Magruder’s American Government
1st Edition
ISBN: 9780133306996
Textbook solutions
All Solutions
Section 12-3: Financing Government
Exercise 1
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The main sources of revenue for the Federal Government are **taxes**. Tax collection is regulated by the Constitution – this duty is entrusted to Congress.
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There are various types of taxes: **direct tax, income tax, social insurance tax, corporate income tax, excise tax, estate tax, inheritance tax, gift tax**, etc.
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In addition to taxes, government revenues include funds from **nontax sources**. The Federal Government received the largest part of these revenues from the earnings of the Federal Reserve System (interest charges, loans, fees).
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Other smaller sources of income are the sale of public land and property, the making of coins, the sale of postage stamps,etc.
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The **main source of federal revenue comes from taxes**.
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The three main tax revenue are **income, payroll, and corporate** taxes. Other ones are estate and gift taxes, excise taxes, and custom duties.
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Other sources of the federal non tax revenues include the **interest rate** from borrowing money, loans, and **fees for services** like trademarks, copyrights, and passports.
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Another source is the profit from coining money which is referred as **seigniorage**.
**Postal Service** racks a large amount of money from its service as well.
**Postal Service** racks a large amount of money from its service as well.
Exercise 2
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Congress regulates exports and imports in various ways.
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The Constitution places several restrictions on Congress for tax collection, and one of them is that Congress has the right to tax only imports. **Exports cannot be subject to taxation.**
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In terms of exports, Congress has the power to **ban the export** of something specific, most often for national security purposes.
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The main difference in Congress’s regulation of exports and imports is that **only imports are taxed**. Exports cannot be taxed.
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This is due to the restrictions stated in the Constitution that forbid the taxation of exports. They have to be zero tax rated, which makes sense because the government would be charging itself in that way since the exports regard consumption outside of the nation.
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Furthermore, Congress has control over what is imported and exported. It can also forbid exports that are seen as useless or could damage the government’s interest.
Exercise 3
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There are multiple federal revenues from different types of taxes.
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Taxes in the States are:
1. **Income taxes** – which make the most of the revenue. They are charged on federal, state, and local levels. The income itself determines the amount. However, not all states collect taxes.
2. **Sales taxes** – regard the tax revenue from purchased services and goods. They vary in different states. At some states and their local levels, sales taxes are not levied.
3. **Excise taxes** – are taxes charged on particular goods such as cigarettes, alcohol, and fuel. They are mostly combined with sales taxes for a single purchase.
4. **Property taxes** – are taxes levied that are used for the founding of local services. They are property market value-based, real estate taxation, taxes on cars.
5. **Payroll taxes** – are the Social Security taxes funded by the employees and employers. The government might strategize and reduce the amount of payroll taxes to encourage people to spend more, which boosts the economy.
6. **Gift taxes** – Is taxation that is levied on the transaction of wealth. If a gift has a price higher than 14 thousand USD, it is taxed.
7. **Estate taxes** – Everything that is considered a part of the estate is taxed – insurance, real estate, cash, and securities. What makes them controversial is the tax implied on the transfer of property at someone’s death.
1. **Income taxes** – which make the most of the revenue. They are charged on federal, state, and local levels. The income itself determines the amount. However, not all states collect taxes.
2. **Sales taxes** – regard the tax revenue from purchased services and goods. They vary in different states. At some states and their local levels, sales taxes are not levied.
3. **Excise taxes** – are taxes charged on particular goods such as cigarettes, alcohol, and fuel. They are mostly combined with sales taxes for a single purchase.
4. **Property taxes** – are taxes levied that are used for the founding of local services. They are property market value-based, real estate taxation, taxes on cars.
5. **Payroll taxes** – are the Social Security taxes funded by the employees and employers. The government might strategize and reduce the amount of payroll taxes to encourage people to spend more, which boosts the economy.
6. **Gift taxes** – Is taxation that is levied on the transaction of wealth. If a gift has a price higher than 14 thousand USD, it is taxed.
7. **Estate taxes** – Everything that is considered a part of the estate is taxed – insurance, real estate, cash, and securities. What makes them controversial is the tax implied on the transfer of property at someone’s death.
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Under constitutional authority, taxes are collected by Congress. There are several types of taxes and they all together represent revenue of the Federal Government.
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**1. Individual income taxes** are paid by individual on their income
**2. Corporate income taxes** are paid by business and corporations
**3. Social insurance taxes** are paid by employers, employees and self employers
**4. Excise taxes** are paid by supplier or producer of specific goods and services
**5. Estate taxes** are paid by heirs of the assets
**6. Gift taxes** are paid by people who receive a large sum of money as a gift
**7. Custom taxes** are paid by importers of goods
**2. Corporate income taxes** are paid by business and corporations
**3. Social insurance taxes** are paid by employers, employees and self employers
**4. Excise taxes** are paid by supplier or producer of specific goods and services
**5. Estate taxes** are paid by heirs of the assets
**6. Gift taxes** are paid by people who receive a large sum of money as a gift
**7. Custom taxes** are paid by importers of goods
Exercise 4
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A **progressive tax** is based on the income of the taxpayer. Those who have low incomes will have a lower tax rate compared to those with high incomes.
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On the other hand, **regressive taxes** are characterized by an inversion of the relationship between taxable income and tax rate. Therefore, the rate of the tax is fixed.
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**Progressive taxes** are taxes in which the tax rate varies in relation to the base. If the base is lower then the tax rate is lower, while the higher base leads to a higher tax rate. An example of this type of tax is individual income.
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**Regressive taxes** are those in which the tax rate is fixed regardless of the taxable base. Examples of this tax are Medicare and unemployment compensation.
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Both of these types of taxes lead to the fact that wealthier individuals pay a higher tax in absolute value, and they differ in the tax rate, which is variable for the progressive tax, and fix for the regressive tax.
Exercise 5
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**Taxes** are a tool for contributing to the national **GDP**. Economic growth is stimulated through taxation, which raises the standards, employment opportunities, and offers prosperity in different economic segments.
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The government uses tax money for educational purposes, infrastructure, government aid programs, schools, libraries, and more. Thus taxes are considered to be one of the civic duties that contribute to the functioning of economics system.
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There is a consistent debate over the **benefits of lower and higher taxes** levied because it is crucial to find the right balance. If taxes are too low, the government will have less revenue to spend on the system. If taxes are too high, the amount people spend will be less.
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There have been different mechanisms implied to the system of taxation, such as Reaganomics, where President Reagan intended to reduce taxes by 30 percent over a period of a few years to boost economic growth.
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The taxation system has a major impact on the economy. Its main goal is to collect revenues that are further at the disposal of the Federal Government.
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These revenues are used to finance the administration, for various government programs and for investments. From these revenues, the federal government finances the maintenance and construction of systems that are important for the life and work of citizens, such as public transport, railways, road infrastructure, etc. These investments enable people to live and work, and that enables further collection of taxes.
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If tax rates are low, the government will have a more modest income and will be able to invest and allocate less. On the other hand, citizens will have more money to spend and thus, due to the creation of demand, accelerate the production of goods and services, that is, new jobs.
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If tax rates are high, the government will have more revenue available, but people will have less money to spend, leading to less spending and more savings, which in turn leads to lower demand.
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