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money flows to the govt through
taxes
borrowing
proprietary income
net taxes
taxes minus transfer payments & subsidies
government purchase
exhaustive
products purchased require the use of resources
products purchases are part of the domestic output
EX: purchase of a missile requires physicists and engineer labor, as well as raw materials & other inputs
transfer payments
nonexhaustive
do not require the use of resources
do not create output
EX: social security benefits, welfare payments, veterans’ benefits, unemployment compensation
the funds used to pay for govt purchases and transfers come from three sources
taxes, proprietary income, and funds
deficit spending
govt spending that is financed by borrowing
government borrowing
the ability to borrow allows a govt to spend more money than it collects in tax revenues & proprietary income
why is government borrowing useful during economic downturn?
because a govt can use borrowed funds to maintain high-spending levels on G, S, & transfer payments (even if tax revenues & proprietary income are falling)
what are the four areas of major federal spending
pensions & income security
national defense
health programs
interest on public debts
largest federal revenue sources
income tax, payroll taxes, the corporate income tax
personal income tax
tax on the individuals earnings
T or F: federal personal income tax is a progressive tax
True
progressive tax
a tax system where higher-income people pay a higher percentage of their income
marginal tax rate
tax rate applied to the last dollar of income earned
average tax rate
total tax paid/total income
payroll taxes
taxes taken from workers’ paychecks to fund programs like Medicine, Social Security, Dental Insurance
employees and employers pay these taxes equally
payroll taxes
corporate income tax rate for almost all corporation is
35%
corporate income tax
a tax on a company’s profit
difference between its total revenue and its total expenses
sales & excise taxes
taxes on G/S
sales tax
sales tax is general
calculated as a percentage of the price paid for a product
primary revenue source of most state govt
excise tax
excise tax is on specific items like gasoline or alcohol
levied on a per-unit basis
EX: $2/per pack of cig
federal govt collects excise taxes of various rates
state finances: state tax revenue
sales & excise taxes
personal income taxes
Licenses & registration
Corporate taxes
Government lotteries
state finances: spending priorities
education
public welfare
local finances: spending
Education
Welfare, Health care, Hospitals
Highways
Public Safety
Housing, parks, and sewage
property taxes
tax on land/buildings owned
local govt obtain 71% of their tax revenues from property taxes
local finance: tax revenue
property taxes
sales & excise taxes
personal income taxes
corporate income taxes
state & local employemnet
education
hospitals/health
administraton
federal employment
postal service
national defense
hospitals/health
natural resources
Benefits-received Principle:
people should pay taxes based on the benefits they receive from government services
ability-to-pay principle
people should pay taxes based on their income and wealth, with higher earners paying more
progressive tax
the tax rate increases as income increases (high earners pay a larger percentage)
regressive tax
the tax rate decreases as income increases (low-earners pay a higher percentage)
proportional tax
the tax rate stays the same for all income levels (also called a flat tax)
progressive tax example
personal income tax
regressive tax example
sales tax
payroll tax
proportional tax example
corporate tax
tax incidence
the extent to which a tax affects a specific person or group
federal taxes are progressive, regressive, or proportional?
overall— they are progressive
state and local taxes tend to be progressive, regressive, or proportional
regressive
overall U.S. tax system is ____, but redistribution happens more through government spending than taxation alone
progressive
