Taxation

Glossary
TERM DEFINITION
expenditure the amount spent on purchases
the amount owed by a borrower to a lender
debt
excise tax an indirect tax levied on the production of certain goods and services
revenue income received
sales tax a tax paid when buying retail goods
direct tax a tax paid directly to the government, such as property tax or income tax

indirect tax a tax paid indirectly through the purchase of taxed goods and service
progressive tax a tax in which the tax rate increases as the taxable amount increases
a tax levied by the federal government on the earnings of individuals,
federal income tax
corporations, and any other taxable institution
regressive tax a tax in which the tax rate increases as the taxable amount decreases
proportional tax a tax in which the tax rate remains constant irrespective of income level or taxable income
a payroll tax collected from workers and their employers to fund payments to retired workers and disabled people
Social Security tax
Medicare a federal health insurance program for people aged 65 and older
federal budget an estimate of the federal government’s total revenue and spending in a year
estate tax a tax imposed on property inherited by a descendant or lawful heir
gift tax a tax imposed on the transfer of gifts or property from one individual to another

Medicaid a federal and state program to fund medical and health-related services for low-income people

unemployment insurance a sum of money paid to individuals who have lost their jobs
budget surplus a situation in which the government’s revenue exceeds its expenditures
budget deficit a situation in which the government’s expenditures exceed its revenue

Objective
In this lesson, you will explain the use and goals of fiscal policy, government regulations, and taxation in the US economy.
In this lesson, you will

Types of Taxes
inevitable
Taxes are _______________________ because we expect the government to provide many services and
facilities
_____________________. taxes
Every individual must pay $ _______________ at some time in some way. But taxes
costs
have both ____________________ benefits
and _____________________ attached to them.
leakage
The __________________ injected
in our income in the form of taxes is _________________ into the economy
through government expenditures.

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 constitution
The US ________________________ right
gives the government the _____________ to collect taxes. Article 1,
section 8, of the Constitution states the following:

The Congress shall have Power To lay and collect Taxes, Duties,
Imposts and Excises, to pay the Debts and provide for the common
Defence and general Welfare of the United States; but all Duties,
Imposts and Excises shall be uniform throughout the United States....

According to the Constitution, for what two (2) purposes should Congress collect taxes?

History of Taxation
excise
Until 1913, the federal government collected only ___________________ duty
taxes and ____________ (taxes) on
imported
______________________ goods.
specific
Excise taxes are charged on the purchase of _________________ goods, such as
gasoline
__________________ and cigarettes
_____________________. included
They are often __________________
revenue
in the product’s price. Aside from collecting ___________________, the other important reason for levying
reduce
excise taxes was to ___________________ the consumption of specific goods.
57%
Currently, about ______________ state
of the total revenue from federal, ________________, and local
income
governments comes from ________________ taxes.

Levels of Taxes
Local Taxes
Federal Taxes State Taxes
 ___________________
property Tax

 Personal Income Tax  Income Tax Revenue Revenue

sales
 _____________ Tax local
✓ ______________ schools
Revenue
tax public
✓ ____________
 Payroll ___________ Revenue parks

Revenue  Property Tax Revenue ✓ birth and death records

corporate education
✓ ______________________ elections
✓ conducting _____________
 ______________________
public
✓ _______________ Welfare ✓ collecting garbage
Income Tax Revenue
✓ Administration water
✓ sewer and ______________
✓ defense equipment
military
✓ salaries of ______________ systems

personnel ✓ fire protection

law
✓ ___________ enforcement
✓ administrative work

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Direct Taxes
directly
Direct taxes are taxes paid ____________________ by
government
an individual to the _________________________.
Direct taxes:

✓ Personal income tax

✓ income
Corporate _________________ tax

✓ Property tax

Personal and corporate Property taxes fund:

income
_________________ taxes pay for: $ education
$ government administration local
$ __________ services
programs
$ government _________________

Indirect Taxes
We sometimes do added
do not see the taxes _______________ to the cost of goods and
taxes
services that we pay for. The ______________ levied (collected) on goods and services are often
indirect
___________________ taxes. These are common indirect taxes, but consumers do not pay
 Sales taxes directly
these taxes ___________________ to the government. The
always
burden of these taxes _______________shifts to
 Excise taxes
consumers
______________________.

indirect
The main purpose of an __________________ reduce
tax is to  _______________ the consumption of certain
reduce
goods, such as cigarettes and liquor. Another purpose is to  __________________ consumer and business
increase
spending and  __________________ savings in an economy.

Progressive Taxes
increases
The rate of a progressive tax  ___________________ as the income of the taxpayer
increases
 ____________________. progressive
A __________________________ tax takes larger portions of an
individual’s income as the individual’s income  rises.

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Regressive Taxes
decreases
The rate of a regressive tax  ____________________ increases
as income  __________________.
burden
The ________________ lower
of regressive taxes is  greater on  _________________-income
groups than on  higher-income groups.

 Sales tax sales

is a perfect example of regressive tax because the _______________
constant
tax rate is __________________ (the same) for everybody.

Lower-Income Groups
That means individuals who earn
Every person $40,000 would pay 25% of their
must pay a fixed income as income tax.
income tax of
$10,000
Higher-Income Groups
Individuals earning $80,000
would pay only 12% of their
income as income tax.

