Taxes And Spending

1. Taxes And Spending “In this world, nothing is certain but death and taxes” -Benjamin Franklin

2. What are Taxes? • Taxes are payments people are required to pay to local, state and national governments. • Taxes are used to pay for services provided by government: • Schools • Police • Defense • Etc.

3. Taxes and the Constitution • Article 1, 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.

4. Limits on the Power to Tax Certain taxes are prohibited or limited in the Constitution: • The purpose of the tax must be for “the common defense and general welfare” • Federal taxes must be the same in every state • The government may not tax exports

5. Principles of Taxation • Benefit Principle - Taxation concept that those who benefit more from government expenditure should pay more taxes to support such expenditure.

6. Principles of Taxation • Ability to Pay Principle - Economics concept that those who have more resources (wealth), or earn higher incomes, should pay more taxes. The ability to pay taxes (such as income tax or tax on luxury goods) are used as means of income redistribution. Also called ability to pay tax. ( i. e. – All property owners pay school tax even though they might not have school age children).

7. Impact of Taxes • Types of taxes affect people differently, depending on their income. 3 forms of taxes are: Progressive Tax Regressive Tax Proportional Tax

8. Progressive Tax • Def. Tax designed to take a larger percentage of income from the wealthy than the poor. • Argument for: the wealthy can afford a higher tax and should pay more of the tax burden. • Argument against: why should the hardest working and most successful pay more taxes? Wealthy are penalized for their success. • Ex. Income Tax with Tax Brackets

9. Progressive Tax (cont.) • A person making $20,000 pays 10% income tax ($2000). Their after tax income is $18,000. • A person making $200,000 pays 30% tax ($60,000). Their after tax income is $140,000.

10. Regressive Tax • Def. Tax which takes a higher percentage of income from the poor than from the rich. • Ex. Sales Tax • Argument for: Tax levied on what is bought. If you cannot afford the tax, do not buy the item. • Argument against: Tax harms those who can least afford it.

11. Regressive Tax (cont.) • Two people buy a $20,000 car. They both pay $1600 in sales tax. • The first person makes $30,000. The sales tax is 5.3% of his income. He has $28,400 left after paying the tax. • The second person makes $100,000. The sales tax is 1.6% of his income. He has $98,000 left after paying the tax.

12. Proportional Tax • Def. A tax that takes the same percentage of income from the wealthy and poor. • Argument for: Everyone is equal- pay same % of income. • Argument against: The poor need their income more than the wealthy. They need every penny and cannot afford as much of a tax as the wealthy. • Ex. “Flat Tax” Income Tax, (does not exist in our country, but some political parties support the idea)

13. Proportional Tax (cont.) • On a “Flat” Income tax of 20%: • A person making $20,000 pays $4000, after tax income= $16,000 • A person making $200,000 pays $40,000, after tax income= $160,000

14. Federal Income Taxes • “Pay-as-You-Earn” Taxation • Federal income taxes are collected throughout the course of the year as individuals earn income • Tax Withholding • The process by which employers take tax payments out of an employees pay before he or she receives it.

15. Federal Income Taxes (cont.) • Tax Brackets • The federal income tax is a progressive tax. In 1998, there were five rates, each of which applied to a different range of income. The percent taxed ranges from 10% for the lowest income to 35% for the highest of incomes.

16. Federal Income Taxes (cont.) • Tax Returns: • At the end of the year, an employer gives employees a report showing how much they withheld in taxes. • Individuals file a tax return with information regarding exemptions and deductions that adjust the amount of tax that should have been paid. • If you paid too much, you get arefund. If you paid too little, you mustpay the balance. • All tax returns must be filed by April 15th.

17. Social Security Taxes • Provides funds for older Americans, their survivors, and disability insurance. • Program funded by the Federal Insurance Contributions Act (FICA).

18. Medicare • Funds a national health insurance for people over 65 and with certain disabilities. • Paid through FICA.

19. Unemployment Taxes • Paid for by employers, provides “unemployment compensation” for workers laid off through no fault of their own and are actively looking for work.

20. Corporate Tax • A tax levied on a corporation's income BEFORE dividends are distributed to stockholders. 3rd largest source of income to the Federal government. Is actually a bigger burden to consumers and workers than to the owners because their elasticity is greater. • 14th Amendment

21. Other Taxes • Excise Tax: tax on the sale or production of a good. Often used to discourage use of the item, called a “Luxuary” or “Sin” tax. Ex. Cigarettes, Alcohol, Gas, Telephone • Estate Tax: Tax on the total value of money and property of a person who has died. Only taken on estates over $1.5 million. Opponents labeled it as the “Death Tax” because they believe it is unfair to wealthy, successful people.

