Presentation Plus! Economics: Principles and Practices Copyright © by The McGraw-Hill Companies, Inc. Developed by FSCreations, Inc., Cincinnati, Ohio 45202 Send all inquiries.

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Presentation Plus! Economics: Principles and Practices
Copyright © by The McGraw-Hill Companies, Inc.
Developed by FSCreations, Inc., Cincinnati, Ohio 45202
Send all inquiries to:
GLENCOE DIVISION
Glencoe/McGraw-Hill
8787 Orion Place
Columbus, Ohio 43240
Chapter 9
Sources of
Government Revenue
CHAPTER INTRODUCTION
SECTION 1 The Economics of
Taxation
SECTION 2 The Federal Tax System
SECTION 3 State and Local Tax
Systems
SECTION 4 Current Tax Issues
CHAPTER SUMMARY
CHAPTER ASSESSMENT
3
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Press the ESC key at any time to exit the presentation.
Economics and You
Have you wondered or questioned why
the paychecks you’ve seen have so many
deductions? In Chapter 9, you will learn
more about taxes and revenues raised by
all levels of government.
Click the Speaker button to
listen to Economics and You.
4
Chapter Objectives
Section 1: The Economics of Taxation
• Explain the economic impact of taxes. 
• List three criteria for effective taxes. 
• Understand the two primary principles of
taxation. 
• Understand how taxes are classified.
5
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Chapter Objectives
Section 2: The Federal Tax System
• Explain the progressive nature of the
individual income tax. 
• Describe the importance of the corporate
tax structure. 
• Identify other major sources of federal
revenue.
6
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to display the information.
Chapter Objectives
Section 3: State and Local Tax Systems
• Explain how state governments collect
taxes and other revenues. 
• Differentiate between state and local
revenue systems. 
• Interpret paycheck deductions.
7
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to display the information.
Chapter Objectives
Section 4: Current Tax Issues
• Describe the major tax reforms since
1980. 
• Debate the advantages and
disadvantages of the value-added tax. 
• Explain the features of a flat tax. 
• Discuss why future tax reforms will occur.
8
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to display the information.
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Study Guide
Main Idea
Taxes are the single most important way of raising
revenue for the government. 
Reading Strategy
Graphic Organizer As you read the section,
complete a graphic organizer similar to the one
on page 223 of your textbook by listing the
criteria for taxes to be effective. Then, define
each of the criteria in your own words.
10
Click the mouse button or press the Space Bar to display the
information. Section 1 begins on page 223 of your textbook.
Study Guide (cont.)
Key Terms
– sin tax 
– proportional tax 
– incidence of a tax 
– average tax rate 
– tax loophole 
– progressive tax 
– individual income tax 
– marginal tax rate 
– sales tax 
– regressive tax
– benefit principle of
taxation 
– ability-to-pay principle
of taxation 
11
Click the mouse button or press the Space Bar to display the
information. Section 1 begins on page 223 of your textbook.
Study Guide (cont.)
Objectives
After studying this section, you will be able to: 
– Explain the economic impact of taxes. 
– List three criteria for effective taxes. 
– Understand the two primary principles of
taxation. 
– Understand how taxes are classified. 
Applying Economic Concepts
Equity What role does equity, or fairness, play
in administering taxes?
Click the Speaker button
to listen to the Cover
Story.
12
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information. Section 1 begins on page 223 of your textbook.
Introduction
• An enormous amount of money is required
to run the federal, state, and local
governments of the United States. 
• In 2003, all three levels of government
collected approximately $3 trillion—or
about $10,300 for every man, woman, and
child in the United States. 
• Whether we count the dollars, or the days
needed to earn the dollars, it all adds up to
a staggering sum.
13
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Introduction (cont.)
• Total revenue collections by all levels of
government have grown dramatically over
the years. 
• Even when adjusted for inflation and
population growth, these revenues
increased by nearly 800 percent since
1940.
14
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Introduction (cont.)
Figure 9.1
15
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to display the information.
Did You Know?
• To help the ailing yacht industry, which
suffered great losses after the 1991 luxury
tax was imposed, Representative Patrick
J. Kennedy introduced into the House of
Representatives the Boat Building
Investment Act of 1999. Its goal was to
allow a personal tax credit of 20 percent
of the cost, up to two million dollars.
Kennedy’s hope was that this change in
the income tax code would once again
encourage yacht construction in the
United States.
16
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to display the information.
Economic Impact of Taxes
• Taxes affect the factors of production and,
therefore, resource allocation. 
• A tax placed on a good at the factory raises
production costs (supply curve shifts to the
left); if demand stays the same, the
equilibrium price goes up. 
• Taxes affect the economy by encouraging
or discouraging certain activities. 
• A sin tax is a high-percentage tax that
raises revenue while reducing
consumption of a socially undesirable
product.
17
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Economic Impact of Taxes
• Taxes affect productivity and economic
growth by changing the incentives to
save, invest, and work. 
• The incidence of a tax is the final burden
of the tax: it is easier for a producer to
shift the incidence of a tax to the
consumer if the demand is inelastic; the
more elastic the demand, the more likely
the producer will absorb a greater portion
of the tax.
18
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Economic Impact of Taxes
Figure 9.2a
19
Figure 9.2b
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to display the information.
Discussion Question
In your opinion, how effective is a sin
tax?
Answers will vary. Students should
support their opinion with examples
of sin taxes.
20
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to display the answer.
Criteria for Effective Taxes
• Taxes are effective when they are
equitable, simple, and efficient. 
