The Federal Government

The U.S. federal government collects about two-thirds of the taxes in our economy. It raises this money in a number of ways, and it finds even more ways to spend it.

Receipts Table 12-2 shows the receipts of the federal government in 1999. Total receipts in this year were $1,806 billion, a number so large that it is hard to comprehend. To bring this astronomical number down to earth, we can divide it by the size of the U.S. population, which was about 272 million in 1999. We then find that the average American paid $6,639 to the federal government. A typical family of four paid $26,556.

The largest source of revenue for the federal government is the individual income tax. As April 15 approaches, almost every American family fills out a tax form to determine how much income tax it owes the government. Each family is required to report its income from all sources: wages from working, interest on savings, dividends from corporations in which it owns shares, profits from any small businesses it operates, and so on. The family's tax liability (how much it owes) is then based on its total income.

A family's income tax liability is not simply proportional to its income. Instead, the law requires a more complicated calculation. Taxable income is computed as total income minus an amount based on the number of dependents (primarily children) and minus certain expenses that policymakers have deemed "deductible" (such as mortgage interest payments and charitable giving). Then the tax liability is calculated from taxable income using the schedule shown in Table 12-3. This table presents the marginal tax rateā€”the tax rate applied to each additional dollar of income. Because the marginal tax rate rises as income rises, higher-income families pay a larger percentage of their income in taxes. (We discuss the concept of marginal tax rate more fully later in this chapter.)

Almost as important to the federal government as the individual income tax are payroll taxes. A payroll tax is a tax on the wages that a firm pays its workers. Table 12-2 calls this revenue social insurance taxes because the revenue from these taxes is earmarked to pay for Social Security and Medicare. Social Security is an income support program, designed primarily to maintain the living standards of the elderly. Medicare is the government health program for the elderly. Table 12-2 shows that the average American paid $2,239 in social insurance taxes in 1999.

Receipts of the Federal Government: 1999

Receipts of the Federal Government: 1999

Amount (in billions)

Amount per Person

Percent of Receipts

Individual income taxes Social insurance taxes Corporate income taxes Other

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