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Lesson: 9.2 The Federal Tax System

The Tax Reform Act of 1981 actually used taxes to encourage savings. It provided Americans of
all income brackets with an individual retirement arrangement (IRA), or account, to which they
could contribute a portion of their income without paying income taxes. What Congress had not
counted on was that IRAs were far more popular with the wealthiest rather than the poorest
Americans. As a result, the Tax Reform Act of 1986 put a ceiling on the income level of
individuals who would qualify for tax-free contributions.
I. Individual Income Taxes
A. The federal government collects about 45 perc ent of its revenue from the individual income
B. Taxes are typically withheld from individual’s paychecks, with employers sending the taxes
directly to the Internal Revenue Service.
C. Individuals file a tax return on or before April 15 each year; if taxes withheld are more than the
taxes owed, the individual receives a refund; if not, the individual makes a pay ment of the tax
D. The individual inc ome tax is a progressive tax because individuals earning higher inc omes pay
higher tax rates.
• Discussion Question
Why do you suppos e the individual making $100,000 per year pays about the same tax rat e as
the person making $35,000 per year? (Ans wers will vary but the students should demonstrate an
understanding of the current progressive tax policy’s complexity, with the wealthy tak ing
advantage of many exemptions and ot her loopholes.)
II. FICA Tax es
A. The Federal Insurance Cont ributions Act (FICA ) tax pays for Social Security and medicare.
B. FICA it is the second largest source of government revenue.
C. The FICA tax is a regressive tax. Social Security is partly a proportional tax and partly a
regressive tax.
• Discussion Question
Why do you think some Americans call the Social Security tax the “tax of the middle and lower
classes”? (Ans wers will vary, but students may indicate that because it is a partly regressive tax,
these economic classes bear more of the burden of Social Security taxes than the wealthy class.)
III. Corporate Income Taxes
A. Corporations pay a tax on their profits because they are considered legal entities.
B. Corporate tax is the third largest source of government revenue.
• Discussion Question
How would you evaluat e the effectiveness of the corporat e income tax based on the fairness,
simplicity, and efficiency test? (Answers will vary, but students should support their opinions with
IV. Other Federal Taxes
A. The excise tax is a regressive tax on the manufacture or sale of selected items.
B. The estate tax deals with the transfer of property when a person dies.
C. The gift tax is placed on large donations of money or wealth and is paid by the
D. A customs duty is a charge levied on goods brought in from other countries.
E. The Reagan administration implemented user fees for the use of goods or services.
F. User fees are an example of taxation based on the benefit principle.
• Discussion Question
Why do you suppos e customs duties are no longer a large source of government revenue?
(Ans wers will vary, but students may indicate that the United States government encourages
international trade and heavy customs duties would discourage such trade.)

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