Chapter 12 - The Design of the Tax System
A Financial overview of the U.S. Government
The Federal Government
The U.S. federal government collects about ⅔ of the taxes in our economy. It raises this
money in a number of ways, and it finds even more ways to spend it.
Receipts
The largest source of revenue for the federal government is the individual income tax. Each
family is required to report its income from all sources: wages from working, interest on
savings, dividends from corporations in which it owns shares, profits from any small
businesses it operates, and so on. The family’s tax liability (how much it owes) is then based
on its total income. A family’s income tax liability is not simply proportional to its income.
Taxable income is computed as total income minus an amount based on the number of
dependents (children) and minus certain expenses that policymakers have deemed
“deductible” (such as mortgage interest payments, state and local tax payments, and
charitable giving.) Almost as important to the federal government as the individual income
tax are payroll taxes. A payroll tax is a tax on the wages that a firm pays its workers, this is
also called social insurance taxes. Next in magnitude is corporation tax. A corporation is a
business that is set up as a separate legal entity. The government taxes each corporation
based on its profits.
Spending
In 2004, the federal government spent 2,292 billion USD. The largest category is Social
Security, which represents mostly transfer payments to the elderly. A transfer payment is a
government payment not made in exchange for a good or service. This made up 22% of the
federal government spending. The second largest category of spending is national defense.
Spending on national defense fluctuates over time as international tensions and the political
climate change. The third category is spending on income security, which includes transfer
payments to poor families. This comes in forms of welfare, food stamps, and others.
Medicare, the 4th category, is the government’s health plan for the elderly. Just below
medicare is other health spending which includes Medicaid, the federal health program for
the poor. 6th on the list is net interest. This is payments the government must make on loans
from the public and other countries. When a government spends more money than it is
receiving the government is in a budget deficit, and when the government saves more
money than it spends it is in a budget surplus.
State and Local Government
State and local government collect about 40% of all its taxes paid.
Receipts
The two most important taxes for state and local government are sales taxes and property
taxes. Sales taxes are levied as a percentage of the total amount spent at retail stores.
Property taxes are levied as a percentage of the estimated value of land and structures and
are paid by property owners. These two taxers make up more than ⅓ of all receipts of state
and local government. State and local government also receive substantial funds from the
federal government. To some extent, the federal government’s policy of sharing its revenue
with state government redistributes funds from high-income states to low-income states.
Finally, state and local governments receive much of their receipts from various sources
including fees for fishing and hunting licenses, tolls from roads and bridges, and fares for
public buses and subways.
A Financial overview of the U.S. Government
The Federal Government
The U.S. federal government collects about ⅔ of the taxes in our economy. It raises this
money in a number of ways, and it finds even more ways to spend it.
Receipts
The largest source of revenue for the federal government is the individual income tax. Each
family is required to report its income from all sources: wages from working, interest on
savings, dividends from corporations in which it owns shares, profits from any small
businesses it operates, and so on. The family’s tax liability (how much it owes) is then based
on its total income. A family’s income tax liability is not simply proportional to its income.
Taxable income is computed as total income minus an amount based on the number of
dependents (children) and minus certain expenses that policymakers have deemed
“deductible” (such as mortgage interest payments, state and local tax payments, and
charitable giving.) Almost as important to the federal government as the individual income
tax are payroll taxes. A payroll tax is a tax on the wages that a firm pays its workers, this is
also called social insurance taxes. Next in magnitude is corporation tax. A corporation is a
business that is set up as a separate legal entity. The government taxes each corporation
based on its profits.
Spending
In 2004, the federal government spent 2,292 billion USD. The largest category is Social
Security, which represents mostly transfer payments to the elderly. A transfer payment is a
government payment not made in exchange for a good or service. This made up 22% of the
federal government spending. The second largest category of spending is national defense.
Spending on national defense fluctuates over time as international tensions and the political
climate change. The third category is spending on income security, which includes transfer
payments to poor families. This comes in forms of welfare, food stamps, and others.
Medicare, the 4th category, is the government’s health plan for the elderly. Just below
medicare is other health spending which includes Medicaid, the federal health program for
the poor. 6th on the list is net interest. This is payments the government must make on loans
from the public and other countries. When a government spends more money than it is
receiving the government is in a budget deficit, and when the government saves more
money than it spends it is in a budget surplus.
State and Local Government
State and local government collect about 40% of all its taxes paid.
Receipts
The two most important taxes for state and local government are sales taxes and property
taxes. Sales taxes are levied as a percentage of the total amount spent at retail stores.
Property taxes are levied as a percentage of the estimated value of land and structures and
are paid by property owners. These two taxers make up more than ⅓ of all receipts of state
and local government. State and local government also receive substantial funds from the
federal government. To some extent, the federal government’s policy of sharing its revenue
with state government redistributes funds from high-income states to low-income states.
Finally, state and local governments receive much of their receipts from various sources
including fees for fishing and hunting licenses, tolls from roads and bridges, and fares for
public buses and subways.
