Magruder’sAmerican Government

C H A P T E R 16Financing Government

C H A P T E R 16

Financing GovernmentSECTION 1 Taxes

SECTION 2 Nontax Revenues and Borrowing

SECTION 3 Spending and the Budget

SECTION 4 Fiscal and Monetary Policy

http://www.usdebtclock.org/ Paying your taxes is considered a civic duty, although doing so is also a requirement of the law. If you do not pay your taxes, the government agency that oversees taxes — the Internal Revenue Service or IRS — will require you to pay your taxes or else face penalties, such as fines or going to jail.

• Article I, 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.

Withholding

A corporation is an artificial being under the law. It pays income tax, can own property, can sue and be sued, etc.Each corporation must pay a tax on its net income, its profits, that is, on the earnings above the costs of doing business.

Certain things are taxedand heavily as an attempt to dissuade such behavior.

Other Types of TaxesExcise Taxes

• An excise tax is a tax laid on the manufacture, sale, or consumption of goods and/or the performance of services.

Custom Duties• A custom duty is a tax laid on goods brought

into the U.S. from abroad.

Estate and Gift Taxes• An estate tax is a levy imposed on the assets

(estate) of one who dies. A gift tax is one imposed on the making of a gift by a living person.

#1 Building Permit Taxes

#2 Capital Gains Taxes

#3 Cigarette Taxes

#4 Court Fines (indirect taxes)

#5 Dog License Taxes

#6 Federal Unemployment Taxes

#7 Fishing License Taxes

#8 Food License Taxes

#9 Gasoline Taxes

#10 Gift Taxes

#11 Hunting License Taxes

#12 Inheritance Taxes

#13 Inventory Taxes

#14 IRS Interest Charges (tax on top of tax)

#15 IRS Penalties (tax on top of tax)

#16 Liquor Taxes

#17 Luxury Taxes

#18 Marriage License Taxes

#19 Medicare Taxes

#20 Property Taxes

#21 Recreational Vehicle Taxes

#22 Toll Booth Taxes

#23 Sales Taxes

#24 Self-Employment Taxes

#25 School Taxes

#26 Septic Permit Taxes

#27 Service Charge Taxes

#28 Social Security Taxes

#29 State Unemployment Taxes (SUTA)

#30 Telephone Federal Excise Taxes

#31 Telephone Federal Universal Service Fee Taxes

#32 Telephone Minimum Usage Surcharge Taxes

#33 Telephone State And Local Taxes

#34 Tire Taxes

#35 Toll Bridge Taxes

#36 Toll Tunnel Taxes

#37 Traffic Fines (indirect taxation)

#38 Utility Taxes

#39 Vehicle License Registration Taxes

#40 Vehicle Sales Taxes

#41 Workers Compensation Taxes

Flat Taxes

Flat taxes charge everyone the same rate, regardless of income. In practice, there are not many flat taxes in the United States. Even some of the flat tax proposals put forward are not truly flat.

Example: Although the United States may not have many flat taxes, other countries do. In fact, during the last ten years, many countries in Eastern Europe (including Russia, Ukraine, Romania, and Georgia) have adopted flat taxes ranging between roughly 10 and 30 percent of income. The governments of these countries instituted the flat tax with the hope that a simpler tax system with fewer loopholes and opportunities for tax shelters would actually increase the amount of taxes they collected from wealthier individuals and corporations.

Tax Credits

Governments use tax credits to alleviate the income tax burden for some activities. A tax credit is deducted from the amount of taxes a person owes. A good example is the Earned Income Tax Credit program in the United States. The EITC gives lower-income workers back some of the money they paid in payroll taxes. Tax credits are also known as tax expenditures.

Employers also report to the IRS how much they paid each worker. The IRS compares all these numbers to make sure that each person pays the correct amount of taxes.

If you haven’t had enough tax money withheld from your checks throughout the year to cover the amount of tax you owe, you will have to send more money (“pay in”) to the government. If, however, too much tax money was withheld from your paychecks, you will receive a check (get a “refund”) from the government.

So it’s your overpaid amount of $$$ you get back!

The Power To Tax• Article I, 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.

Limits on the Power to Tax

The power to tax is also limited through the

Constitution. According to the Constitution:

1. Taxes must be used for public purposes only.

2. Federal taxes must be the same in every State.

3. The government may not tax exports.

Current Federal Taxes

Individual Income Tax

• Individual income taxes regularly provide the largest source of federal revenue.

• The tax is levied on each person’s taxable income.

Corporation Income Tax

• Each corporation must pay a tax on its net income, that is, on the earnings above the costs of doing business.

The Income Tax

The income tax is the largest source of federal revenue today. The tax is also a progressive tax, that is, the higher the income and the ability to pay, the higher the tax rate.