• Criterion 1: equity or fairness; fairness is
subjective, but taxes are considered fairer
if they have fewer loopholes—exceptions,
deductions, and exemptions. 
• Criterion 2: simplicity; tax laws should be
easy to understand. 
• Criterion 3: efficiency, which means it is
easy to administer and is successful at
generating revenue.
21
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to display the information.
Discussion Question
How might congress have better
analyzed the potential efficiency of the
1991 luxury tax on yachts and small
aircraft before passing the tax law?
Students should consider studies
congress might have conducted on
numbers of yachts and aircraft,
employment in each industry, etc.
22
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to display the answer.
Two Principles of Taxation
• The benefit principle states that those who
benefit from government goods and
services should pay in proportion to the
amount of benefits they receive. 
• The limitations of this principle are that
many government services provide the
greatest benefit to those who can least
afford them and that benefits are hard to
measure.
23
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Two Principles of Taxation (cont.)
• The ability-to-pay principle is the belief that
people should be taxed according to their
ability to pay, regardless of the benefits
they receive. 
• The ability-to-pay principle is based on two
ideas: that societies cannot always
measure the benefits derived from
government spending, and that people with
higher incomes suffer less discomfort in
paying taxes than people with lower
incomes.
24
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Discussion Question
How would you measure the benefits
for a proposed tax?
Answers will vary. Students should
support their answers with a
rationale.
25
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to display the answer.
Types of Taxes
• A proportional tax is one that imposes the
same percentage on everyone, regardless
of income. 
• A progressive tax is one that imposes a
higher percentage of tax on persons with
higher income. 
• A regressive tax is one that imposes a
higher percentage on low incomes than on
high incomes.
26
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to display the information.
Types of Taxes
Figure 9.3
27
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to display the information.
Discussion Question
What benefits does the government
enjoy in having a progressive income
tax?
As Americans become more
successful and earn higher incomes,
the government’s revenue
increases—for example, stock
market dividends are taxable, leading
to higher government collections.
28
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to display the answer.
Section Assessment
Main Idea Using your notes from the
graphic organizer activity on page 223,
list the ways that taxes influence the
economy.
Taxes influence the economy through
resource allocation, behavior
adjustment, productivity and growth,
and the incidence of a tax.
29
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to display the answer.
Section Assessment (cont.)
Describe the economic impact of
taxes.
They affect resource allocation,
consumer behavior, and the nation’s
productivity and growth.
30
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to display the answer.
Section Assessment (cont.)
List three criteria used to evaluate
taxes.
Three criteria that are used to
evaluate taxes are equity, simplicity,
and efficiency.
31
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to display the answer.
Section Assessment (cont.)
Summarize the two main principles of
taxation.
The two main principles of taxation
are the benefit principle of taxation
and the ability-to-pay principle.
32
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to display the answer.
Section Assessment (cont.)
Explain the characteristics of
proportional, progressive, and
regressive taxes.
proportional: impose same percentage rate
of taxation on everyone
progressive: impose higher percentage rate
on persons with higher incomes
regressive: impose a higher percentage
rate on lower incomes as compared to high
incomes
33
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to display the answer.
Section Assessment (cont.)
Drawing Inferences Think about the
last tax you paid. Using the criteria for
progressive, proportional, and
regressive taxes, determine which type
of tax you think it is and explain why.
34
Section Close
The only fair tax is a tax on
someone else.
How can equity be achieved in the tax
system?
35
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Study Guide
Main Idea
The federal government raises revenue from a
variety of taxes. 
Reading Strategy
Graphic Organizer As you read the section,
complete a graphic organizer like the one on
page 231 of your textbook to identify the federal
government’s most important revenue sources.
37
Click the mouse button or press the Space Bar to display the
information. Section 2 begins on page 231 of your textbook.
Study Guide (cont.)
Key Terms
– payroll withholding
system 
– corporate income
tax 
– Internal Revenue
Service (IRS) 
– excise tax 
– tax return 
– indexing 
– FICA 
– medicare 
– payroll tax 
38
– luxury good 
– estate tax 
– gift tax 
– customs duty 
– user fee
Click the mouse button or press the Space Bar to display the
information. Section 2 begins on page 231 of your textbook.
Study Guide (cont.)
Objectives
After studying this section, you will be able to: 
– Explain the progressive nature of the
individual income tax. 
– Describe the importance of the corporate tax
structure. 
– Identify other major sources of federal
revenue. 
Applying Economic Concepts
Federal Taxes You, the American taxpayer, are
the source of most of the money the government
spends. Almost all federal government revenue
Click the Speaker button to
comes from taxation.
listen to the Cover Story.
39
Click the mouse button or press the Space Bar to display the
information. Section 2 begins on page 231 of your textbook.
Introduction
• The federal government collects taxes from
a number of sources. 
• The most important sources of government
revenue are individual income taxes, Social
Security taxes, and corporate income
taxes.
40
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to display the information.
Did You Know?
• 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 qualify for
tax-free contributions.
41
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Individual Income Taxes
• The Federal government collects about 48
percent of its revenue from the individual
income tax. 
• Taxes are typically withheld from
individual’s paychecks, with employers
sending the taxes directly to the Internal
Revenue Service.
42
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Individual Income Taxes (cont.)
• 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 payment of the tax balance.
Figure9.4
43
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to display the information.
Individual Income Taxes (cont.)
• The individual income tax is a progressive
tax because individuals earning higher
incomes pay higher tax rates.
Figure 9.5
44
Individual Income Taxes (cont.)
Figure 9.6A
45
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to display the information.
Discussion Question
Why do you think some Americans call
the Social Security tax the “tax of the
middle and lower classes?
