Role of Government

"In this world nothing can be said to be certain, except death and taxes.“• Benjamin Franklin, in a letter to Jean-Baptiste

Leroy, 1789, which was re-printed in The Works of Benjamin Franklin, 1817

"Death, taxes and childbirth! There's never any convenient time for any of them."• Margaret Mitchell's line from her book Gone With

the Wind, 1936

List at least five goods and services that are provided to us and our communities by the federal, state, and/or local government.• National defense• Highways• Education• Law enforcement• Public parks

No one likes taxes, but most people agree that they are necessary to at least some degree

“No matter what functions we end up assigning to government, to do anything at all government must first raise revenues. The primary vehicles that the government uses to finance itself is taxation.” - your book, page 377.

Tax – a required payment to a local, state, or national government

Article I, Section 8 gives Congress the power to tax, stating that the purpose of a tax is for “common defense and general welfare.”

Therefore, there are limits…

Limits on Congress’ power to tax:• Cannot bring in money for individual

interests• Must be the same in every state (federal

taxes, that is)• Cannot tax church services (freedom of

religion, separation of church and state)• Cannot tax exports (only imports)

Tax base – the measure or value upon which the tax is levied (what we are taxed on)

What kinds of things are taxed?• Income • Property• Sales (goods and services)• Corporate profits • Capital gains – profit made in the stock

market

Tax rate structure – the percentage of a tax base that must be paid in taxes• 25 % of income, for example

Taxes bases can either be stock measures or flow measures

Stock – a value that is measured or estimated at a point in time • Ex: Your parents pay a property tax if they own

their home. Their tax amount is based on the current assessed value of their home.

Flow – a value that is continuous• Ex: Income is a flow (people are paid monthly,

with taxes taken out every month)• Ex: Retail sales take place continuously (retail

sales tax takes a portion of that flow)

Depending on the burden as a proportion of income, a tax can be proportional, progressive, or regressive.

The key is NOT to consider the percentage of the tax itself, but instead to consider the proportion of a person’s income that the tax will affect.

Progressive – a tax that exacts a higher proportion of income from higher-income households than from lower-income households • the burden (as a % of income) increases as

income increases • The U.S. income tax is a progressive tax

because you pay a higher percentage of your income as you make more money

Proportional tax – a tax whose burden is the same proportion of income for all households

Our wage tax of 1% is proportional, because no matter how much you make, you pay 1% of your income to your municipality.

Obviously, we all pay different amounts, but what makes it proportional is the fact that we pay the same % of our incomes!

Regressive – A tax that exacts a higher proportion of income from lower-income families than from higher-income families• Excise taxes (taxes on specific goods like

gasoline or telephone calls)• Retail sales tax – everyone in Allegheny

County pays 7%• This may seem proportional but it really

affects lower-income families more

Average tax rate – the total amount of tax you pay divided by your total income• Let’s say I paid a total of $10,000 in taxes

this year, while I made $50,000• My average tax rate would be

$10,000/50,000 = .20 (or 20% of my income)

Marginal tax rate – the tax rate you pay on any additional income you earn• If I chaperoned 10 events at school and

earned an additional $500 and paid $200 in taxes on this income, then my marginal tax rate would be $200/$500 = .4 (or 40% of the additional income)

To figure out the total amount of taxes you owe, you have to first add up your total income.

From your total income, you are allowed to subtract what we call exemptions and deductions. • For 2014, the personal exemption is $3950• For 2014, the standard deduction is $6200 for

a single person and $12,400 for a married couple For you (a dependent) it is only $1000

Simplicity – simple and easily understood, people can keep records, prepare forms, and pay predictably

Efficiency – government can collect easily and taxpayers can pay easily

Certainty – it’s clear to taxpayer when tax is due, how much is due, and how to pay

Equity – no one bears too much or too little of the burden

Benefits-received – theory that says the people who pay a tax should receive the benefit of that tax• gasoline tax used to build and maintain

highways (only paid by people who use these)

Ability-to-pay - the belief that those who have the ability to pay should pay• progressive income tax – those who are more

able to pay will bear a greater burden

Individual Income Taxes are the federal government’s main source of revenue.• True!

You pay your income taxes at the end of the year in one lump sum.• False• “Pay-As-You-Earn” – we pay this throughout

the year instead of one large lump sum

Your employer holds onto some money each paycheck that they will give the government as your federal income taxes.• True

Tax Withholding – our employers take payments out of our pay (withhold) before we receive it•Based on an estimate of how much we will

owe for the year

If your employer holds onto money, you do not have to file income taxes with the government.• If you want to see if they owe anything back

to you, then this is absolutely false! That’s because…

•You should use a form to file income taxes

•Declare your income to the government and figure out taxable income

What you owe in taxes is based on ALL the money that you make• False!•Taxable income – person’s gross (total)

income minus exemptions and deductions

•Personal exemptions – set amounts you subtract from gross income for yourself, your spouse, and any dependents

You can actually deduct some of your expenditures from your income before paying taxes on it. • True!•Deductions – variable amounts you can

subtract, or deduct, from gross income Interest on a mortgage, donations to charity,

some medical expenses, state and local payments

You may actually owe more or less than what your employer has withheld throughout the year.• True• Depending on your exemptions and

deductions, then it is very possible that you will get money back.

