Government Revenue and Spending: Understanding Tax Bases and Impacts

1. Government Revenue and Spending

2. Government Revenue • Revenue—government income from tax and non-tax sources • Tax Bases • Individual income tax—on income from all sources • Corporate income tax—on corporation’s profits • Sales tax—on value of product; a percentage of sale price • Property tax—on value of assets, generally real estate; part of rent • Growing, shrinking tax base means changes in amount of taxable wealth

3. Tax Bases and Structures • Tax Structures • Proportional tax—flat tax—all taxpayers pay same percentage of income • Progressive tax—higher income earners pay higher percentage of income (ability to pay) • most closely linked to ability-to-pay principle • Regressive tax—lower income earners pay higher percentage of income • examples: sales tax, property tax

4. Impact of Taxes on the Economy • Resource Allocation • Tax on a good or service increases cost of production • Productivity and Growth • When taxes on interest and dividends high, people save less • impacts amount of money available to producers to invest in businesses • Some economists think high taxes reduce incentives to work • Others think high taxes promote underground economy • Economic Behavior • Tax incentive—use of taxes to influence economic behavior • Tax credits, rebates encourage behavior good for society, economy • Sin taxes imposed on unhealthful, damaging products, activities

5. Individual Income Tax Federal government gets about $2.5 trillion in revenue yearly • Taxes important sources of revenue • largest source is individual income tax • second largest source is social insurance taxes • Paying Your Taxes • Withholding—payroll tax taken before worker gets paycheck • Internal Revenue Service (IRS) collects money, administers tax system • Taxable income—taxable portion; exemptions, deductions reduce it • Tax returns—forms used to report income, taxes owed to government • if too much withheld, taxpayer gets refund; if not enough, taxpayer pays rest

6. Types of Spending • Mandatory Spending • Entitlements—social welfare programs with specific requirements • Social Security restrictions: former worker, age, extra income limit • Medicare provides hospital, other medical insurance; means tested • Medicaid is federal-state insurance program for low-income people • Other programs’ funding based on number of people eligible

7. Types of Spending cont. • Discretionary Spending • Defense includes salaries, weapons, military bases, homeland security • Interstate highway system and other transportation • Natural resources, environment; includes: parks, pollution clean up • Education; science, space, technology; other research • Justice administration includes enforcement agencies, federal courts

8. The Federal Budget and Spending • Federal budget—plan for spending federal revenue • Fiscal year—12-month period for which expenditures are planned • Congressional Budget Office helps develop appropriations guidelines • appropriations are specific amounts set aside for specific purposes

9. State Revenues • Sales and Excise Taxes • Almost all states have sales tax on most goods, services • Income Tax and Other Revenue Sources • estate, property taxes; user, business registration, license fees

10. Should Online Sales Be Taxed? • Background • In 1992, the Supreme Court upheld a law making Internet retailers exempt from collecting most sales taxes because rules varied widely among states. • Today, tax collection is simpler, and Internet purchases are commonplace. Most states have made tax on Internet sales voluntary, with poor results. • What’s the Issue? • Should there be sales tax on Internet purchases?

11. Should Online Sales Be Taxed? {continued} • Thinking Economically • Summarize the arguments for and against an Internet sales tax as presented in the documents. • Who is most likely to benefit from Internet sales tax revenue? Explain your answer, using information from the documents. • How has government responded to e-commerce—the selling of goods and services online? Use information from the documents in your answer.