Answers will vary but the 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.
46
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to display the answer.
FICA Taxes
• The Federal Insurance Contributions Act
(FICA) tax pays for Social Security and
medicare. 
• FICA it is the second largest source of
government revenue. 
• The FICA tax is a regressive tax. Social
Security is partly a proportional tax and
partly a regressive tax.
47
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to display the information.
FICA Taxes
Figure 9.6B
48
Discussion Question
Why do you suppose customs duties
are no longer a large source of
government revenue?
Answers will vary but the students
may indicate that the United States
government encourages international
trade and heavy customs duties
would discourage such trade.
49
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to display the answer.
Corporate Income Taxes
• Corporations pay a tax on their profits
because they are considered legal
entities. 
• Corporations tax is the third largest
source of government revenue.
50
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to display the information.
Discussion Question
How would you evaluate the
effectiveness of the corporate income
tax based on the fairness, simplicity,
and efficiency test?
Answers will vary, but students
should support their opinions with
rationales.
51
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to display the answer.
Other Federal Taxes
• The excise tax is a regressive tax on the
manufacture or sale of selected items. 
• The estate tax deals with the transfer of
property when a person dies. 
• The gift tax is places on large donations of
money or wealth and is paid by the donator.
52
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Other Federal Taxes (cont.)
• A customs duty is a charge levied on goods
brought in from other countries. 
• The Reagan administration implemented
user fees for the use of goods or services.

• User fees are an example of taxation based
on the benefit principle.
53
Discussion Question
Why do you suppose customs duties
are no longer a large source of
government revenue?
Answers will vary, but students may
indicate that the United States
government encourages international
trade and heavy customs duties
would discourage such trade.
54
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to display the answer.
Section Assessment
Main Idea Using your notes from the
graphic organizer activity on page 231,
list the federal government’s most
important revenue sources.
The federal government’s most
important revenue sources are
individual income taxes, FICA taxes,
and corporate income taxes.
55
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to display the answer.
Section Assessment (cont.)
Describe the progressive nature of the
individual income tax.
It imposes a higher percentage rate
of taxation on persons with higher
incomes.
56
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to display the answer.
Section Assessment (cont.)
Identify the main marginal tax
brackets in the corporate income tax
structure.
The main marginal tax brackets in the
corporate income tax structure are
15, 25, 34, and 35 percent.
57
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to display the answer.
Section Assessment (cont.)
Describe the other sources of
government revenue.
Government also raises revenue
through excise taxes, estate taxes,
gift taxes, customs duties, and user
fees levied for the use of a good or
service.
58
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to display the answer.
Section Assessment (cont.)
Categorizing Information Explain
and use an example to explain the
regressive nature of the current FICA
tax.
It is regressive because persons with
large incomes pay no Social Security
tax on income greater than $80,400.
59
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to display the answer.
Section Assessment (cont.)
Finding the Main Idea What is
indexing? What is its purpose?
Indexing is an upward revision of the
tax brackets to keep workers from
paying more in taxes due to inflation.
60
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to display the answer.
Section Close
Discuss what you think the three
most important sources of federal
revenue should be.
61
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Study Guide
Main Idea
State and local governments each rely on different
revenue sources. 
Reading Strategy
Graphic Organizer As you read the section,
complete a graphic organizer like the one on
page 238 of your textbook by describing why
sales taxes are effective ways to raise revenue.
63
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information. Section 3 begins on page 238 of your textbook.
Study Guide (cont.)
Key Terms
– intergovernmental revenue 
– property tax 
– tax assessor 
– payroll withholding statement
64
Click the mouse button or press the Space Bar to display the
information. Section 3 begins on page 238 of your textbook.
Study Guide (cont.)
Objectives
After studying this section, you will be able to: 
– Explain how state governments collect taxes
and other revenues. 
– Differentiate between state and local revenue
systems. 
– Interpret paycheck deductions. 
Applying Economic Concepts
Sales Tax When you purchase an item in most
states, why do you pay a fee in the form of a
sales tax?
Click the Speaker button to
listen to the Cover Story.
65
Click the mouse button or press the Space Bar to display the
information. Section 3 begins on page 238 of your textbook.
Introduction
• State and local governments, like the
federal government, raise revenue in
many ways. 
• They receive funds from sales taxes,
property taxes, utility revenues, and
through other methods. 
• Sometimes, they even tax us when we die.
66
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to display the information.
Did You Know?
• Ohio ranks fourth in the nation for lottery
ticket sales and revenues, after New York,
Texas, and Massachusetts. In 1998 it
reported total expenses and payments of
$2,192,761,403. Since the lottery started
in 1974, it has contributed $9 billion to the
state’s public educational system.
67
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to display the information.
State Government Revenue Sources
Figure 9.7
68
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to display the information.
State Government Revenue Sources
• Intergovernmental revenue are funds
collected by one level of government that
are distributed to another level. 
• Intergovernmental revenues are the largest
source of revenues for state and local
governments—about one-fourth of all state
revenues. 
• A sales tax is one levied on consumer
purchases for nearly all products.
69
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to display the information.
State Government Revenue Sources
• Employee retirement contributions make up
the third largest source of income. 
• Individual income tax revenues make up
the fourth largest source of income. 
• Other sources of revenue include interest
earnings on surplus funds; fees from stateowned colleges, universities, and schools;
corporate income taxes, and hospital fees.
70
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to display the information.
State Government Revenue Sources
Figure 9.8
71
Discussion Question
Why is the sales tax an easy way for
states to collect from consumers?
The tax is collected by the seller from
the buyer at the site of the purchase,
and the seller sends the funds into
the government on a regular basis.
