Taxes Flashcards
Current Social Security Benefit Formula
Worker’s average monthly earnings are determined by taking the annual earnings for each of the worker’s 35 highest earning years
The amount the worker earned in each year before that worker turned 60 is then adjusted by the increase in the average wage level in the U.S. economy between the year in which the wages were earned and the year the worker reached 60 years of age.
This ensures that the percentage of pre-retirement wages that are replaced remain constant across generations.
This is WAGE INDEXING
How is SS calculated?
The earnings levels for these 35 years are then averaged and divided by 12. The result is the worker’s average indexed monthly earnings.
The Social Security benefit formula is then applied to the workers average monthly earnings.
90 percent of the worker’s first $612 of average indexed monthly earnings;
Plus 32 percent of average indexed monthly earnings between $612 and $3,689;
Plus 15 percent of any average monthly covered earnings above that
What is The Consumer Price Index (CPI)?
It is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.
Budget Control Act of 2011 (BCA)
Imposed caps on discretionary programs to reduce their spending by > 1 trillion between 2012-2021.
Established a Joint Select Committee on Deficit Reduction
Propose legislation to further reduce deficits by another 1.2 trillion (2012-2021)
Establish a “sequestration” procedure to put pressure on the committee to compromise
Sequestration = automatic cuts
Features of the Budget Control Act
Caps on annual appropriations bills which cover discretionary (non-entitlement) programs – reduce projected spending by > 1 trillion through 2021 Defense Education Low income housing National parks Medical research FBI, EPA Many other programs
Tax Revenues
Main sources of funding for government expenditures
There are various types of taxes, however, personal income taxes are the primary source of government revenue, with payroll taxes as a close second.
Though Americans are famously “anti-tax”, we pay a smaller proportion of taxes relative to GDP than most other OECD countries, except for Mexico and Chile.
Mandatory programs that are exempt from sequestration
Social Security
Medicaid
Children’s Health Insurance Program
SNAP (Food Stamps)
SSI (Supplemental Security Income)
Refundable Tax Credits
Child Tax Credit
Earned Income Tax Credit
Veteran’s Compensation and other benefits
Federal retirement
Where do the $54.7 billion in non-defense cuts come from?
Cuts are occurring in both mandatory (entitlement) and discretionary (non-entitlement) programs.
Cuts include:
Cuts in Medicare payments to providers –
providers will be reimbursed 98 cents on the dollars (about 11 billion)
About $5.2 billion in cuts in other mandatory programs
The largest of which supports farm prices, others include Student loans Vocational rehabilitation Mineral leasing payments Social Services Block Grant Dozens of smaller programs
This is the 16.2 billion in cuts from mandatory (entitlement) spending
What happens 2014-2021?
Required defense spending cuts in each year from 2014-2021
Appropriations committees will decide how to live within reduced defense funding caps
For entitlements
Medicare providers will be paid 98 cents on the dollar for 2014-2021
since Medicare costs will rise, this change will bring in
> $$ each year, projected to be $17.8 billion in 2021 (or 33% of the cuts needed)
Proportional cuts for other non-exempt mandatory programs
For discretionary programs will go through the appropriations process as Congress writes bills to remain within the newly reduced caps for total non-defense appropriations.
New Spending Caps: 2017
Defense Appropriations subject to caps:
634 billion
Non-defense Appropriations subject to caps:
553 billion
Tax Expenditures
What is a tax expenditure?
A loss of tax revenue because some item is excluded from the tax base.
The government has maintained a tax expenditure budget since 1972
“…Revenue losses attributable to provisions of the Federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of a tax liability.” (Congressional Budget and Impoundment Control Act of 1974 (PL 93-344), sec 3(3))
Examples of each tax structure
Regressive taxes:
Social Security payroll tax
Regressive tax – because everyone is taxed at a certain % up to a wage “cap” (wages over this cap amount are not subject to the tax).
Regressive tax — Sales & amp; “sin” taxes, they are a % tax at point of purchase.
Lower income persons pay a higher % of their income than higher income persons to purchase things.
Progressive taxes:
Income taxes are progressive, through application of tax brackets and marginal tax rates.
Proportional taxes:
E.g., “flat tax proposals”—raised as an issue in 1996 Presidential campaign, but didn’t catch on—everyone pays the same percentage on their income.
Medicare tax (2.9% split btw employer and employee; no wage cap).
Regressive taxes:
Social Security payroll tax is regressive because everyone is taxed at a certain % up to a wage “cap” (wages over this cap amount are not subject to the tax).
Sales & “sin” taxes can also be thought of as regressive—they are a % tax at point of purchase. Lower income persons pay a higher % of their income than higher income persons to purchase things.
Progressive taxes:
Income taxes are progressive, through application of tax brackets and marginal tax rates.
Proportional taxes:
E.g., “flat tax proposals”—raised as an issue in 1996 Presidential campaign, but didn’t catch on—everyone pays the same percentage on their income. Medicare tax (2.9% split btw em
Proportional taxes:
E.g., “flat tax proposals”—raised as an issue in 1996 Presidential campaign, but didn’t catch on—everyone pays the same percentage on their income. Medicare tax (2.9% split btw employer and employee; no wage cap).
“Sin” taxes
The idea is that the price of a pack of cigarettes should account for second-hand smoke and the impact of cigarette smoking on the health and enjoyment of others.
often referred to as “negative externalities”
The price of alcohol should include the costs of things like drunk driving or other costs to society.
Also – sin taxes may be more politically feasible if a small group (smokers) or a politically unpopular group (heavy drinkers) are involved.
Property taxes
Among home-owners, could be thought of as proportional.
The State Constitution requires that property tax rates be uniformly applied, although property tax rates vary by city, town, or village because there is variation in what is needed to support municipal operations.
Size of property tax bill is tied to the value of one’s home. Rising home values can create tax burden.
Property taxes are also used to support the county and school district operations.
Tax Deductions and Exemptions
Deductions and exemptions are examples of
“tax expenditures”, or foregone revenue to government.
Ex: standard deduction and exemptions (e.g. for self and number of dependents) in filing tax returns
There are deductions for home mortgages, charitable giving, and educational loans, etc. However, they sometimes don’t benefit those with lower incomes, and they tend to favor those with higher incomes (although some things are capped, like educational loans).
Tax deductions and exemptions can result in refunds of taxes paid.
Tax Credits
Tax credits are generally progressive in nature.
They are different from a refund for overpaid taxes. They change the amount owed, and can result in payments back to individual greater than the amount owed.
Most assume some level of earnings
Tax credits do not generally count as income in determining eligibility for benefits such as W-2, Medicaid, Food Stamps, Supplemental Social Security (SSI) or public or subsidized housing.
Tax Credits vs. Tax Deductions
A “tax credit” entitles the taxpayer to subtract the amount of the credit (dollar-for-dollar) from the total federal income tax bill. Therefore:
Credit - reduces your total tax
A “tax deduction” is subtracted from your adjusted gross income before you calculate your federal income taxes. Therefore:
Deduction - reduces your gross income
Tax Credit
reduces your total tax
