Chapter 14, Taxes and Gov’t Spending

Examining Fiscal Policy

Taxes

• Taxes are required payments by individuals and businesses to local, state, and federal gov’ts.

• Taxes generate the majority of revenue (incoming money) for gov’t.

• Taxes are used to pay the salaries of gov’t employees, the purchase of public g/s’s, and transfer payments, and pay debts owed by gov’t’s.

• Taxes are also used to control the highs and lows of the business cycle.

Fair distribution of the tax burden between income levels

• Proportional tax- a tax for which the % of income paid in taxes remains the same for all income levels. Also called a flat tax.

• Progressive tax- a tax for which the % of income paid in taxes increases, as income rises. Income tax, corporate tax,

• Regressive tax- a tax for which the % of income paid in taxes decreases as income goes up. Sales tax, license fees,

Should a tax be based on one’s ability to pay or the benefit one receives?

• Ability to pay- those with greater income should pay more. (progressive taxes)

• Benefit received- those who benefit most from a tax should bare the larger burden of the tax. Ex: Gasoline tax, “sin” tax

• http://cms.gavirtualschool.org/Shared/SocialStudies/Economics_13/Macro_KeepingEconomy_FiscalMonetaryPolicy/index.html Section 3

• View Khan Academy and Macro video

Advanced Assignment

• Read the article at http://www.atr.org/wisconsin-democrats-dont-know-much-about-taxes

• What does EITC stand for?• The article claims that this is not a tax, but a spending

measure by the government. How does the article defend this statement?

• Which political party seems more interested in reducing the EITC?

• Research EITC. Give a more detailed explanation of what it is. Who is eligible to get it? And offer your opinion on whether it is good or bad. Two paragraphs should be sufficient for this question.

Federal Taxes

The 3 main sources of federal revenue are:Individual Income Taxes- 43%Social Security Taxes- 32% (includes S.S. disability, Medicare, Medicaid, as well as funding for the tax payers’ individual S.S. pension)Corporate Income Taxes- 13%

S.S. Taxes

https://www.nationalpriorities.org/budget-basics/federal-budget-101/revenues/

Income Taxes and the Constitution

• Article I, Section 8: the Taxing and Spending Clause limited the authority of Congress to create direct taxes.

• During and after the Civil War, a small income tax was levied on the wealthy to help pay for the war.

• In 1895, the Supreme Court declared income taxes unconstitutional.

• The 16th Amendment- (1909) was created to ease these restrictions and enable the federal gov’t to create the income tax.

What is Mr. Gary’s projected S.S. benefit?

• https://secure.ssa.gov/RIL/SiView.do

Federal Gov’t Spending

• Mandatory Spending- existing laws require the gov’t to fund certain programs, primarily entitlements like social security, Medicare, Medicaid, SSI, food stamps, and veteran’s pensions, and paying the interest on the national debt.

Federal Gov’t Spending

• Discretionary spending- The Gov’t can choose to fund, or not to fund, or to increase or decrease funding for most programs, Such as:

Defense Student loansEducation environmental cleanupR & D HousingNational parks subsidiesLaw enforcement transportationForeign Aid

Assessment

• Choose two areas you feel the federal gov’t should increase or decrease spending from the list of discretionary spending. Write a paragraph for each defending your position.