72
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to display the answer.
Local Government Revenue Sources
• Intergovernmental revenues are generally
earmarked for education and public
welfare; they make up the largest source of
local government revenue. 
• Property taxes are levied on tangible and
intangible products; they make up the
second largest source. 
• Local governments receive revenues from
government-owned public utilities and
state-owned liquor stores.
73
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to display the information.
Local Government Revenue Sources
(cont.)
• Some towns and cities have a sales tax,
which is collected along with the state’s
sales tax. 
• Other sources of local income include
hospital fees, personal taxes, and public
lotteries.
74
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to display the information.
Discussion Question
For what government expenses are
your local property taxes earmarked?
What do you think of these
allocations?
Answer will vary, students should
look up this information and consider
if they think the allocations are
productive uses of the money.
75
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to display the answer.
Examining Your Paycheck
• Looking at your payroll withholding
statement will help you identify many of
your state and local government’s revenue
sources. 
• Additional deductions can be added to
payroll for retirement contributions,
purchases savings bonds, or credit unions.
76
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to display the information.
Examining Your Paycheck (cont.)
Figure 9.9
77
Discussion Question
To what levels of government do you
pay income taxes?
Answer will vary. Students who have
a part-time job should note Social
Security and other taxes.
78
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to display the answer.
Section Assessment
Main Idea Using your notes from the
graphic organizer activity on page 238,
write a definition in your own words of
what intergovernmental revenues are.
Intergovernmental revenues are
funds collected by one level of
government distributed to another for
expenditures.
79
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to display the answer.
Section Assessment (cont.)
Explain the four major sources of state
tax revenues.
The four major sources of state tax
revenues are sales tax,
intergovernmental revenues, individual
income taxes, employee retirement
contributions, and assessments levied
on state employees.
80
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to display the answer.
Section Assessment (cont.)
Explain the difference between state
and local revenue systems.
state: collect from intergovernmental
revenues, sales taxes, employee retirement
contributions, and individual income taxes
local: collect from intergovernmental
revenues, property taxes, public utilities and
state liquor store sales, and sales taxes
81
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to display the answer.
Section Assessment (cont.)
List the major types of state, local, and
federal taxes reflected on a paycheck.
Federal income tax, state income tax,
city income tax, and FICA are
reflected on a paycheck.
82
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to display the answer.
Section Assessment (cont.)
Drawing Conclusions State and
local governments receive revenue
from various sources. Which source do
you think best satisfies the tax criteria
listed in the chapter? Defend your
answer.
83
Section Close
What do you think is the most
equitable way of raising revenue for
state and local governments?
84
Click the mouse button to return to the Contents slide.
Study Guide
Main Idea
The consequence of tax reform was to make the
individual tax code more complex than ever. 
Reading Strategy
Graphic Organizer As you read the section,
complete a graphic organizer like the one on
page 244 of your textbook by listing the
advantages and the disadvantages of the flat tax.
Include a definition of flat tax in your own words.
86
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information. Section 4 begins on page 244 of your textbook.
Study Guide (cont.)
Key Terms
– accelerated depreciation 
– investment tax credit 
– surcharge 
– alternative minimum tax 
– capital gains 
– value-added tax (VAT) 
– flat tax
87
Click the mouse button or press the Space Bar to display the
information. Section 4 begins on page 244 of your textbook.
Study Guide (cont.)
Objectives
After studying this section, you will be able to: 
– Describe the major tax reforms since 1980. 
– Debate the advantages and disadvantages of
the value-added tax. 
– Explain the features of a flat tax. 
– Discuss why future tax reforms will occur. 
Applying Economic Concepts
Flat Tax Have you ever noticed how much time
your parents spend filling out their income tax
returns? What would a flat tax mean to them?
Click the Speaker button to
listen to the Cover Story.
88
Click the mouse button or press the Space Bar to display the
information. Section 4 begins on page 244 of your textbook.
Introduction
• The complexity of our tax code is not
accidental: it is the result of adjustments
and amendments by Congress to both
influence and reward behavior.
89
Did You Know?
• Congress’s Joint Economic Committee
reported that a flat income tax could raise
the same amount of government revenue
as the current income tax. The
congressional Budget Office calculated in
1995 that the progressive income tax with
its hundreds of exemptions, credits,
loopholes, and deductions could be
replaced by a flat income tax of 13.1
percent.
90
Tax Reform
• The Economic Recovery Act of 1981
reduced taxes for individuals and
businesses. 
• By the mid-1980s, Americans believed the
tax code favored the rich and powerful. 
• In 1986 Congressional tax reform limited
the tax brackets to 15 percent and 28
percent.
91
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to display the information.
Tax Reform (cont.)
• The Omnibus Budget Reconciliation Act of
1993 added two higher income tax brackets
but its goal was more to assist in balancing
the federal budget than in adjusting rates
for income levels. 
• By 1997 the government had high tax
revenues, so the Taxpayer Relief Act was
passed giving tax credits for children and
educational expenses, and reduced rates
to people with capital gains from long-term
investments in stocks and bonds.
92
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to display the information.
Discussion Question
What were some other components of
the 2001 tax bill?
An immediate refund check, higher
child tax credits, increased
deductions for college educational
expenses, and the elimination of the
estate tax (2010)
93
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to display the answer.
The Value-Added Tax
• A value-added tax (VAT) places a tax on
the value that manufacturers add to a
good at each stage of production. 
• Advantages to the VAT: the tax is levied
on the total amount of sales less the cost
of inputs; the incidence of the tax is widely
spread among the manufacturers
involved; it is easy to collect; it would
encourage people to save.
