With very few exceptions, the U.S. federal government does not have an "income" to spend providing goods and services. The money used for federal spending programs must be collected as federal taxes, or it must be borrowed. This lesson provides information about the costs of government programs. This information is necessary if you are to make responsible decisions in your role as citizen.

KEY CONCEPTS

Taxation

STUDENTS WILL

  • Explain that tax revenues are collected from households and businesses for use by various levels of government--federal, state, and local.
  • Predict the types of taxes they (or people in their household) will have to pay over the next several years.

INTRODUCTION

uncle samWith very few exceptions, the U.S. federal government does not have an "income" to spend providing goods and services. The money used for federal spending programs must be collected as federal taxes, or it must be borrowed. This lesson provides information about the costs of government programs. This information is necessary if you are to make responsible decisions in your role as citizen.

MATERIALS


PROCESS

Taxes shift resources from the private sector to the public sector.The purpose of the shift is to pay for the goods, services, and government operations that we, through our representatives, ask government to provide.

mailboxFor example, think of the post office that you sometimes visit. The federal government builds post offices, and to do this it must hire workers and buy tools and equipment. As a result, these workers, tools, and equipment are not used to construct private housing.

In addition to the taxes collected at the federal level, taxes are also collected at the local and state level. Local and state taxes are also used to pay for goods, services, and government operations.

What are some goods or services provided by state or local government? (Hint: Think about your daily activities, --e.g., attending school, walking on sidewalks, playing in parks.)

Activity 1

A Taxing Situation

In this activity, we are going to look at one family's experiences with taxes.

Family Data:

  • Grandmother: A teacher
  • Mom: Owns a convenience store
  • Son: Fred, age 17, student
  • Daughter: Maria, age 12, student

Compute the family members' taxes based on the information provided in each of the following situations. You will need the use of a calculator. (You may want to use the one on your computer.)

1.  Mom opens the mail and finds a notice from the county government indicating that one-half of the family's $1,500 property tax is due. This tax is based on the value of the family's home. What does the family owe the county now?"
[$750.00]

2.  Grandmother receives a statement from her employer, Murphy Middle School. This statement, called a W-2 Form, shows that Grandmother earned $30,000 last year in taxable income. If the federal tax income rate for this income level is 15%, what is the total amount of federal tax taken out of Grandmother's pay? [$4,500.00']

3.  Maria mows lawns in the neighborhood to earn extra money during the summer. On Saturday she buys three gallons of gas at $1.09 a gallon. "I'd make a lot more this summer if I didn't have to pay so much for gas," Maria complains. "I've got news for you: over one third of the price of a gallon of gas is excise taxes!" says Mom. "You pay 19.3 cents in state taxes and 18.4 cents in federal taxes for each gallon. Perhaps your should complain about the cost of government instead." What are the total taxes Maria paid on her three gallons of gas? [$1.13 Total, $0.58 state, $0.55 federal]

4.  Mom pays Linda, a worker at the convenience store, $8.00 an hour. Linda works 40 hours a week and works 50 weeks of the year. How much does Mom pay Linda in a year? [$16,000]

5.  Mom must also pay a social security tax (payroll tax) of 7.65% of Linda's wages. (Mom must pay payroll taxes for all her employees.) What is the total payroll tax Mom pays to the federal government based on Linda's wages? [$1,224]

6.  Fred finally saved $500 to make a down payment on a used car costing $2,500 from the local dealership. His grandmother agreed to help him with a loan to finance the rest of the purchase price. Fred is excited as he drives his very own car to the Department of Motor Vehicles to apply for a license plate. His excitement fades when the clerk tells him he must pay 6.5% state sales tax on the $2,500 purchase price. He hadn't thought about that. When Fred calls his mom from the Department of Motor Vehicles, how much money will he tell her he needs? (Assume he has no money with him.) [$162.50]

7.  Mom's convenience store earned $350,000 in profits last year. Since her store operates as a small corporation, she must pay the corporate tax rate of 34% for federal corporate income taxes. How much does Mom owe to the federal government in taxes on the corporate profits from the store? [$119,000]

Activity 2

In the Drag and Drop, students will match each statement with the proper term. Have them drag the appropriate statement to its correct term on the right of the activity.

As you can see from the above activity, we pay many taxes every day. Federal taxes can be grouped into certain categories. These categories can help us identify who pays for the things that we, through our representatives, ask government to provide. Read the directions below. Then tell who pays the tax for each category.

paycheckPersonal Income Taxes: taxes on the income earned by households and certain business (unincorporated). Most households pay between 15% and 35% of their income to the federal government in personal income taxes. People with higher incomes pay the higher rates. Who pays? [Individuals and families that earn income as defined by the government.]

Corporate income taxes: taxes on a business corporation's profits. Define profit as the difference between revenues (price x quantity sold) and the costs of producing or selling a good or service. Profit is a return for risk-taking. Most corporations pay a tax rate of about 34%. Who pays? [Businesses that have gone through the legal process of incorporating.]

Payroll Taxes: these include all social security and Medicare taxes. Both the employer and the employee must pay a payroll tax of 7.65% on the first $55,000 of an employee's annual earnings. Who pays? [Businesses and workers.]

Excise and other miscellaneous taxes: excise taxes are taxes you pay when you purchase a specific good, such as gasoline. Excise taxes are often included in the price of the product. The business collects the taxes and passes them on to the appropriate level of government. Who pays? [Consumers of the items taxed, such as gasoline, tobacco, alcohol, and some imported goods.]

Activity 3

A sales tax is usually a state and/or local tax you pay when you purchase goods or services. In this activity, we will look at how much sales tax you might pay on different purchases, depending on where you live.

Step 1:  Visit the site Check Taxes in Your State . Find the state sales tax rate for the state you live in and write that rate down. Next find the state sales tax rates for one other state (your choice) and write those rates down.

Step 2:  Search the following web pages for the prices of the listed products. Write down the specifics of each item and its price.

A book from Amazon.com

A DVD player from Best Buy

A shirt from BlueFly.com

tax formStep 3:  Using the sales tax rates from Step 1 and the item prices from Step 2, calculate each item's price if it were being purchased in each state. Did you find much difference in total price including sales tax? What would the difference be if the item were an expensive one, like a computer? Do you think sales tax is important to consider when purchasing a good or service?

EDUCATOR REVIEWS

  • “This lesson begins and ends in a false assumption. Namely, that taxation actually provides government with sustainable funding. A careful examination will reveal that sustainable government funding must be sourced from an actual surplus of production in the private sector. Taxation has nothing at all to do with a surplus of any kind. In fact, income taxation, by offering negative incentives, actually causes production and savings (surpluses) to decrease. So the only real effect of income taxation is to remove private liquidity, which then creates an absolute monopoly for the trading banks in the issue of new money (out of thin air) which enters the economy as interest-bearing debt purchased by out-of-pocket taxpayers. This is an inquiry that should be put to our students before any more tax-brainwashing occurs. Considering the present state of world conflict, perhaps some thought should be given to the unimaginable temptations presented to our banking friends to foment international conflict; forcing taxes to be increased so that they can benefit with even more opportunity to issue high interest debt in the guise of a banking service.”

    Carl Peterson, New Zealand   POSTED ON January 1, 2007

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