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Texas Politics - Political Economy
Former Lt. Gov. Hobby on taxation and revenue in Texas Former Lt. Gov. Hobby on taxation and revenue in Texas
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Progressive and regressive tax systems Progressive and regressive tax systems
States without taxes on individual incomes States without taxes on individual incomes
ad valorem tax
excise tax
fiscal policy
progressive tax
regressive tax
4.    Financing Government

The revenue and spending provisions of all governments - whether national, state or local - constitute their fiscal policy. Revenues can come from many sources, including taxes, user fees, interest income, intergovernmental transfers, sales of assets, and more.

For many governments the primary source of revenue is taxes, which in turn can take many forms, including income taxes, sales taxes, property taxes on houses, ad valorem tax taxes for automobiles, and excise tax (a kind of sales tax on things like cigarettes, alcohol, and gasoline - sometimes referred to as "sin taxes").

Income taxes may apply to stock dividends, capital gains (the profit from selling stock, real property or other assets), wages, and salaries. Taxes on these last two forms of income (wages and salaries) commonly take the form of payroll taxes. Payroll taxes are withheld each time the income is paid - usually weekly, bi-weekly or monthly.

Payroll taxes include additional taxes that are not paid on other types of income such as stock dividends and capital gains. These additional taxes include Social Security and Medicare taxes. Below is a list of the three types of taxes on payrolls:

  • Income taxes - Texans pay only federal income taxes, as Texas is one of only seven states that do not levy state taxes on individual income.

  • Social Security - This is a federal payroll tax that includes old-age, survivors, and disability insurance (OASDI); sometimes this is referred to as FICA (Federal Insurance Contribution Act) on paycheck stubs. In 2003, employees paid a flat rate of 6.20 percent on all income up to $87,000 for Social Security. Income above this level is not taxed for Social Security purposes.

  • Medicare - This is another federal payroll tax that is also specified by the FICA law, but is usually identified as a separate line item in payrolls. Taxes for Medicare are calculated using a flat rate of 1.45 percent for all income, with no upper limit. These payroll taxes (income, Social Security, and Medicare) apply to all members of the workforce who receive a regular payroll check, and are usually "withheld" from each check as the wages of salaries are earned. This is why we commonly refer to income and social security tax withholding. For obvious reasons, that part of one's salary or hourly wages that is not withheld is referred to commonly as "take home" pay.

Social Security and Medicare taxes are not assessed on income from other sources like stock dividends, interest income, or capital gains. The only one of the three main types of federal income tax assessed on these other sources of income is the regular income tax, with some limited exemptions on capital gains. Notably, regular income taxes are not automatically withheld when non-payroll income is earned, as is the case for payroll income. So, most individuals do not have to pay taxes on non-payroll income until April 15 of the year after the income was earned. This deferral of tax payment allows individuals earning such income to put more of their income to productive uses for a longer period of time.

Most people rely primarily or even solely on payroll income, and therefore must pay all three types of federal taxes on most of their income. Also, they must pay those taxes immediately as their earnings are paid (no deferral).

[image]433676[/image]States and localities (i.e., counties and cities) derive considerable revenue from property taxes and sales taxes. Since Texas does not levy taxes on individual incomes, it must rely ever the more so on these other sources of revenue. This reliance on property and sales taxes instead of income taxes has generated perpetual concerns about the equality and fairness of the tax system.

Generally speaking, wealthier individuals pay a bigger share of their incomes on income taxes, while the less wealthy pay a bigger share of their income on sales and property taxes (taxes on consumption). In debates about different approaches to taxation, tax schemes are characterized as either progressive or regressive. Progressive taxes require those with higher incomes to pay higher percentages of their income on those taxes. Regressive taxes require those with lower incomes to pay higher percentages of their income on those particular taxes. This chapter's feature Progressive and Regressive Tax Systems provides more in-depth discussion and illustrations.

Texas Politics:
© 2009, Liberal Arts Instructional Technology Services
University of Texas at Austin
3rd Edition - Revision 115
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