Public spending and taxes

Make a list of six things paid for with public money that you have used this month (high school, the local health clinic, street lighting, the library, the park, the police) and explain what would happen if each was paid for directly per user: who could afford high school or an operation?

The figure shows how the Valdeluz city council allocates its budget across its four main categories, as percentages. The figure for culture and sports is covered.

1. a) Calculate what percentage of the budget goes to culture and sports, knowing that the four categories total $100\ \%$.
2. b) If the total budget is $\$2,000,000$, calculate how many dollars go to each of the four categories.

The federal budget works like that of a giant household: on one side the revenue (taxes and payroll contributions), on the other the spending (healthcare, education, Social Security).

1. a) Explain what happens if it spends more than it takes in (a deficit: it has to borrow) and if it takes in more than it spends (a surplus).
2. b) Compare it with your own monthly budget: what do you do when your expenses exceed your allowance?

Not everything paid to the government is a tax: fees are paid for a specific service you use, like the municipal swimming pool, trash collection or the driver's license exam.

1. a) Explain the difference between a tax and a fee with those examples.
2. b) Say which way of funding the public library seems fairer to you: with a fee only for those who use it or with a tax we all pay, and give reasons for your answer.

Your city council sets aside $\$50,000$ as a participatory budget: residents propose and vote on projects. The finalist proposals are: fixing the dog park ($\$8,000$), a bike path ($\$35,000$), Wi-Fi in the town square ($\$7,000$) and benches with shade ($\$10,000$).

1. a) Choose which projects you would fund without exceeding the budget and justify them with criteria (how many people use them, urgency, price per beneficiary).
2. b) Explain what a town gains by deciding part of its spending this way and what risk it has (that only the most active people vote).

Direct taxes tax what you earn or own; indirect taxes tax what you spend. Classify these taxes as direct or indirect: (a) federal income tax deducted from a paycheck; (b) sales tax on a video game; (c) corporate income tax, paid by a company on its profits; (d) sales tax on bread; (e) vehicle registration fee for a car. Then explain the difference in your own words.

When you buy a pair of sneakers for $\$60$ with sales tax included, the store does not keep that tax: it holds on to it and pays it to the tax authorities every quarter.

1. a) Explain who really pays sales tax (the final buyer) and who acts as the collector (the store).
2. b) Argue why the government uses stores to collect it instead of asking each of us for the sales tax at the end of the year.

A game console costs $\$350$ excluding sales tax, and the standard rate for this tax is $21\ \%$.

1. a) Calculate how many dollars of sales tax are paid and the final price of the console.
2. b) In another store, the same console displays $\$423.50$ with sales tax already included: calculate what portion of that price is sales tax.

At the café, a set menu costs $\$11$ before sales tax; restaurants have a reduced rate of $10\ \%$.

1. a) Calculate the final price you pay.
2. b) If that same menu were taxed at the general rate of $21\ \%$, calculate the new price and the difference.
3. c) Explain why the government applies reduced rates to certain products (restaurant meals, transportation, culture) instead of the general rate for everything.

Two families from the same city have the following monthly income and consumption patterns:

• Family A: Net income of $\$1,200$. Allocates $\$1,100$ to consumption ($\$700$ on goods with a standard sales tax of $21\ \%$ and $\$400$ on basic food subject to the super-reduced sales tax of $4\ \%$) and saves $\$100$.

• Family B: Net income of $\$5,000$. Allocates $\$2,500$ to consumption ($\$2,000$ on goods at $21\ \%$ and $\$500$ on food at $4\ \%$) and saves $\$2,500$.

1. a) Calculate the total amount each family pays in sales tax and calculate the effective tax burden (the percentage that the sales tax paid represents relative to each household's total income).
2. b) Based on your calculations, rigorously demonstrate whether the sales tax behaves as a regressive, proportional, or progressive tax with respect to household income.
3. c) To combat inflation, the federal government is considering two options: temporarily eliminating the sales tax on basic food for the entire population or keeping the tax and granting a direct monthly transfer of $\$60$ to families with incomes below $\$1,500$. Evaluate both alternatives in terms of redistributive justice and cost to public finances.

An imaginary tax operates in brackets: $10\ \%$ is paid on the first $\$1,000$ of monthly salary, and $20\ \%$ on anything above $\$1,000$. Emma earns $\$900$ per month and Noah, $\$2,000$.

1. a) Calculate how much each person pays per month.
2. b) Calculate what percentage of their total salary each person pays and explain why this tax is called progressive.
3. c) Compare this with a flat (proportional) tax of $15\ \%$ for everyone: who would win and who would lose?