• Unfortunately, it is also possible that you may owe money.

• What your employer withholds is only based on their estimate of what you will owe.

Corporate income taxes make up a small portion of federal revenues.• This is actually true.• Why do you think this is?

Finding taxable income is very easy for businesses.• False. They usually have to hire

accountants to figure this out. It is VERY COMPLICATED.

Large, multimillion dollar companies pay a higher percentage in income taxes than smaller companies.• True.• The income tax structure for companies is

also progressive.

FICA• “Who is this FICA, and what is he doing with

all of my money??!!!!!” ~Rachel from “Friends” when she got her first paycheck

• FICA is a payroll tax imposed by the federal government on both employees and employers to fund Social Security and Medicare - federal programs that provide benefits for retirees, the disabled, and children of deceased workers. Social Security benefits include old-age,

survivors, and disability insurance (OASDI)

Medicare –• Medicare provides hospital insurance

benefits. Unemployment –

• FUTA (Federal Unemployment Tax)• Employees do not pay this tax; Employers

do.• It goes to fund unemployment

compensation for people who are currently out of work and looking for a job.

Excise Taxes• Excise taxes are taxes paid when purchases

are made on a specific good, such as gasoline

• Excise taxes are often included in the price of the product.

• There are also excise taxes on activities, such as on highway usage by trucks.

Estate Taxes• The estate tax is a tax on your right to

transfer property at your death. • It consists of an accounting of everything

you own or have certain interests in at the date of death.

• Typically, this only affects the wealthiest 2% of Americans because you have to have an estate worth more than $1,000,000 to be taxed. (Actually Congress just changed this to 5.25 million!)

Gift Taxes• The gift tax is a tax on the transfer of

property by one individual to another while receiving nothing, or less than full value, in return.

• The tax applies whether the donor intends the transfer to be a gift or not.

• 2014: $14,000

State and Local Taxes and Spending

Operating budget – pays for day-to-day expenses •Salaries of state employees, supplies,

maintenance of facilities Capital budget – pays for major

capital (investment) spending•New buildings, bridges, etc.

49 states require balanced budgets (revenues = spending)•Easier to balance state budgets

Education•Public universities (Clarion, Edinboro,

Slippery Rock)•Some $ to local governments for public

K-12 schools•National average: $11,665 per student

per year http://www.nationaljournal.com/thenextamerica/

education/analysis-how-much-states-spend-on-their-kids-really-does-matter-20121016

Public Safety•State police along highways and in crime

labs •Corrections systems

Highways and transportation (along with federal and local $$$)•Resurface roads, repair bridges •Waterways, airports

Public Welfare •Public hospitals and clinics•Regulators inspect water supplies • Unemployment compensation

Arts and Recreation•State forests and parks (Moraine State

Park, North Park)•Museums, music and art programs

Administration •Governor’s office, legislature, and court

system

Limits• Can’t tax imports or exports or goods sent between

states • Can’t tax federal property (military bases)• Tax exempt: nonprofits, religious groups, and charities

Sales tax • Taxes on goods or services• Different between states: usually between 3-8%• Some categories of products are exempt (differs between

states: Minnesota, Massachusetts, New Jersey, New York Pennsylvania, Rhode Island and Vermont have exempted some or all clothing purchases.)Read more: What States Have No Sales Tax on Clothing? | eHow.com http://www.ehow.com/list_7300742_states-sales-tax-clothing_.html#ixzz2QXdRdXC4

• http://www.salestaxinstitute.com/resources/rates

State income taxes Corporate income tax

•Usually keep relatively low to attract new businesses to the state

Other taxes•Licensing fees • Inheritance taxes (in addition to estate

tax by federal govt.)

Forms of Local Government •Townships, counties, school districts

Jobs of Local Government• Public school systems• Law enforcement• Fire protection• Public facilities (library, airport, hospitals)• Parks and other facilities (beaches, pools, zoos)• Public health• Public transportation• Elections• Record keeping• Social services

Property Taxes•Millage – fixed dollar amount per $1,000

of the assessed value of a property Main source of funding for public schools http://www.alleghenycounty.us/treasure/millsd.asp

Other Local Taxes•Sales, excise, and income taxes •Taxes for visitors on hotel rooms, rental

cars, airports, and movie or theater tickets

•City payroll taxes – for workers who live in suburbs but work in city