94
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The Value-Added Tax (cont.)
• Disadvantages
of the VAT:
taxpayers are
unlikely to notice
increases in VAT
taxes; it would
compete with
state sales
taxes; politicians
would lose
some power in
promoting pet
projects.
95
Figure 9.10
Click the mouse button or press the Space Bar
to display the information.
Discussion Question
Which tax do you favor—the income
tax or the value-added tax? Explain
your choice.
Answers will vary but students should
indicate why the advantages of the
tax they cite make it a more favorable
choice.
96
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to display the answer.
The Flat Tax
• A flat tax is a proportional tax on individual
income after a specified threshold has been
reached. 
• Advantages of the flat tax: it would be
simple to report; it would close or minimize
tax loopholes; it reduces the need for tax
accountants and much of the IRS; it could
lead to savings of up to $100 billion. 
• Disadvantages of the flat tax: it removes
the behavior incentive in the tax code; it
benefits those with high incomes; it shifts
tax policy away from the ability-to-pay
principle.
97
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to display the information.
Discussion Question
How would a 15 percent flat tax hurt
homeowners?
The could no longer deduct mortgage
interest payments
98
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to display the answer.
The Inevitability of Future Reforms
• The complex tax code guarantees future
attempts to simplify it. 
• Unexpected economic slowdowns, such as
the 2001 recession, can cause tax revenues
to fall and budget deficits. 
• Unexpected political events may require
unplanned expenditures, such as Congress
voting to spend $40 billion to rebuild New
York City and the air traffic system after
September 11, 2001.
99
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to display the information.
The Inevitability of Future Reforms
• Tax reform is likely to continue because
each political administration abruptly
changes policies to suit its agenda. 
• Politicians are reluctant to give up the
power they have in adjusting the current
complex system.
100
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Discussion Question
What advice would you give your
congressperson about future tax
reforms?
Answers will vary, but students
should support their advice with a
rationale.
101
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to display the answer.
Section Assessment
Main Idea What is the purpose of tax
reform?
The purpose of tax reform is to
influence and reward behavior.
102
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to display the answer.
Section Assessment (cont.)
Describe three major tax reform bills
since 1980.
Three major tax reform bills were the
Economic Recovery Tax Act of 1981,
tax reform act of 1986, Omnibus
Budget Reconciliation Act of 1993,
and the Taxpayer Relief Act of 1997.
103
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to display the answer.
Section Assessment (cont.)
Explain the advantages and
disadvantages of the VAT.
advantages: hard to avoid, widely
spread tax incidence, easy to collect,
encourages savings
disadvantages: invisible to
consumers, competes with state
sales taxes
104
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to display the answer.
Section Assessment (cont.)
Describe the features of the flat tax.
The flat tax taxes all income at a
specific rate, exempts some income
from taxation, and eliminates
incentives and deductions.
105
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to display the answer.
Section Assessment (cont.)
Identify three forces that are likely to
cause future revision of the tax code.
The tax code is more complex now.
The strong economy of the 1990s
resulted in record tax collections.
Power shifts can trigger political
change.
106
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to display the answer.
Section Assessment (cont.)
Summarizing Information What
changes would you recommend in the
federal tax code if you were in charge
of revising it? Explain your answer.
107
Section Close
If there is one thing that you would
change in the tax laws, what would
it be? Why?
108
Click the mouse button to return to the Contents slide.
Section 1: The Economics of Taxation
• Taxes affect the allocation of resources, behavior,
and economic growth. 
• The incidence of a tax, or final burden of a tax, is
affected by elasticity–when demand for a product
is elastic, less of the tax can be shifted to the
buyer; more can be shifted when demand is
inelastic. 
• Equity, simplicity, and efficiency are the criteria
used to judge the effectiveness of a tax.
110
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Section 1: The Economics of
Taxation (cont.)
• Two principles, the benefit principle of taxation
and the ability-to-pay principle of taxation, have
been used to help select the group or groups that
bear the burden of the tax. Both involve value
judgments, and both types of taxes are widely
used today. 
• Taxes can be placed into three groups–
proportional taxes, progressive taxes, and
regressive taxes–depending on the way in which
the tax burden changes as income changes.
111
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Section 2: The Federal Tax System
• The main source of revenue for the federal
government is the individual income tax. 
• Indexing is used to change the marginal tax
rates to offset the effects of inflation. 
• The second largest revenue source is the FICA
tax, collected to cover Social Security and
medicare. 
• The corporate income tax is the third largest
source of federal revenue. 
• Other sources of federal revenue include excise
taxes, gift taxes, customs duties, and user
fees, which is a different name for a benefit tax.
112
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to display the information.
Section 3: State and Local Tax
Systems
• Intergovernmental revenues are the largest
source of state revenues. 
• Local governments receive intergovernmental
revenues from state and federal governments.
Local governments also raise revenue from
property taxes, utility and liquor store sales,
sales taxes, and other sources. 
• The payroll withholding statement attached to a
person’s weekly, biweekly, or monthly paycheck
provides a summary of wages, taxes, and other
withholdings.
113
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to display the information.
Section 4: Current Tax Issues
• A value added tax (VAT) is a tax on consumption
rather than income. It is built into a product’s every
stage of production, is largely invisible, is
regressive, and can raise huge sums. 
• The Economic Recovery Tax Act of 1981 lowered
marginal tax rates for all levels of income, and
added accelerated depreciation and the
investment tax credit for businesses. 
• The 1986 tax reform law closed tax loopholes
opened in 1981, and reduced the individual
income tax code to two brackets, making it more
proportional.
