Chapter 13: The Politics of Taxing and Spending

Chapter 13: The Budget, The Politics of Taxing and Spending

Introduction to Taxation and Spending

• Taxation and spending are deeply political processes, influencing individual lives and the economy.
• Understanding where tax dollars go is crucial for civic awareness and participation.

The Impact of Taxes on Paychecks

• Workers often expect to earn a full dollar, but taxes reduce actual take-home pay significantly.
  • Federal taxes: Deductions from paychecks for income tax.
  • State taxes: Additional deductions depending on residence.
  • Local taxes: Possible deductions contributing to lower actual earnings.

Federal Revenue Sources

• Governments fund operations from various revenue streams. Key sources for federal revenue include:
  • Individual Income Taxes: Significant source; higher earners pay more due to progressive tax system.
  • Social Insurance Taxes: Contributions for Social Security (6.2%) and Medicare (1.45%).
  • Corporate Income Taxes: Lower rate; corporations often pass tax costs onto consumers.
  • Excise Taxes: Levied on specific goods/services (e.g., tariffs, national park fees).

Tax Structure in the U.S.

• Progressive Tax System: Higher income earners pay a greater percentage:
  • Top 1% average tax rate: 25.9%
  • 5-1% earners: 18.9%
  • Bottom 50%: 3.3% average tax rate
• In 2021, the top 1% contributed approximately 45-46% of total tax revenue, while the bottom 50% contributed about 3%.
  • This highlights the disparity in tax contributions among different income groups.

Federal Budget Overview

• Total Revenue (2021): $3.4 trillion
• Total Expenditures (2021): Approximately $6.5 trillion, resulting in significant national debt.
• National Debt: Current U.S. national debt stands at around $34 trillion, frequently rising due to continual deficits.

The Role of the Sixteenth Amendment

• The 16th Amendment (1913) allowed for income tax collection, changing revenue generation dynamics previously reliant on tariffs.
• Individual contributions significantly fund government operations, while corporate taxes remain relatively low.

Government Borrowing Practices

• Borrowing Explanation: Used to cover budget shortfalls by selling government bonds.
  • Bonds financed by individuals, other governments, and return with interest over time.
  • Intergovernmental debt includes funds borrowed from the Social Security Trust Fund, reflecting fiscal challenges ahead.
• Consistent governmental spending exacerbates national debt.

Tax Expenditures and Their Impact

• Tax expenditures indicate revenue lost through exemptions and deductions:
  • Deductions (e.g., mortgage interest, charitable donations) disproportionately benefit wealthier taxpayers.
  • Reducing taxes can lead to increased government debt, requiring effective policies to balance tax revenue and expenditures.
• Examples of tax expenditures costing the government:
  • Mortgage interest deduction: $48 billion
  • Employer health insurance deductions: $228 billion

Conclusion

• Monitoring taxation, spending, and revenue generation is essential to understanding governmental operation and individual economic implications.
• Continuous deficits and national debt underscore the importance of informed civic participation and fiscal responsibility in governance.