The Tax System

Chapter 12

What Are Taxes and When Do You Have to Pay Them?

• Taxes are payments to local, state or national governments. They are the government’s revenue or income.

• Taxes are paid when you buy goods and services.

• Taxes are paid when you earn income.• Taxes are paid when you own property.

Who pays taxes?

• Individuals

• Businesses

• Foreign businesses

Why taxes?

• Pay for government services• Pay for government goods• Pay for government transfer payments• Provide for economic stability

What are the consequences of not paying taxes?

• Fines & interest payments• Loss of property• Jail term• Government unable to provide for our needs

What kinds of taxes are there?• Personal Income tax• FICA – (Federal Income Contribution Act)

– Social Security– Medicare

• Sales tax• Property tax• Excise tax – tax on the supplier (usually included in the price)

• Tariffs – taxes on imported goods

• Corporate income tax

“In this world nothing is certain but death and taxes.” . . . Benjamin Franklin

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Taxes paid in Ben Franklin’s time accounted for 5 percent of the average American’s income.

“In this world nothing is certain but death and taxes.” . . . Benjamin Franklin

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Today, taxes account for up to a third of the average American’s income.

Government Revenue as a Percentage of GDP

Federal Spending• Spending for 2010 was

• $3.518 trillion.• Tax revenue for 2010 was

• $2.105 trillion.• 2010 deficit was $1.413 trillion.

Federal Tax Revenue Sources 2010

Category % of total revenue

Individual income tax 42% FICA taxes (Medicare & Social Security)

40%

Corporate income tax 9% Excise 3% Others (tariffs, estate, etc.) 6%

• Federal spending falls under two categories – Mandatory & Discretionary

– Mandatory spending is spending on existing programs as required by law (61%)

• Most mandatory spending is on entitlements -social programs people are entitled to if they meet certain eligibility requirements. (55%)

– Social Security, Medicare (46%)– Medicaid (25%)– Income Security (food stamps, TANF, unemployment (21%)– Other retirement and disability programs (8%)

• Interest payment on the debt makes up the remainder (6%)

– National defense and veteran’s programs (51%)– Foreign aide (3%)– Other spending (46% = .18 of each federal dollar

spent)• Education• Research• Student loans• National parks and monuments• Environmental cleanup• Federal courts and prisons

Discretionary spending is spending about which government planners can make choices (39%)

States’ Sources of Tax Revenue Texas /Other States Texas 2009

State average 2008

Categories % of total % of total Sales & excise tax

73% 35%

Personal income

0%

26%

Others (Texas has over 60 separate taxes, licenses & fees)

27% 35%

Corporate income

0% 4%

SOURCE: http://www.taxpolicycenter.org/briefing-book/state-local/revenues/overtime.cfm SOURCE: http://www.window.state.tx.us/taxbud/revenue.html

State Revenue Sources

31% of all state revenue comes from the Federal government

Local Tax Sources of Revenue 2008

Categories % of Total Property tax 47% Sales & excise tax 13% Personal & corporate income tax

3%

Licenses & other fees 37%

SOURCE: http://www.taxpolicycenter.org/briefing-book/state-local/revenues/local_revenue.cfm

Local Sources of Revenue

Local governments receive 38% of their revenue from the state or federal government

State Spending Categories

• Health 29%• Welfare 18 %• Education 17%• Pensions 11%• Transportation

7%• All others 17%

Local Spending Categories• Education 38%

• Police & Fire 11%

• Transportation 8%

• Health 8%

• All others 35%

Individual Income TaxesWhen evaluating equity and efficiency of taxes economists distinguish between marginal and average tax rates.

The marginal tax rate is the tax rate applied to each additional dollar of income.

Average Tax Rates are your total taxes divided by your total income

If your income is between $8, 351 and $33,950 your marginal rate is 15%, but your average tax rate would be less than 13.7%

Paying Income Tax• Add up your deposit column on your current check

register. Add this amount to your previous income totals. This is your TOTAL INCOME

• Complete the 1040EZ tax return by following the directions on the form itself.

• Write a check for the amount owed – payable to the IRS.

• Attach check to 1040EZ along with income totals.• Before turning in calculate your average tax rate (taxes

paid/total income)______________________• How does that compare to the marginal tax rate for

your income on this page?

If government spending exceeds government revenue (taxes) within one year it is called deficit spending If government revenue exceeds government spending within one year it is called a budget surplus

Government Debt and Deficits

The Total Deficit or Surplus 1969 to 20162010 Projected deficit is $1.17 trillion.

The US Federal Budget, in surplus only a few years ago, has dropped dramatically back into deficit. Recent budget deficits have broken all previous records.

The Federal Debt is the total of all budget deficits and budget surpluses in our history.

http://www.usdebtclock.org/

Most state and local governments require a balanced budget-revenues must equal expenditures for their operating budgets.

Money In equals Money Out

Governments may borrow to pay for building projects (capital budget).

State and Local governments divide spending between two different budgets.

Operating budget: pays for day to day expenses -salaries, supplies, maintenance. These expenses are paid for with taxes.

Capital budget: pays for major capital, or investment, spending - roads, buildings, bridges. These expenses are paid for by borrowing (bond sales).

State & Local Spending