In the US, the government has three primary sources of tax revenue: 1) personal income
tax which, as you can see from this pie chart, accounts for the lion’s share of the federal
government's revenue; 2) corporate income tax, typically around 10% the overall tax
receipts in the US; and 3) Social Security tax, or payroll tax.
Together, these three categories make up nearly all of the federal government’s tax revenue.
The small portion that's left includes sources like gas tax, taxes on traded goods, or estate
taxes.
In fiscal year 2007, this meant that the federal income was $2.568 trillion.
On the flip side, federal expenditures in fiscal 2007 were $2.730 trillion.
What does the government spend our tax dollars on?
Well, remember that the government provides many, many services, but here are the larger
spending categories based on IRS data for 2007:
Social Security, Medicare and other retirement account for 38% of overall spending.
National defense, veterans, and foreign affairs, 23%; physical, human and community development,
9%; social programs, 19%; law enforcement and general government, 2%; and net interest
on the debt, 9%.
If you’d like a little more information about what's included in each of these categories.
I got this data from the IRS 1040 form so you can always look it up on the Internet
-- they have a lot of explanation about what goes in what category.
Based on the 2007 data, I can see that the government is actually spending $.162 trillion
-- that's $162 billion -- more than the tax revenues that it's bringing in.
This overspending in a single year is the budget deficit.
The sum of all the deficits and surpluses we've ever run – yes, we have had surpluses,
the most recent being very briefly in 1969, then again for a few years from 1997 to 2001
– is the national debt.
In 2007, the debt was sufficiently large that just the interest payment accounted for 9%
of the $2.73 trillion in government spending; or, the interest payment was $245.7 billion.
There are recurring debates as to whether we should revisit our tax system and simplify
with a flat tax.
So that you can think about this, let me explain the three types of income tax structures,
1) progressive tax, 2) proportional, or flat, tax and 3) regressive tax.
The first type, the progressive tax, is the system that we have now, where the tax rate
rises as a person's taxable income rises.
The reasoning behind this system is that the wealthier will bear a larger share of the
tax burden, and the poor will bear a smaller share.
The second type of tax system, the proportional, or flat, tax, applies the same tax rate to
all income levels.
So for example, a person making $10,000 would pay $1000 under a 10% flat tax, whereas a
person making $100,000 would pay $10,000 in taxes.
Many people feel that this would be a much fairer, and simpler, way for us to run our
tax system.
The typical argument against this system is that the money actually means more to someone
living below the poverty level; the poorer taxpayer has only $9000 to live on, but the
wealthier taxpayer still has $90,000.
The third type is a regressive tax, where the tax rate decreases the more money you
make.
Who would ever use a system like that?
Well, in fact our sales taxes take a bigger bite out of the poor, who spend all of their
income (and therefore get taxed on all of their income) than from the wealthy, who pay
sales tax out of a portion that they spend, but not on the portion that they save or invest.
This is why many states will not have sales tax on essential items like food.
Now that you know something about the different tax structures, you can decide: which type
of tax would you prefer?
NEXT TIME: Money TRANSCRIPT00(MACRO) EPISODE 28: TAXES AND
BUDGET