Ch 12: The Design of the Tax System Monday, October 20, 201410:43 PM -Today, taxes take up about a third of the average American's income-Taxes are inevitable because we as citizens expect our government to provide us with various goods and servicesA Financial Overview of the U.S. Government-As the economy's income has grown, the government's revenue from taxation has grown even more-As a nation gets richer, the government typically takes a larger share of income taxes-The Federal GovernmentoThe U.S. Federal government collects about 2/3 of the taxes in our economyoReceipts-In 2009 the average American paid $6,846 to the federal government-The largest source of revenue for the federal government is the individual income taxA family's tax liability (how much it owes) is based on its total income but it is not simply proportional to its income. Marginal tax rate: the tax rate applied to each additional dollar of incomeBecause the marginal tax rate rises as income rises, higher income families pay a larger percentage of their income taxesOn Taxable Income… The Tax Rate is…Up to $8375 10%From $8375 to $34000 15%From $34000 to $82400 25%From $82400 to $ 171850 28%From $171850 to $373650 33%Over $373650 35% 2. Payroll tax: a tax on the wages that a firm pays its workers. This revenue is called socialinsurance taxes because the revenue from these taxes is earmarked to pay for Social Security and Medicare3. Corporation: a business set up to have its own legal existence, distinct and separate from its owners. Each corporation is taxed based on its profitCorporate profits are taxes twice. Once by corporate income tax when the corporation earns the profits; a second time by the individual income tax when the corporation uses its profits to pay dividends to its shareholders.4. The "other" category includes excise taxes, which are taxes on specific goods like gasoline, cigarettes, and alcohol oSpending-In 2009 the total spending of the federal government was $11,441 per person-Social Security, represents transfer payments to the elderlyTransfer payments are government payments not made in exchange for a good or service. -National Defense includes both the salaries of military personnel and the purchases of military equipment-Income Security includes transfer payments to poor families and the unemployed. Welfare, food stamps, and unemployment compensation for people who have recently lost jobs-Medicare is the government's health plan for the elderly-Other health spending including Medicaid, the federal health program for the poor, and spending on medical research-Net interest. When a person borrows from a bank, the bank requires the borrower to pay interest for the loan. The same is true when the government borrows from the public-"Other" consists of many less expensive functions of government like the federalcourt system, the space program, etc. -Budget Deficit: an excess of government spending over government receipts. The government finances a budget deficit by borrowing from the public-Budget Surplus: An excess of government receipts over government spending. Government uses the excess surplus to reduce its outstanding debtsoThe Fiscal Challenge Ahead-In 2009 the government's budget deficit rose dramatically due to the deep recession the economy was experiencing. Recessions tend to increase government spending and reduce government revenue-Long term projections of the government's budget show that, under current law,the government will spend vastly more than it will receive in tax revenue in the decades ahead. -One reason for the rise in government spending is that Social Security and Medicare provide significant benefits for the elderly, who are a growing percentage of the overall populationIncreased life expectancyPeople are having fewer children, resulting in smaller families so the labor force is growing more slowly now than in the pastAs a result, there will be fewer workers paying taxes to support the government benefits that each elderly person receive -Marginal tax rates for an unmarried taxpayer. The taxes owed depend on all the marginaltax rates up to his or her income level. -A taxpayer with income of $25,000 pays 10% of the first $8375 of income, and then 15% of the rest The Growing Elderly Population Government spending onSocial security, medicare, and medicaidPopulationAge 65+(as percentageOf population)Percentageof GDP.. 1020Elderly population 5111 111120102010-The growing elderly population will put increasing pressure on the government budget-Unless changes in benefits are enacted, government spending on these programs will rise significantly and will require large tax increases to pay for them -Another trend that will affect government spending in the decades ahead is the rising cost of healthcare, which will increase government spending. -Policymakers have tried reducing the burden of lawsuits on the healthcare system to promote greater use of information technology.-Obama signed a healthcare reform bill with the goal of expanding health insurance coverage andreducing the growth of healthcare costs-These measures will only have a limited impact because the main reason for rising healthcare costs is medical advances that provide new, better, but often expensive ways to extend and improve our lives -Increasing the budget deficit would not help handle these spending increases because that will just push the cost of government spending on to a future generation of taxpayers, who will inherit a government with greater debts-Some economists believe that to pay for these commitments we need to raise taxes substantially. If so, the long term trend will continue-Other economists think that such high tax rates would impose too great a cost on younger workers, so they believe that policymakers should reduce the promises now being made to the elderly of the future and that, at the same time, people should be encouraged to take greater role in caring for themselves as they age. -State and Local GovernmentoState and local government collect about 40 percent of all taxes paidoReceipts1. Sales taxes are levied as a percentage of the total amount spent at retail stores2. Property taxes are levied as a percentage of the estimated value of land and structures and are paid by property owners3. Individual income taxes4. Corporate income taxes5. From federal government. To