Taxes and Spending Notes

Taxes are payments people are required to pay to local, state, and national governments.
Taxes are used to pay for services provided by the government:
- Schools
- Police
- Defense
- Etc.

Article 1, 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.

Definition: Tax designed to take a larger percentage of income from the wealthy than the poor.
Argument for: The wealthy can afford a higher tax and should pay more of the tax burden.
Argument against: Why should the hardest working and most successful pay more taxes? Wealthy are penalized for their success.
Example: Income Tax with Tax Brackets
A person making $20,000 pays 10% income tax ($2000). Their after-tax income is $18,000.
A person making $200,000 pays 30% tax ($60,000). Their after-tax income is $140,000.

Definition: Tax which takes a higher percentage of income from the poor than from the rich.
Example: Sales Tax
Argument for: Tax levied on what is bought. If you cannot afford the tax, do not buy the item.
Argument against: Tax harms those who can least afford it.
Two people buy a $20,000 car. They both pay $1600 in sales tax.
The first person makes $30,000. The sales tax is \frac{1600}{30000} = 0.053 or 5.3% of his income. He has $28,400 left after paying the tax.
The second person makes $100,000. The sales tax is \frac{1600}{100000} = 0.016 or 1.6% of his income. He has $98,000 left after paying the tax.

Definition: A tax that takes the same percentage of income from the wealthy and poor.
Argument for: Everyone is equal - pay the same % of income.
Argument against: The poor need their income more than the wealthy. They need every penny and cannot afford as much of a tax as the wealthy.
Example: "Flat Tax" Income Tax (does not exist in our country, but some political parties support the idea)
On a “Flat” Income tax of 20%:
- A person making $20,000 pays $4000, after-tax income= $16,000
- A person making $200,000 pays $40,000, after-tax income= $160,000

“Pay-as-You-Earn” Taxation
- Federal income taxes are collected throughout the course of the year as individuals earn income
Tax Withholding
- The process by which employers take tax payments out of an employee's pay before he or she receives it.
Tax Brackets
- The federal income tax is a progressive tax. In 1998, there were five rates, each of which applied to a different range of income. The percent taxed ranges from 10% for the lowest income to 35% for the highest of incomes.
Tax Returns:
- At the end of the year, an employer gives employees a report showing how much they withheld in taxes.
- Individuals file a tax return with information regarding exemptions and deductions that adjust the amount of tax that should have been paid.
- If you paid too much, you get a refund. If you paid too little, you must pay the balance.
- All tax returns must be filed by April 15th.

Funds a national health insurance for people over 65 and with certain disabilities.
Paid through FICA.

Paid for by employers, provides “unemployment compensation” for workers laid off through no fault of their own and are actively looking for work.

Excise Tax: tax on the sale or production of a good. Often used to discourage the use of the item, called a “Luxury” or “Sin” tax. Example: Cigarettes, Alcohol, Gas, Telephone
Estate Tax: Tax on the total value of money and property of a person who has died. Only taken on estates over $1.5 million. Opponents labeled it as the “Death Tax” because they believe it is unfair to wealthy, successful people.
Gift Tax: Tax on money or property given as a gift over $10,000 per year.
Import Taxes: known as Tariffs, taxes on goods entering the U.S. Used to raise the price of foreign goods and help American companies.

Definition: Social welfare programs that people are “entitled to” if they meet certain requirements. Congress must fund these programs.
Entitlements are very expensive because Congress cannot control how many people receive the benefits.
- Examples: Social Security (#1 spending), Medicare, Medicaid, Food Stamps, etc.

Definition: Spending category where government can choose how to fund.
- Examples: Defense (#1 discretionary spending), education, research, student loans, technology, law enforcement, national parks and monuments, the environment, housing, transportation, disaster aid, foreign aid, farm subsidies, etc.

Balanced Budget: when the government collects the same in revenue (taxes) as it spends.
Budget Surplus: When the government takes in more revenue than it spends.
Budget Deficit: When the government spends more than it takes in.

New York State, Virginia, Maryland, and West Virginia along with other localities collect taxes from residents.
These taxes pay for services within the state/county/city/school district.

Sales Tax: Taxes on goods sold within the state and not levied on food.
Excise Tax: “Sin Tax” on the sale of certain items ex. cigarettes, alcohol, gasoline.
State Income Taxes
Corporate Income Taxes: Taxes on corporations in the state

Property Tax: a tax levied on the value of property (real estate) owned. The main source of public school funding.
Sales Tax: additional taxes above state sales tax.