Social Insurance Taxes

There are three main types of social insurance taxes levied:

OASDI•The Old-Age, Survivors, and Disability program is the basic Social

Security program.

Medicare•Medicare is health insurance for the elderly and part of the

Social Security program. •The unemployment compensation program pays benefits to

jobless workers and is also part of the overall Social Security program.

The Federal Government’s IncomeFederal revenue comes from several different sources:

Section 1 Review1. Most of the Federal Government’s income comes from

(a) custom duties.

(b) licenses.

(c) estate taxes.

(d) income taxes.

2. OASDI, Medicare, and unemployment compensation program taxes are all types of

(a) social insurance taxes.

(b) progressive taxes.

(c) nonrevenue taxes.

(d) freedom taxes.

Al Capone v. IRSWhile for 10 years the Chicago police had been unable, if not unwilling, to put the most notorious and murderous of mobsters behind bars, the federal authorities found a way to jail him: through the tax laws. Thus the head of the country's most powerful syndicate providing Americans with bootleg liquor, gambling and prostitution wound up in Alcatraz.The jury found Al Capone not guilty of tax evasion in 1924, but guilty on the counts for 1925 through 1927, and guilty of failing to file returns for 1928 and 1929.

On St. Valentine's Day, 1929, Capone ordered his men to kill "Bugs" Moran, head of the gang that had machine-gunned the Capone headquarters. Masquerading as police officers, Capone's men massacred seven opponents in a downtown warehouse

$18 Trillion?

Nontax Revenues and Borrowing

Nontax Revenues•Nontax revenues come from a variety of sources, including

canal tolls; fees for passports, copyrights, and patents; interest earned; and selling philatelic stamps.

Borrowing•Congress has the power “[t]o borrow Money on the credit of

the United States.” (Article I, Section 8, Clause 2).•A deficit is the shortfall between income and spending.•A surplus is more income than spending.•Congress must authorize all federal borrowing.

The Public DebtThe public debt is the government’s total outstanding indebtedness. It

includes all of the money borrowed and not yet repaid, plus the accrued, or accumulated, interest.

Causes and Effects of the Public Debt

Causes:

• Deficit financing

• Failure to repay the debt over time

• Interest accruing on the existing debt

Effects:

• Increased revenue needed to pay off the debt

• Fears of financial obligations for tomorrow’s taxpayers

Section 2 Review1. Examples of nontax revenues include all of the following EXCEPT

(a) profits made by the U.S. Mint.

(b) customs duties.

(c) the sale of philatelic stamps.

(d) passport fees.

2. Deficit spending means that the government(a) spends more money than it gains in revenue and borrows the rest.

(b) spends less money than it gains in revenue.

(c) balances the budget every year.

(d) spends an amount of money that is equal to the amount of money it gains in revenue.

Creating the Federal Budget

House Budget CommitteeChairman Paul Ryan (R-WI)

Singer and songwriter John Legend testifies beforea House Appropriations hearing on funding for the arts.

Federal Spending

Spending by the Federal Government accounts for billions of dollars and has effects on the economy as a whole.

Spending Priorities• Entitlements are benefits that federal law says must be paid to all

those who meet the eligibility requirements. Entitlements are the largest sector of government spending.

• Interest on the public debt has grown to be the second largest category of federal spending.

• Outlays for defense spending account for another large section of the federal budget.

Section 3 Review1. Uncontrollable spending refers to (a) the monies required to ensure military readiness.

(b) spending that Congress and the President cannot change.

(c) the government’s accounting system.

(d) what the government does with our tax money.

2. Which of the following sequence of groups most closely resembles the federal budget creation process?

(a) Federal agencies > the President > Congress > Office of Management and Budget

(b) the President > Congress > Office of Management and Budget > federal agencies

(c) Federal agencies > Office of Management and Budget > Congress > the President

(d) Office of Management and Budget > federal agencies > the President > Congress

Recovery

Credit is paying for theprivilege of

using someoneelse’s money when youdon’t have enough money now—but you pay back more!

Adam Smith Was Right!

Janet L. Yellen took office as Chair of the Board of Governors of the Federal Reserve System on February 3, 2014, for a four-year term ending February 3, 2018. Dr. Yellen also serves as Chairman of the Federal Open Market Committee, the System's principal monetary policymaking body. Prior to her appointment as Chair, Dr. Yellen served as Vice Chair of the Board of Governors, taking office in October 2010, when she simultaneously began a 14-year term as a member of the Board that will expire January 31, 2024.

Incumbent Janet Yellensince February 1, 2014

In 2014 a new detailed level of Fed communication was dubbed Fedspeak 3.0