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14 - Taxes and Government Spending


PowerPoint for Chapter 14



U.S. Federal Budget


1. Revenue   - Money the federal (national) government receives (from taxes)


2. Expenditure - Expenses during the fiscal year (budget year)


3. U.S. Budget Deficit - The amount of money the federal government overspends each year

    because total revenue is less than total spending.  


4. U.S. National Debt - The total amount of money that the federal government owes (to those

    people who own U.S. Savings Bonds.  As of 1/1/13, the national debt was $16.3 trillion.



The U.S. Budget - A Visual Perspective




Where do we stand internationally?



Taxes are payments that people are required to pay to a local, state, or national government. Taxes supply revenue, or income, to provide the goods and services that people expect from government. The Constitution grants Congress the power to tax and also limits the kinds of taxes Congress can impose. Federal taxes must be for the common defense and general welfare,” must be the same in all states, and may not be placed on exports ("denied power"). The Sixteenth Amendment, ratified in 1913, gave Congress the power to levy an income tax. When government creates a tax, it decides on the type of tax base—the income, property, good, or service that is subject to a tax. It also decides how to structure the tax. The three basic kinds of tax structures are proportional, progressive, and regressive. A proportional taxis a tax in which the percentage of income paid in taxes remains the same for all income levels. A progressive tax is one in which the percentage increases at higher income levels. An example is the

individual income tax, a tax on a person’s income, which requires people with higher incomes to pay a higher percentage of their incomes in taxes.


Below are the 2011 Federal Income Tax Rates:


 In a regressive tax, the percentage increase sat lower income levels. A sales tax, a tax on the value of a good or service being sold, is regressive because higher-income people pay a lower proportion of their incomes on goods and services.




The federal government has several sources of income


Projected Tax Revenues



Payroll Taxes

Excise Taxes - Tax on a specific item like gas or cigarettes.

Personal Income Tax

Corporate Income Tax

Customs Duties







The largest is the individual income tax, which provides nearly half of federal revenue. It is collected on a “pay-as-you-earn” system throughout the year, mostly by employers withholding, or taking out part of an employee’s income and sending it to the federal government. At the end of the year employers send employees a report showing how much has been withheld. (W2 or a 1099 for independent contractors)


What is this person's net pay?



Employees then fill out a tax return, a form in which people declare income to the government and figure out how much tax must be paid.

Taxable income is a person’s gross, or total, income minus exemptions and deductions. Gross income includes income from salaries, wages, tips, and commissions, as well as from interest on savings accounts and stock dividends.Personal exemptions are set amounts that can be subtracted for an individual and for family members.


Deductions include interest on a mortgage, donations to charity, and state and local taxes. Corporations pay a corporate income tax on their income. Corporate taxes makeup about 7 - 10 percent of federal revenues. Like personal income taxes, corporate taxes are progressive.

Tax rates increase as profits increase. The Federal Insurance Contributions Act, or FICA, taxes are also withheld from people’s salaries. Most goes for Social Security, which was established in 1935 as a retirement fund for workers. Now it also provides benefits to wage earners’ surviving family members and people with disabilities. FICA taxes also fund Medicare, a national health insurance program for people over age 65.


2012 Tax Tables (go to page 34)






The federal government takes in nearly $2 trillion dollars a year in revenue. About three-quarters of its spending, however, is “mandatory.”




 Mandatory spending is money lawmakers are required by law to spend on certain programs or to use for interest payments on the national debt. Most mandatory spending is for entitlements. These are benefits paid to people who meet certain requirements, such as age or income. Spending on entitlement programs rises as the number of qualified recipients rise. The largest entitlement programs are Social Security, Medicare, and Medicaid, which provides health insurance to low-income families. Other mandatory spending programs include food stamps, Supplemental Security Income (SSI), and child nutrition, generally for low-income people. The federal government also pays retirement benefits and insurance for federal workers and veterans’ pensions.


 Discretionary spending is spending for which government planners can make choices. It accounts for about one-quarter of federal spending. Discretionary spending includes defense spending, education, national parks and monuments, transportation, disaster aid, foreign aid, and many other items. The federal government also provides aid to state and local governments and shares the costs for some programs with state and local governments. Medicaid costs, for example, are shared by both the federal and state governments. 


What is the Fiscal Cliff? Everything You Need To Know

Fiscal Cliff: How Much Would Taxes Rise in 2013?

House passes fiscal cliff bill.




State governments have two budgets. The operating budget pays day-to day expenses.




New York State medicaid budget


 The capital budget pays for major capital, or investment, spending. New bridges and buildings are examples of capital spending.








State laws require a balanced budget—a budget in which revenue is equal to spending. This rule applies only to the operating budget. While tax policies and spending differ among states, most spend the largest amounts on education, public safety, highways, and public welfare. Public safety includes state police, crime labs, and corrections systems. States also build and maintain highways and roads, often with federal assistance. States get revenue several ways.


 All but five states have a sales tax. States may also have excise taxes, state income taxes, taxes on real property, such as land and buildings,




 and personal property, such as furniture and jewelry. Most states collect corporate income taxes and license fees. Local governments—towns, cities, townships, counties, and special districts—also collect taxes. These taxes support public schools, law enforcement, fire protection, libraries, airports, public hospitals, parks, public transportation, and more. The main source of local revenue is property taxes, a tax on the value of a property. Property taxes are paid by people who own homes, apartments, buildings, or land. An official called a tax assessordetermines the value of the property. Local governments may also levy sales taxes, excise taxes, and income taxes.