22. Other Taxes (cont.) • Gift Tax: Tax on money or property given as gift over $10,000 per year. • Import Taxes: known as Tariffs, taxes on goods entering the U.S. Used to raise price of foreign goods and help American companies.

23. Other Taxed • Custom Duties: is a tariff or tax imposed on goods when transported across international borders. The purpose of Customs Duty is to protect each country's economy, residents, jobs, environment, etc., by controlling the flow of goods, especially restrictive and prohibited goods, into and out of the country. • VAT: a tax on the amount by which the value of an article has been increased at each stage of its production or distribution.

24. VAT

25. Federal Spending 2003 Where do my tax dollars go?

27. Entitlement Programs • Def. Social welfare programs that people are “entitled to” if they meet certain requirements. Congress must fund these programs. • Entitlementsare very expensive because Congresscannot control how many people receive the benefits. • Ex. Social Security (#1spending), Medicare, Medicaid, Food Stamps, etc.

28. Discretionary Spending • Def. Spending category where government can choose how to fund. • Ex. Defense (#1 discretionary spending), education, research, student loans, technology, law enforcement, national parks and monuments, the environment, housing, transportation, disaster aid, foreign aid, farm subsidies, etc.

29. Surplus/Deficits • Balanced Budget: when the government collects the same in revenue (taxes) as it spends. • Budget Surplus: When the government takes in more revenue than it spends. • Budget Deficit: When the government spends more than it takes in.

30. The Great Depression (1929-39) was the deepest and longest-lasting economic downturn in the history of the Western industrialized world. In the United States, the Great Depression began soon after the stock market crash of October 1929, which sent Wall Street into a panic and wiped out millions of investors.

31. John Maynard Keynes • British economist who argued that for a nation to recovery fully from a depression, the government had to spend money to encourage investment and consumption and pay it off in good times.

32. New Deal • President Franklin Roosevelt's precursor of the modern welfare state (1933-1939); programs to combat economic depression enacted a number of social insureance measures and used government spending to stimulate the economy; increased power of the state and the state's intervention in U.S. social and economic life.

33. Glass-Steagall Act • Established the Federal Deposit Insurance Corporation (FDIC) and included banking reforms, some of which were designed to control speculation.; were both reactions of the U.S. government to cope with the economic problems which followed the Stock Market Crash of 1929.

34. State and Local Taxes • California State, Los Angeles County, The City of Los Angeles and the Los Angeles City School District all collect taxes from residents. • These taxes pay for services within the state/county/city/school district.

35. State Taxes • Sales Tax: Taxes on goods sold within the state. Not levied on food. • Excise Tax: “Sin Tax” on sale of certain items ex. cigarettes, alcohol, gasoline, hotel rooms. • State Income Taxes • Corporate Income Taxes: Taxes on corporations in the state

36. State Spending • Education: SUNY colleges, funding to public schools • Public Safety: State police, prisons • Highways and transportation • Public Welfare: Hospitals, unemployment • Arts and Recreation: Parks, museums, historic sites • State employees

38. Local Taxes • Property Tax: a tax levied on the value of property (real estate) owned. The main source of public school funding. • Sales Tax: additional taxes above state sales tax. • NYS sales tax is 4.5%, Monroe County adds 3.5% for a total of 8% sales tax.

39. Local Spending • Public Schools • Law enforcement/Fire Protection • Local Parks/Recreation • Public Health (hospitals, sewers, food inspectors) • Public Transportation • Social Services (food stamps, welfare, etc.) • Records (Birth/Death certificates, marriage licenses)

40. How is Deficit and Debt Financed • Ronald Regan: U.S. President during the conservative ascendancy of the 1980's. Argued that high tax rates distorted economic incentives to work and save. While in office he signed huge cuts in the tax rate.

41. Reganomics (trickle down) • The federal economic polices of the Reagan administration, elected in 1981. These policies combined a monetarist fiscal policy, supply-side(cut income taxes), and domestic budget cutting. Their goal was to reduce the size of the federal government and stimulate economic growth, unemployed started going back to work

42. Laffer Curve • A curve which shows the relationship between tax rates and tax revenues of government and on which there is a tax rate at which tax revenues are a maximum.

43. Supply Side • An economic philosophy that holds the sharply cutting taxes will increase the incentive people have to work, save, and invest. Greater investments will lead to more jobs, a more productive economy, and more tax revenues for the government. • Demand Side: A form of fiscal policy that emphasizes "demand" (consumer spending). Government can use increased spending or tax cuts to place more money in consumers' hands and thereby increase demand.

44. Surplus Years 1990s