Financing Government
Document Actions
Constitutional Authority
- Article 1, Section 8: Pay debts, provide for defense and general welfare
Methods
- Tax
- Borrow
- Create money
Tax Concepts
- Uses of taxes
- Pay for purchases
- Change consumer and producer decisions
- Redistribute income, hopefully from rich to poor
- Tax terms
- Tax base--dollars actually taxed
- Tax rate
- Average rate: Proportion of all dollars paid as taxes
- Marginal rate: Proportion of extra dollars paid as taxes
- Progressive taxes
- Increasing marginal tax rate
- Rich pay proportionately more
- Justification is ability to pay
Marginal
| Tax Base | Tax Rate | Total Tax |
| 0 | 0 | |
| $10,000 | 5% | $500 |
| $20,000 | 10% | $500 + $1,000 = $1,500 |
| $30,000 | 15% | $1,500 + $1,500 =$3,000 |
Regressive taxes
- Lower income pay proportionately more
- Generally viewed as bad taxes
Consider a 5% Sales Tax
| Income | Tax Base | Total Tax | Average Tax Rate |
| 0 | 0 | 0 | |
| $10,000 | $10,000 | $500 | 5% |
| $20,000 | $18,000 | $500 + $400 = $900 | 4.5% |
| $30,000 | $24,000 | $900 + $300 = $1,200 | 4.0% |
Types of Taxes
- Taxes on goods and services
- Sales
- Excise taxes and tariffs
- Federal Income Tax
- Origin
- Originally prohibited: "No direct taxes except in proportion to population"
- 16th Amendment allowed income taxes (1916)
- Origin
- Today
- The major source of revenue
- Top marginal rate about 36%
- Rates and incentives--high marginal tax rates reduce the incentive to work
- State and Local Income Taxes
- Social security tax
- Federal Insurance Contribution Act (FICA)--a misnomer
- Employees and employers both taxed--1/2 each
- The young support the old--a problem as the elderly people become a larger percentage of the population
- Property tax
- Tax on property and vehicles
- Primarily a local tax
- A regressive tax--poor people spend a greater percentage of their income on housing
Borrowing
- Federal government budget
- Deficits
- Expenditure - Revenue = Deficit
- For 30 years, deficits every year, except for the last two years
- Deficits
- National debt
- Sum of all previous deficits
- Now at $6,000,000,000,000 (six trillion)
- Borrowed through sale of bonds. Most of the debt is owed to U.S. citizens
- When bonds come due, they are refinanced, not repaid. We will never eliminate the national debt
- Causes of the national debt
- War expenses
- Increased demands for services
- Unpopularity of tax increases--politically easier to borrow
Copyright 2008,
by the Contributing Authors.
Cite/attribute Resource.
factadmin. (2007, October 25). Financing Government. Retrieved November 23, 2009, from Free Online Course Materials — USU OpenCourseWare Web site: http://ocw.usu.edu/university-studies/u-s-institutions/financing-government.
This work is licensed under a
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