In the country of Tributania, income tax has two brackets: the first $\$12,000$ a year is taxed at $10\ \%$ and anything above that, at $25\ \%$. Nora earns $\$10,000$ a year and Paul earns $\$20,000$.

1. a) Calculate how much each one pays (careful: Paul pays $10\ \%$ on his first $\$12,000$ and $25\ \%$ only on the rest).
2. b) Calculate the average rate each one pays on their total salary.
3. c) Explain why the system is progressive even though Paul doesn't pay $25\ \%$ on his whole salary.

In Equilandia there live three families: A earns $\$1,000$ a month, B, $\$2,000$, and C, $\$5,000$. Two systems are compared: (1) a proportional tax of $20\ \%$ for everyone; (2) a progressive tax: $10\ \%$ up to $\$1,500$ and $30\ \%$ above that.

1. a) Calculate how much each family pays in each system.
2. b) Calculate each family's average rate in the progressive system.
3. c) Analyze which system redistributes more and defend which you would choose for a country with a lot of inequality, with an economic argument and one of justice.

Every spring many workers file their annual tax return: they settle accounts with the IRS for what was withheld from their paychecks the previous year.

1. a) Explain why some get money back (too much was withheld) and others have to pay (too little was withheld, for example from having had two employers).
2. b) Explain what it means that federal income tax is paid "on account" every month through paycheck withholding.

Besides taxes, workers and companies pay Social Security contributions.

1. a) Explain what you get in exchange for contributing: Medicare health coverage, unemployment benefits, future Social Security retirement benefits, and disability or paid family leave.
2. b) Give an example of each benefit in a family you know, real or made up.

Here is the simplified paycheck stub for Teo's mother: gross salary $\$1,400$, Social Security and Medicare contributions $\$95$, federal income tax withholding $\$140$.

1. a) Calculate the net salary, the amount that actually goes into the bank account.
2. b) Explain what the contributions are used for (retirement benefits, healthcare) and what the federal income tax withholding pays for.
3. c) Her coworker earns the same gross salary but has $\$180$ withheld for federal income tax: give a possible explanation (family situation, number of children) and calculate the difference in net salary between them.

Samira's first paycheck: gross annual salary of $\$15,400$ in $14$ payments, with $6.35\ \%$ in Social Security contributions and an $8\ \%$ federal income tax withholding.

1. a) Calculate the monthly gross.
2. b) Calculate the approximate monthly deductions and the net amount that will reach her bank.
3. c) Explain the difference between gross and net, and why, when negotiating a salary, you must always ask about the annual gross.

The plumber offers your neighbor two prices to fix the boiler: $\$400$ with an invoice ($21\ \%$ sales tax included) or $\$350$ "without an invoice".

1. a) Calculate how much sales tax the IRS misses out on receiving with the second option (a portion of the $\$400$ is sales tax).
2. b) Explain who loses out from the deal and what this practice is called.
3. c) Reason why people sometimes accept it despite everything.

In a state, it is estimated that about a third of plumbing, masonry, and repair services are carried out without an invoice ("under the table"). A self-employed worker charges $\$1,200$ plus sales tax ($21\ \%$) for an installation, but offers the client to do it for $\$1,100$ in cash without issuing an invoice.

1. a) Analyze the immediate incentives for both to evade taxes and demonstrate the hidden costs or damages that this practice generates in the medium and long term on three fronts: the social protection of the worker themselves, the viability of law-abiding businesses, and the quality of essential public services.
2. b) Compare two measures to combat this situation:

• Measure 1: Ban cash payments for any professional transaction over $\$500$.

• Measure 2: Allow individuals to deduct $15\ \%$ of home renovation expenses on their federal income tax, provided they present an official invoice.

Evaluate which of the two measures more effectively encourages voluntary compliance and foresee what drawbacks or inspection costs each presents.

1. c) Argue why a high volume of tax evasion ultimately forces the federal government to increase the tax burden on taxpayers who do pay.

A country's economy unexpectedly enters a recession: GDP drops by $2.5\ \%$ and the unemployment rate rises from $12\ \%$ to $16\ \%$. Without the federal government amending any tax laws or deciding on new spending programs, public accounts shift from being in balance to running a deficit of $5\ \%$ of GDP.

1. a) Explain in detail the functioning of the automatic stabilizers that account for this budget trend: analyze what happens spontaneously to federal income tax and sales tax revenues, as well as to spending on social transfers.
2. b) Two economic perspectives debate the appropriate response to this scenario:

• Position A (budgetary austerity): cut public spending immediately to close the deficit and meet fiscal stability targets.

• Position B (countercyclical stimulus): sustain public spending through borrowing to revive aggregate demand.

Predict the short-term repercussions of implementing position A on consumption and unemployment, and take a reasoned stance justifying what risks position B also entails if public debt was already high.