114
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to display the information.
Section 4: Current Tax Issues (cont.)
• The Budget Deficit Reduction Act of 1993 added
two marginal tax brackets, restoring the
progressive nature of the tax removed in 1986. 
• The Taxpayer Relief Act of 1997 provided the
wealthy with long-term investment tax breaks, and
provided modest tax relief for individuals with child
and educational expenses. 
• President Bush’s 2001 tax plan is designed to cut
taxes $1.35 billion over ten years. 
• A flat tax is a proportional tax on individual
income after a specified threshold has been
reached.
115
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to display the information.
Click the mouse button to return to the Contents slide.
Identifying Key Terms
Match the letter of the term best described by each statement.
F annual adjustment of tax brackets to keep pace
___
with inflation
J average tax per dollar decreases as taxable
___
income increases
H average tax per dollar increases as taxable
___
income increases
A. ability-to-pay
B. corporate income tax
C. estate tax
D. excise tax
E. FICA
F. indexing
G. individual income tax
117
H.
I.
J.
K.
L.
M.
progressive tax
proportional tax
regressive tax
sales tax
sin tax
VAT
Click the mouse button or press the Space Bar to display the
answer. The Chapter Assessment is on pages 252–253.
Identifying Key Terms (cont.)
Match the letter of the term best described by each statement.
I
___
average tax per dollar unchanged as taxable
income rises
L designed to discourage consumption of socially
___
undesirable goods or services
D tax on the manufacture or sale of certain items
___
A. ability-to-pay
B. corporate income tax
C. estate tax
D. excise tax
E. FICA
F. indexing
G. individual income tax
118
H.
I.
J.
K.
L.
M.
progressive tax
proportional tax
regressive tax
sales tax
sin tax
VAT
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to display the answer.
Identifying Key Terms (cont.)
Match the letter of the term best described by each statement.
G largest source of revenue for the federal
___
government
K large source of revenue for state governments
___
M national sales tax on value added at each stage
___
of production
A. ability-to-pay
B. corporate income tax
C. estate tax
D. excise tax
E. FICA
F. indexing
G. individual income tax
119
H.
I.
J.
K.
L.
M.
progressive tax
proportional tax
regressive tax
sales tax
sin tax
VAT
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to display the answer.
Identifying Key Terms (cont.)
Match the letter of the term best described by each statement.
E Social Security and medicare taxes
___
C tax on the transfer of property when a person
___
dies
A tax paid by those who can most afford to pay
___
B third largest source of income for the federal
___
government
A. ability-to-pay
B. corporate income tax
C. estate tax
D. excise tax
E. FICA
F. indexing
G. individual income tax
120
H.
I.
J.
K.
L.
M.
progressive tax
proportional tax
regressive tax
sales tax
sin tax
VAT
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to display the answer.
Reviewing the Facts
Describe how taxes can be used to
affect people’s behavior.
A heavy tax can be imposed on a
product to limit consumption of that
product.
121
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to display the answer.
Reviewing the Facts (cont.)
Illustrate, using supply and demand
curves, how the burden of a tax can
be shifted.
Answers will vary.
122
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to display the answer.
Reviewing the Facts (cont.)
Explain the three criteria used to
evaluate taxes.
equity–taxes should be just and
impartial; simplicity–tax laws should
be easily understood; efficiency–
taxes should be relatively easy to
administer
123
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to display the answer.
Reviewing the Facts (cont.)
Name the two principles of taxation.
benefit principle, ability-to-pay
principle
124
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to display the answer.
Reviewing the Facts (cont.)
Describe the main features of the
individual income tax.
It is a progressive tax on people’s
earnings, collected through payroll
withholding system and sent directly
to the government.
125
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to display the answer.
Reviewing the Facts (cont.)
Identify the two components of
FICA.
Social Security taxes, medicare
126
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to display the answer.
Reviewing the Facts (cont.)
Describe the corporate income tax.
the tax a corporation pays on its
profits
127
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to display the answer.
Reviewing the Facts (cont.)
Distinguish between excise taxes,
estate and gift taxes, and customs
duties.
excise taxes–taxes on manufacture or
sale of certain items; estate taxes–
levied on transfer of property when a
person dies; gift taxes–levied on
donations of money or wealth;
customs duties–levied on goods
brought in from other countries
128
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to display the answer.
Reviewing the Facts (cont.)
Identify the main sources of revenue
for state governments.
sales taxes, intergovernmental
revenues, individual income taxes,
employee retirement contributions
129
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to display the answer.
Reviewing the Facts (cont.)
List the main sources of revenue for
local governments.
intergovernmental revenues, property
taxes, utilities and liquor stores, sales
taxes
130
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to display the answer.
Reviewing the Facts (cont.)
Identify the main types of taxes that
are normally withheld from a
worker’s paycheck.
federal income tax, state income tax,
city income tax, FICA taxes
131
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to display the answer.
Reviewing the Facts (cont.)
Describe the five major tax reform
bills enacted since 1980.
Economic Recovery Tax Act of 1981,
tax reform law of 1986, Omnibus
Budget Reconciliation Act of 1993,
Taxpayer Relief Act of 1997, and 2001
tax reform
132
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to display the answer.
Reviewing the Facts (cont.)
List the advantages and
disadvantages of a VAT.
adv: hard to avoid, incidence of tax
widely spread, not visible to
consumer, easy to collect, small tax
can raise large revenue; disadv:
invisible to consumers, might compete
with state sales taxes
133
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to display the answer.
Reviewing the Facts (cont.)
