criteria for Effective Taxes

1. Fair/ Equitable – few loopholes

2. Simple – easy to u-stand

3. Efficient – easy to administer and generate revenue for gov.

2 Principles of Taxation1. Benefit principle = those who benefit should

pay in proportion to the amount of benefits they receive.

2. Ability-to-pay principle = according to income, regardless of benefits they receive

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Types of taxes1. Proportional = same % for everyone

2. Progressive = higher % for higher incomes

3. Regressive = opposite of progressive

Federal Gov. Taxes

1. Almost ½ of their rev. comes from income tax

2. FICA (Fed. Insurance Contributions Act) = Largest source of gov. rev. - mainly pays for Social Security and Medicare (“Revolving Door” – ‘it pays for itself’)

3. Corporate income tax – from 15 to 35%*Remember, “Corporations are people too” ,

so they have to pay taxes on their ‘income’.

Federal Gov. Taxes – other ways the fed. Gov. get revenue:

4. Excise taxes – ‘luxury’ items

5. Sin Taxes – behavior adjustment

6. Estate taxes and gift taxes

7. Customs taxes – (imports)

State and Local Taxes

- intergovernmental revenues

- sales tax

- property tax

- income

- lottery?

How do they collect?

• Federal gov. = IRS

• State gov. = the Tax Board– Mostly it comes out of your paycheck (it is

‘withheld’)– You will file your official tax return by April 15

• You may receive a ‘refund’ or be made to pay more, depending on how much was withheld and how much $ you made

Federal Spending

• Based on the ‘fiscal year’, as opposed to the ‘calendar year’.

• Mandatory Spending– Those items that don’t need Congressional

approval. (“The money is already spent.”)

Social SecurityMedicareInterest on the National Debt

• Discretionary Spending– Those items that require approval from

Congress from year to year• Appropriations Bill = a law that allocates money to

a particular program (goes through the traditional ‘Bill to a Law’ sequence)

National “Defense”Veterans benefits“Income Security”AgricultureTransportationEducationInternational AffairsScience/Space/Technology

The Process:

• President & his administration come up with a proposal – called “The 2013 Budget”– Sends it to Congress

• Congress slashes, adds, amends– Sends it back to President

• President signs it – becomes the plan for expenditures for the coming year.

Federal Debt & Deficit• The amount of money that the U.S. Gov.

spends over and above what they took in (Spending – Revenue = Deficit)

• National Debt = the total “credit card bill” that has accumulated thus far.