Exercises: Types of Taxes and Who Collects Them

For each tax, say whether it is mainly collected by the federal, state, or local government (some can have more than one answer):

(a) federal income tax;

(b) FICA payroll tax (Social Security and Medicare);

(c) sales tax at the register;

(d) property tax on a home.

Noah buys sneakers priced at $\$80$. The sales tax rate is 7%. Calculate the sales tax and the total he pays at the register.

Match each tax revenue source to a public service it commonly helps pay for:

(a) local property taxes;

(b) FICA payroll taxes;

(c) federal gas taxes.

Services: public schools; highways; Social Security and Medicare benefits.

A home in a Houston suburb has an assessed value of $\$250{,}000$. The local property tax rate is 1.2% of assessed value per year.

(a) Calculate the yearly property tax.

(b) Calculate the monthly amount a homeowner should set aside.

(c) Which level of government usually receives this tax, and what does it commonly pay for?

Emma earns $\$1{,}800$ gross every two weeks. Her employer withholds FICA (6.2% for Social Security and 1.45% for Medicare) and 10% of her gross for federal income tax. Her state has no income tax.

(a) Calculate the Social Security tax, the Medicare tax, and the total FICA.

(b) Calculate the federal income tax withheld.

(c) Calculate her net pay for the period.

Isabella buys a laptop bag and accessories for $\$240$ before tax. The state sales tax is 6%, and the city adds a local sales tax of 1.5%.

(a) Calculate the combined tax rate and the total tax.

(b) How much goes to the state and how much to the city?

(c) What is the final price she pays?

Daniel earns $\$40{,}000$ a year and spends $\$22{,}000$ a year on items subject to sales tax. He is comparing two hypothetical states.

• State A: no state income tax, 8% sales tax.

• State B: 4% state income tax (applied to all of his income to keep things simple), 5% sales tax.

(a) Calculate his yearly state income tax plus sales tax in each state.

(b) Which state costs him less in these two taxes?

(c) Argue why this comparison alone is not enough to decide where to live, for example by considering property taxes, services, and who spends a larger share of income.

A town has 4,000 homes with an average assessed value of $\$200{,}000$. The property tax rate is 1.5%. The town budget is $\$12{,}000{,}000$: schools $\$7{,}500{,}000$, police and fire $\$3{,}000{,}000$, roads $\$1{,}500{,}000$.

(a) Calculate the revenue the property tax raises and show it matches the budget.

(b) Voters want $\$1{,}800{,}000$ more for schools. Calculate the new rate needed and the extra yearly tax on the average home.

(c) Argue for or against the increase, describing benefits of the tax revenue and costs to households.