Identify the income group that will
receive the most benefit under a flat
tax.
individuals with high incomes
134
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to display the answer.
Reviewing the Facts (cont.)
Explain why future tax reforms are
inevitable.
because of the complexity of the tax
code, the record tax collections in the
1990s, the abruptness of political
changes
135
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to display the answer.
Thinking Critically
Synthesizing Information If you
were an elected official who wanted
to increase tax revenues, which of
the following taxes would you prefer
to use: individual income, sales,
property, corporate income, user
fees, VAT, or flat? Provide reasons
for your decision.
Answers will vary.
136
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to display the answer.
Thinking Critically (cont.)
Making Comparisons Distinguish
between the benefit and the abilityto-pay principles of taxation. Use a
web like the one on page 253 of your
textbook to help you organize your
answer.
Answers will vary.
137
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to display the answer.
Applying Economic Skills
User Fees In your own words,
prepare the rationale for a user fee
that you think should be enacted.
user fee’s burden on the individual
138
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to display the answer.
Applying Economic Skills (cont.)
Sales Taxes Some people object to
state and local governments
imposing sales and property taxes.
What would you say to these people
in defense of the two taxes?
The sales tax is relatively cheap to
administer and raises huge amounts
of revenue; many public services
enable people to maintain and
improve their property value, so
property should be subjected.
139
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to display the answer.
Applying Economic Skills (cont.)
Flat Taxes Evaluate the concept of a
flat income tax using the three
criteria for effective taxes. Write a
brief summary of your support or
opposition to such a proposal.
A flat tax is a proportional tax on
individual income after a specified
threshold has been reached; answers
should consider equity, simplicity, and
efficiency of a flat tax.
140
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to display the answer.
The government decides to fight air
pollution by cutting back on the
amount of gasoline used in the
country. A one-dollar-per-gallon tax
is to be imposed on gasoline.
Should this tax be placed on the oil
companies or on the consumers?
Explain.
141
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to display the answer.
Placing the tax on consumers has the
best chance of reducing gasoline use.
Producers could absorb some of the
cost of the tax in order to keep sales
up.
142
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to display the answer.
Click the mouse button to return to the Contents slide.
Continued on next slide.
Continued on next slide.
Continued on next slide.
Continued on next slide.
Create a television-viewing log for news items
concerning government and the economy–with
specific reference to taxation. Record the date,
the subject of the item, and the length of time
given to the item. When study of the chapter is
completed, compare and discuss your logs with
the class.
Explore online information about the
topics introduced in this chapter.
Click on the Connect button to launch your browser and go to
the Economics: Principles and Practices Web site. At this site,
you will find interactive activities, current events information,
and Web sites correlated with the chapters and units in the
textbook. When you finish exploring, exit the browser program
to return to this presentation. If you experience difficulty
connecting to the Web site, manually launch your Web browser
and go to
http://epp.glencoe.com/sec/socialstudies/economics/econ
principles2005.index.php
Explore online information about the
topics introduced in this chapter.
Click on the Connect button to launch your browser and go to the
BusinessWeek Web site. At this site, you will find up-to-date
information dealing with all aspects of economics. When you
finish exploring, exit the browser program to return to this
presentation. If you experience difficulty connecting to the Web
site, manually launch your Web browser and go to
http://www.businessweek.com
Taxable Income Taxable income is the amount
of income that is subject to taxation by the state
and federal government. It is the adjusted
gross income of wages, salaries, dividends,
interest, capital gains, etc., less allowable
adjustments deductions, which include but are
not limited to contributions to retirement
accounts, business expenses, and capital
losses.
Taxes Around the World If each student were to ask 10
people the question, “Do you pay too much in taxes?” the
vast majority of responses would be in the affirmative. A
recent study suggests, however, that Americans are among
the least taxed people in the industrialized world. In the
United States all taxes account for about 30 percent of gross
domestic product (GDP). Of the world's 24 wealthiest
nations, only Turkey and Australia collect a smaller
percentage of GDP in taxes. Most leading industrialized
nations pay close to 40 percent. The study concluded that
taxes in the United States could be raised substantially and
the country would still remain among the least taxed nations.
High Taxes? Are You Sure?
Canadian Tax System
Click on a hyperlink to choose that topic.
High Taxes? Are You Sure? Individual income
taxes are the main source of revenue for the
Canadian government. Rates in Canada’s
progressive individual income tax system range
from 6 percent to 34 percent. Another major
source of revenue is the corporate income tax.
Canadian corporations are supposed to pay 46
percent of their income in taxes but as a result
of deferments and credits, seldom pay the full
amount.
Canadian Tax System The federal
government of Canada collects a federal
income tax as well as provincial income taxes
for nine of its provinces. The provincial income
tax from each province equals a percentage of
its federal income tax. Only Quebec collects its
own taxes according to its own rates.
The effect of a tax depends on the elasticities
of the demand and supply curves.
Taxpayers send their income tax returns to
one of the IRS’s 10 tax-processing centers.
These centers receive and process around
200 million returns and other related
documents each year. Using computers, IRS
staff members quickly check each return. A
small percentage of each year’s returns are
selected for audit–a more thorough
examination. The IRS also investigates
suspected violations of the tax laws.
Electronic Tax Forms Income-tax payers who
once picked up tax forms at the library or the
local accountant’s office can now stay home
and order a Federal Tax Products CD-ROM on
the Internet. The CD contains current year tax
forms, including forms that may be filled in and
filed electronically.
