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Financing Government

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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)
  • 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
  • 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 January 08, 2011, from Free Online Course Materials — USU OpenCourseWare Web site: http://ocw.usu.edu/university-studies/u-s-institutions/financing-government.html. This work is licensed under a Creative Commons License Creative Commons License