Sources of federal revenue

Now let's look separately at the Federal, state, and local units of government to compare their expenditures taxes.

Four important areas of Federal spending stand out: (1) pensions and income security, (2) national defense, (3) health, and (4) interest on the public debt. The pensions and income security category reflects the myriad income-maintenance programs for the aged, the disabled, the unemployed, the handicapped, and families with no breadwinner. National defense constitutes about one-fifth of the Federal budget and underscores the high costs of military preparedness. Health reflects dramatic increases in costs of government health programs for the retired and poor. Interest on the public debt has grown dramatically in recent years because the public debt itself has grown.

The Personal Income Tax As we saw in Figure 1, the federal government has three main sources of tax revenue, the largest of which is the personal income tax. This tax was only a minor source of federal revenue until World War II. It now accounts for more than two out of every five tax dollars collected by the Internal Revenue Service.

The personal income tax would be an even greater source of revenue were it not for two landmark tax laws passed in the 1980s. First, the Economic Recovery Tax Act of 1981, better known as the Kemp-Roth tax cut, lowered the average citizen's tax bill by 23 percent over a three-year period. The maximum rate was cut from 70 percent to 50 percent, and, most analysts agreed, the wealthiest third of the population got most of the benefits.

Then came the Tax Reform Act of 1986, which cut personal income taxes still further. The maximum rate was lowered to 28 percent, and most taxpayers ended up in the lower bracket - 15 percent. This meant the nation's wealthiest people had marginal tax rates of 28 percent, the upper middle class was taxed at 28 percent, and the working class and lower middle class were taxed at 15 percent. In 1990, however, the top marginal rate was raised to 31 percent, and in 1993 the top bracket was raised to 36 percent, with a 10 percent surtax on incomes over $250,000. That makes the top bracket 39.6 percent (36 + 10 percent of 36 or 3.6). In 1981 the top marginal tax rate was lowered in stages to 50 percent, a rate that was maintained from 1983 to 1987. Under the Tax Reform Act of 1986, it was lowered in stages to 28 percent in 1988. In 1990 the top marginal tax rate was raised to 31 percent, a rate that was in effect from 1991 through 1993. In 1993 the top tax bracket was raised to 36 percent, with a 10 percent surtax for those making more than $250,000. In effect, then, since 1994, the top marginal tax rate has been 39.6 percent (36 percent + 3.6 percent).

You don't have to pay tax on your entire income. In 1994, married couples were entitled to a standard deduction of $6,350, which meant that the first $6,350 was not subject to personal income tax. In addition, they were entitled to exemptions of $2,450 for each dependent. Suppose we're looking at the tax return of a couple with two children. They are entitled to four exemptions, totaling $9,800 ($2,450 X 4). They would not have to pay any federal personal income tax on their first $16,150 of income. Suppose they earned $17,150. How much tax would they have to pay? Work it out here:

The solution: $17,150 - $16,150 = $1,000 taxable income. At a marginal tax rate of 15 percent, they have to pay $150.

Most poor people pay little or no personal income tax. For example, a family of four would need to earn more than $16,150 before it would have to pay any taxes, and that income would place the family well above the poverty line. But what really kills the working poor is the payroll tax, which begins with the first dollar earned.

The Payroll Tax What's the payroll tax? Remember the Social Security and Medicare taxes that you pay? What you pay is matched by your employer. When you pay 7.65 percent of your wages, your employer also pays 7.65 percent of your wages.

The payroll tax is the federal government's fastest-growing source of revenue and now stands second in importance to the personal income tax. But the Social Security trust fund may be running out of money, because in the coming years medical and retirement payments may rise even faster than tax collections.

Social security contributions, or payroll taxes, are the premiums paid on the compulsory insurance plans - old age insurance and Medicare - provided under social security legislation. These taxes are paid by both employers and employees. Improvements in, and extensions of, our social security programs, plus growth of the labor force, have resulted in very significant increases in payroll taxes in recent years. In 1995 employees and employers each paid a tax of 7.65 percent on the first $61,200 of an employee's annual earnings. Also, employers and employees each pay a 1.45 percent tax on all wages to finance Medicare.

Corporate Income Tax The Federal government also taxes corporate income. This corporate income tax is levied on a corporation's profits - the difference between its total revenue and its total expenses. The basic rate is 35 percent, which applies to annual profits above $10 million. A firm with profits of $15 million would pay corporate income taxes of $1,750,000 (=$5 million*35). Firms making annual profits less than $10 million are taxed at lower rates.

Excise Taxes An excise tax is a sales tax, but it is aimed at specific goods and services. The federal government taxes such things as tires, cigarettes, liquor, gasoline, and phone calls. Most excise taxes are levied by the federal government, although state and local governments often levy taxes on the same items. Cigarettes and gasoline, for example, are subjected to a federal excise tax as well as to excise taxes in many states.

Excise taxes, which account for about 3 percent of federal revenue, have another purpose beside serving as a source of revenue. They tend to reduce consumption of certain products of which the federal government takes a dim view.

Excise taxes are generally regressive because they tend to fall more heavily on the poor and working class. The tax on a pack of cigarettes is the same whether you're rich or poor, but it's easier for the rich person to handle 60 or 80 cents a day than a poor person. The same is true of liquor and gasoline. In fact, a tax on most consumer goods is regres­sive because the poor tend to spend a higher proportion of their incomes on consumption than the rich.

Individual income tax, Social Security tax, and corporate income tax receipts provide the federal government with more than 90 percent of its tax receipts.

Federal government does not levy a general sales tax; sales taxes are the bread and butter of most state governments.

23.2 Find in the text the English equivalents of the following words and word-combinations:

1. пенсійні та соціальні гарантії

2. похилий

3. той, хто втратив працездатність

4. той, хто потрапив у скрутне становище

5. годувальник

6. національна оборона держави

7. підкреслювати, робити наголос

8. готовність, підготовка

9. державний борг

10. федеральний дохід

11. податкові надходження

12. податкове управління

13. віха

14. пожвавлення, підйом, відродження

15. максимальна гранична податкова ставка

16. додатковий податок на прибуток

17. давати право

18. стандартне відрахування з обкладеного податку

19. пільги, привілеї

20. утриманець

21. податок на зарплату

22. безкоштовна медична допомога

23. вичерпувати свій запас

24. внесок

25. страхова премія

26. податок на прибуток корпорацій

27. акцизний збір

28. стягувати податки, обкладати податком

29. податкові надходження

23.3 Are these statements true or false? Correct the false ones.

a) Income security and national defense are the main Federal expenditures.

b) Personal income, payroll, corporate income taxes and excise taxes are the primary sources of revenue.

c) The most important source of tax revenue is the federal excise tax.

d) The federal government taxes such things as cigarettes, gasoline and paper products.

e) Payroll taxes are paid by both hirers and office workers.

f) Excise taxes are usually progressive.

23.4 Define the key sentence(s) of each part of the text and translate them into Ukrainian.

23.5. Translate the text into Ukrainian in written form.

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