Chapter 16- Public Finances: Expenditures and Taxes

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

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