Charitable Web Sites Suppose the flat tax on
income becomes a reality? Will more people go
hungry if taxpayers can no longer deduct
charitable contributions? Not if Web sites such
as the Hunger Site catch on. For each click, the
United Nations World Food Program receives
three cups of rice, maize, or other staples. The
user pays nothing. A corporate sponsor pays for
the food in exchange for the opportunity to flash
its logo on the screen after each donation.
The Corporate Tax
Game
In 1913, one compilation of federal tax rules and
regulations was 400 pages long. Today—with
commentaries, interpretations, and many court
cases—it weighs in at a staggering 54,846 pages:
16 feet of solid paper! Does this complexity allow
corporations to pay less in taxes today than they
did in the past?
Read the BusinessWeek Newsclip article on page
243 of your textbook.
Continued on next slide.
This feature is found on page 243 of your textbook. Click
the Speaker button to listen to an audio introduction.
The Corporate Tax
Game
Drawing Conclusions How does
Marriott benefit from investing in coal
treatment machinery?
By using credits to reduce its tax liability.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 243 of your textbook.
The Corporate Tax
Game
Analyzing Information Why do few
corporations pay the 35% tax rate
mandated by the federal
government?
Because they are able to take advantage
of favorable tax rules and regulations.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 243 of your textbook.
Economics and You
Video 15: How the Government
Spends, Collects, and Owes
After viewing How the Government Spends, Collects,
and Owes, you should be able to: 
• Define budget deficit, surplus, and balanced
budget. 
• Describe how the government finances budget
deficits. 
• Outline the different points of view on the 1999
budget agreement.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
information.
Economics and You
Video 15: How the Government
Spends, Collects, and Owes
Side 2
Disc 1
Chapter 15
Click the Videodisc button
anytime throughout this
section to play the complete
video if you have a videodisc
player attached to your
computer.
Click the Forward button to
view the discussion questions
and other related slides.
Click inside the box to play the preview.
Continued on next slide.
Economics and You
Video 15: How the Government
Spends, Collects, and Owes
What is the difference between a budget
deficit and a budget surplus?
In a budget deficit, the federal
government spends more in a
year than it receives in revenue
and taxes. In a budget surplus,
the government takes in more
money than it spends.
Click the mouse button or press the Space Bar to display the
answer.
Side 2
Disc 1
Chapter 15
Using Library Resources
Your teacher has assigned a major research
report, so you go to the library. As you
wander the aisles surrounded by books, you
wonder: Where do I start my research?
Which reference works should I use?
Continued on next slide.
This feature is found on page 230 of your textbook.
Using Library Resources
Learning the Skill
• Libraries contain many resources. Here are brief
descriptions of important ones: 
• Reference Books Reference books include
encyclopedias, biographical dictionaries, atlases,
and almanacs. 
– An encyclopedia is a set of books containing
short articles on many subjects arranged
alphabetically.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
information. This feature is found on page 230 of your textbook.
Using Library Resources
Learning the Skill (cont.)
– A biographical dictionary includes brief biographies
listed alphabetically by last names. 
– An atlas is a collection of maps and charts for
locating geographic features and places. An atlas
can be general or thematic. 
– An almanac is an annually updated reference that
provides current statistics and historical information
on a wide range of subjects.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
information. This feature is found on page 230 of your textbook.
Using Library Resources
Learning the Skill (cont.)
• Card Catalogs Every library has a card catalog,
either on cards or computer or both, which lists every
book in the library. Search for books by author,
subject, or title. Computerized card catalogs will also
advise you on the book’s availability. 
• Periodical Guides A periodical guide is a set of
books listing topics covered in magazines and
newspaper articles.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
information. This feature is found on page 230 of your textbook.
Using Library Resources
Learning the Skill (cont.)
• Computer Databases Computer databases provide
collections of information organized for rapid search
and retrieval. For example, many libraries carry
reference materials on CD-ROM. 
• Internet Libraries can often suggest clearinghouse
sites, online databases, and other reputable sites.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
information. This feature is found on page 230 of your textbook.
Using Library Resources
Practicing the Skill
• Suppose you are assigned a research report dealing
with the introduction of the U.S. income tax. Read the
questions on the following slides, then decide which
of the sources described above you would use to
answer each question and why.
Continued on next slide.
This feature is found on page 230 of your textbook.
Using Library Resources
During which year was the federal
income tax established?
almanac
Continued on next slide.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 230 of your textbook.
Using Library Resources
What was the purpose of the income
tax when it was introduced in 1913?
encyclopedia
Continued on next slide.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 230 of your textbook.
Using Library Resources
How did the public react to the tax?
encyclopedia or card catalog
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 230 of your textbook.
Click a picture
to learn more
about Janet
Yellon or Alice
Rivlin. Be
prepared to
answer the
questions that
appear on the
next two slides.
Janet Yellon
1946–
This feature is found on page 237 of your
textbook.
Alice Rivlin
1931–
Continued on next slide.
Making Comparisons Compare and
contrast the work and views of Yellen
and Rivlin.
Similarities: Both economist lead important
federal economic agencies, both are critical
to federal deficit spending, and both focus
on macro-economic issues. Differences:
Yellen’s top priority is balancing the federal
budget, and Rivlin is a strong critic of the
budget.
Continued on next slide.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 237 of your textbook.
Synthesizing Information What
significance is there in the fact that
both Yellen and Rivlin are women?
Their success belies discriminatory
attitudes.
Click the mouse button or press the Space Bar to display the
answer. This feature is found on page 237 of your textbook.
End of Custom Shows
WARNING! Do Not Remove
This slide is intentionally blank and is set to auto-advance to end custom
shows and return to the main presentation.
Click the mouse button to return to the Contents slide.

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