Proportional Taxes
A proportional tax applies the  ______________
same level
tax rate regardless of income _______________. All
same
individuals pay a  __________________ or
portion regardless if income  increases _________  decreases.

proportional
Because of the  flat rate charged, __________________________ taxes are called
flat
 ______________ taxes

 Social Security tax In the United States, the government collects

two
___________ proportional taxes under the
 Medicare tax FICA
Federal Insurance Contributions Act (________).

The government receives its income from taxes. Some taxes affect
lower
_______________-income earners, while others affect
higher
________________-income earners. The government uses these
taxes
____________, fund
whether directly or indirectly collected, to ___________
its programs and services.

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Federal Government Spending
Like any individual or business, the government also faces the problem of
scarcity
____________________ trade
and has to make ______________ offs
- ___________ while
Allocating (assigning) funds. The government needs to use each tax dollar it receives
efficiently
______________________.
rate
An increase or a decrease in the tax ____________ has a direct
impact
________________ expenditure
on the government’s spending activities. An ___________________________ is
Public
the total amount spent by a government or a business firm. ________________ expenditure is what the
spends
government ___________________ for the country’s welfare.
fiscal
Before the start of each _______________ budget
year, the government prepares the federal ______________ to
revenue
plan its ___________________ period
and expenditures. A fiscal year is a ________________ that the government or
accounting
business uses for _______________________ its income and expenditures.

Revenue
 Individual income
Revenue is the  social security
income
_________________  Corporate income
that the government TAXES  Excise
recieves
________________
 estate
through taxes.
 gift

Mandatory Spending

benefit
Mandatory spending includes _________________ programs for which the law sets an
eligibility
________________ controlled
criteria. It is spending _______________________ law
by _____________.

social
__________ medicaid
____________
Security Medicare

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Social Security
old
The US government spends some of its income on programs such as Social Security. The ________ age
- ________,
disability
Survivors, and _______________________ Insurance program, commonly called Social Security, provides
monthly
__________________ retirement
benefits to replace some of the income lost to ______________________, disability, or
death.
funds
The federal government ______________ payroll
these programs through __________________ taxes.
younger
Social Security constitutes a _______________ physical
source of income for retired ___________________ in the
United States.

Medicare
federal
Medicare is the ___________________ health insurance program for US citizens who are at least
65
_______ younger
years old. Certain _________________ citizens
people with _________________ disabilities are also eligible
for Medicare insurance.

Medicaid
health
Medicaid is a ________________ afford
program for lower-income individuals who cannot ________________
govt
health care. The Health Insurance Association of America describes Medicaid as a “______________________
all
insurance program for persons of __________ insufficent
ages whose income and resources are ____________________
jointly
to pay for health care.” Federal and state governments _____________________ fund
____________ Medicaid.

Other
The federal government funds other programs that were
established
___________________________ law
by ____________.
Unemployment insurance is one such program. It provides
unemployment
____________________________ benefits to individuals who are
involuntarily
__________________________ jobless for some time. The
state
_____________ governments run this program, and the
federal
_______________ administration
government pays only for the ______________
work.

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Discretionary Spending
training Discretionary spending is designated
military _________________
congressional
through the ______________________
salaries
________________ of military personnel appropriations process. It is spending
Defense
approved
Federal Discretionary Spending

equipment ____________________ by Congress

legislative
through the ______________________
machinery
process. Unlike mandatory spending,
education the government is is not
required by law to make such
transportation
expenditures.
veteran's
____________________ benefits
Nondefense
research
scientific __________________

protection
environmental ____________________
programs
assistance
housing _________________________

Net Interest
Government’s interest (%) payment on debt
borrows
The government ____________________ money to finance
Income ($) received
its past deficits. Net interest is government’s
interest Net interest
__________________ payment on its debt
minus the income received.
growing
Debt payment is the fastest _____________________ expenditure of the federal government.

Finished Federal Budget Revenue (R) Expenditures (E)

balanced budget revenue expenditures

increased government income

OR revenue expenditures
decreased expenditures
surplus budget surplus
The government uses its budget  _________________ primarily to reduce its
(budget surplus)
debt
_____________. surplus
A budget  ________________ healthy
is an indicator of a _______________
and smoothly functioning
_________________________ economy.

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 expenditures exceed revenue revenue expenditures

One cause of a budget deficit is ________________

cutting taxes without a

 decrease in expenditures
___________________ Any kind of economic
deficit budget
(budget deficit)  __________________,
downturn such as a  global recession, leads to a  decrease in the

taxable $ income of the country’s citizens

________________. Even though the tax rates
income
remain unchanged, a reduction in taxable $ ________________ leads to a  decrease
in the collected
taxes ___________________.

Because the federal government runs in a deficit often, the options for increasing revenue are:

currency
make more __________________ circulate
and __________________ it in the economy

borrowing
________________ sectors
funds from other _______________ of the economy

treasury
sell ___________________ bonds to raise money

increase
_______________ taxes

Fiscal Policy
decision
Every ________________ direct
by the government has a _______________
indirect
or _______________ budget
implication on our lives. Government _____________
all
decisions affect ___________ of the economic activities of the country.
fiscal
The government’s ________________ revenue
policy includes ________________ collection through ______________
and expenditures on public welfare.
management
Proper ____________________ inefficient
of taxes is essential to benefit citizens. _____________________ use of
decrease
revenue collected through taxes can lead to a ___________________ in government programs. Increasing tax
less
rates can mean _____________ power
spending _________________ for the consumers.

Summary
What is the relationship between tax revenue and government expenditures?
for example: Increasing government expenditure stimulates economic activities, which in turn
increase government revenues

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