What do we spend most of our money on? Unit 3 Section 2 TAXES AND GOVERNMENT SPENDING Taxes •A required payment to local, state, national gov. •The primary way gov. collects money. •Gives gov. money it needs to operate. •The first power granted to Legis. Branch is the power to tax. Taxes Taxation Limitations: •A tax can’t bring in money to individual interests. •Must be for the common defense and general welfare of the citizens. •Fed. taxes must be the same for all states •Religious organizations can’t be taxed. Revenue •Income gov. receives from taxes and other non-taxed sources •Helps gov. pay for public services. •National def., highways, education. Tax Structures and Bases •Progressive Tax: Income tax increases as income goes up. The more you make, the more you pay. Tax Structures and Bases •Proportional Tax: Tax rate stays the same for everyone, no matter the income. Everyone pays the same percentage. Tax Structures and Bases •Regressive Tax: As income goes up, percentage of income tax paid goes down. The more you make, the less you pay. Checking for Understanding 1. What are taxes and who has the power to tax? 2. How are people taxed under a progressive tax system? 3. Revenue from taxes helps pay for what? 4. Taxes must be used for the common defense of the people and what else? Tax Structures and Bases •Tax Base: Income, property, good, or service that is subject to a tax. -Individual Income Tax: Based on personal earnings -Corporate Income Tax: Based on a company’s earnings -Property Tax: Based on real estate and other property -Sales Tax: Based on the goods and services sold Individual Income Tax •The U.S. uses a “pay-as-you-earn” progressive structure. •Individuals pay income tax throughout the year as they earn. •Withholdings -Payments employers take from earnings. -Employer sends withheld money to the federal gov. -Based on how much is estimated you might earn Individual Income Tax •Tax Return: Form used to file income taxes -On the form you declare your income to gov. -You figure out how much of your income is taxable Individual Income Tax •Forms 1040, 1040A, 1040EZ -1040: most complex, but allows for more deductions -1040A: less complex, allows for some deductions -1040EZ: least complex, no itemized deductions Individual Income Tax •Taxable Income: Gross (total) income minus deductions (income withheld). •The tax return determines if you’ve paid too much in taxes or not enough. •Too much=refund, Not enough=send payment Corporate Income Tax •Corporations also pay taxes on their taxable income. •Corp. can make deductions from their taxable income (such as employee healthcare) •Corps. also pay on a progressive tax structure Corporate Income Tax Checking for Understanding 1. What is a tax base? 2. The U.S. uses what kind of structure for income tax? 3. Which tax return form is the simplest one? 4. What do you get if you’ve paid too much in taxes? The Federal Budget •Written document estimating gov.’s revenue. •Authorizes spending for the coming year. •The gov. prepares a new budget for each fiscal year. •Fiscal Year: 12 month period used for budget purposes. The Federal Budget Balancing the Budget •When gov. revenue (earnings) equals expenditures (spending) the budget is balanced. •Budget Surplus: Revenue > expenditures. •Budget Deficit: Expenditures > revenue. •Gov. spends more w/o increasing revenue-deficit •Revenue increases w/o increase in expenditures-surplus Balancing the Budget •What can help fix a deficit? -Print more money: Not used often. More money in circulation can lead to the dollar losing it’s value. -Borrow Money: The gov. can sell bonds (a type of loan) that consumers and businesses can buy. Controlling the Deficit •How can gov. prevent deficits? -Cut expenditures: reduce the amount the gov. spends (social programs). -Increase taxes: raise amount people pay in taxes. •Sometimes both strategies are used, sometimes one is used over the other. Entitlement Programs •Gov. program that guarantees certain benefits •Benefits go to certain segment of population •Social Security, Medicare, Unemployment Social Security •Federal insurance program •Provides benefits to retired people •Also to those that are unemployed or retired Medicare •Federal insurance program for: -People 65 or older -Young people with disabilities Checking for Understanding 1. Social Security provides benefits to which people? 2. Medicare is a federal insurance program for who? 3. What is one way the gov. can prevent deficits? 4. What does it mean when the federal budget is balanced?