Taxes and Government Regulation

Ms. Nwaolu

IBM

Objectives

Explain how the government uses tax money

Describe the purposes of individual & business taxes

Suggest ways that individuals & businesses can reduce their taxes

The US Constitution authorizes taxation in Article I which states, “The Congress shall have Power To lay and collect Taxes, Duties, Impost, Excises to pay the Debts and provide for the common Defense and the General Welfare of the United States.”

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What Are Taxes Used For?Oliver Wendell Holmes once said,“ I like to pay taxes. With

them I buy civilization.”• Although taxes do not pay for civilization they sure do

pay for government services.• In the US tax $’s provide public services and provide for

the infrastructure- system of organizations, public systems, structures, & services that a society needs to function and be productive.

• Taxes pay for: water treatment, trash pick-up, human and environmental health agencies, medical care, etc.

• Can you think of any other thing that is paid for with tax dollars?

What Are Taxes Used For?• Sometimes the government will use tax

dollars to give subsidy’s- financial aid from the government to support industry or public service.

• Ex. The Gov. gives Amtrak (national rail passenger carrier) a subsidy in order to keep fares low and ridership high.

• What other companies/industries receive government subsidies?

Social Programs• Beginning with the Great Depression, the

government has taken an increasing role in creating a safety net for people who can not meet their basic needs.

• The largest and oldest of all social programs is Social Security( full name Old Age, Survivors, and Disability Insurance program) which covers retired workers, dependants of deceased workers, workers who have disabilities and their dependants.

Social Programs• Another agency dependant on taxes is the

Department of Health and Human Services.

• HHS fills a range of needs that include early childhood education, immunizations, and programs to combat domestic violence, and drug dependency.

• Medicare and Medicaid provides health insurance for one-quarter of all Americans.

Defense• The Department of Defense (DOD) is a prime

recipient of tax money and accounts for about 20% of the federal budget.

• Not only does the armed forces provide national security but they also provide education and career training.

• Nat. Guard and Coast Guard provide disaster relief, drug enforcement, rescue operations, and environmental protection.

• Did you know that GPS uses DOD satellites?

Closure

• What are taxes? Explain their purpose!• What does Article 1 of the US Constitution

say concerning taxes?• List and Explain 5 things that our tax dollars

are used for.• What is a government subsidy?

• What program is the largest and oldest of all social programs? Explain its purpose!

Payroll Taxes. The government pays for retirement and disability insurance programs by using FICA taxes.

Federal Unemployment Tax. payments to fund unemployment insurance are called FUTA.

Consumption Taxes. The most common consumption taxes are local and state government sales taxes.

Business Income Tax. Business income is taxed in the same way as income earned as an employee. The main difference is that the business owner is responsible for calculating and sending in these payments throughout the year.

Property Tax. Entrepreneurs who own the land or building where their business operates are also subject to an annual commercial property tax.

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Payroll Taxes• Retirement and disability insurance make up a large part of the federal

budget.

• The government pays for these by using Payroll taxes, also called Federal Insurance Contributions Act (FICA).

• FICA is figured as a percentage of the employees wages and salary and withheld each pay period.

– Both employer and employee contribute to the tax but employer must send payment to the fed. Gov.

• Ex. Employee Payroll Deductions- $ amount of total deductions?

Employee’s Gross Salary

$20,000

Social Sec. (20,000 x .062)

-1,240

Medicare ( 20,000 x .0145)

-290

Employee’s Net Salary $ 18,470

Unemployment Taxes• Business also have to pay Federal Unemployment

Taxes. • Payments to people who have lost their job( to no fault

of their own) is known as the Federal Unemployment tax Act or FUTA.

• FUTA is calculated using a portion of an employees salary, however it is TOTALLY funded by the employer!

• FUTA is run jointly by the federal government and the state government.

• Payments are usually sent in quarterly.

Consumption Tax• As consumers most of the goods and services we buy are

taxed. Taxes on goods are services used are called consumption taxes.

• Lawmakers decide which goods and services are taxed and at what rate.

• Businesses who sell these goods decide either to absorb the cost of the taxes or pass some or all of the cost to the consumer.

• The most common consumption tax is sales tax.

State by state

Virginia – 4% generally, 2.5% food

Maryland – 6% generally, 0% food

DC – 6% generally, 0% food

Computing Sales Tax• Computing Sales taxes can be a complicated. See

below-• Ex. State imposes sales tax on a frying pan.

Scenario 1- If the frying pan is bought by a wholesaler (items being resold) the wholesaler does not pay sales taxScenario 2- When the frying pan is sold to a department store, the department store is liable for sales tax. Scenario 3- If the department store donated the pans to a non-profit (ex. Soup kitchen) then the non-profit would not be liable for the sales tax (tax-exempt).

Other Consumption Taxes• Other consumption taxes include: Excise taxes,

interstate sales tax, and tariffs.• Excise taxes are taxes on a specific product or

commercial activity. Fed, state, and local gov. impose these types of taxes usually to control consumption or to raise money for a project.

Ex. Includes cigarettes and alcohol.• Did you know that taxes on alcohol help fund

state programs to fight alcoholism?

Other Consumption Taxes• Laws on taxing goods sold via the Internet are still

evolving and are generally exempt from sales tax (except Interstate Sales Tax).

• Interstate sales tax is sales made within the state within the state where the company is physically located.

• Tariffs are taxes goods traded internationally. They are usually imposed to strengthen domestic industry and discourage foreign competition. Tariffs are controversial because they can restrict trade.

• Can you think of any tariffs that can/has helped American Industry?

Business Income TaxIn many cases, businesses income is taxed in the same ways as an employees individual income.• A businesses income is the personal income of the business owner. This is true for sole proprietorships, partnerships, S Corps, and limited liability corporations. • These types of businesses are called pass-through businesses. The business owner is responsible for sending the taxes to the IRS throughout the year (quarterly).

– If they underpay they are responsible for making up the difference and could be penalized by the gov. If they over pay they can receive a tax refund at the beg. Of the yr.

• A C Corporations taxes are more complex, some believe unfair because the business is taxed once on the businesses earnings and shareholders dividends are also taxed.

Property TaxBusiness owners also owe taxes if they own the land or building where there business operates. They are subject to annual commercial property tax. •As with individual property tax, the rate of the commercial property tax is set by the local gov. •Each gov. sets the rates based on their own formula and in some areas the rate is set based on the property’s actual and potential value. •Values usually rise in area where homebuyers are building and the infrastructure is improving.•Some states assess a tax on personal property being used for business.

Closure

• List 5 taxes that business owners pay.• If an employee’s gross salary is 35,000 and they

are taxed by the Fed at a rate of .05, the state at .003, SS, at .001, and Medicare at .002, what is the employees net salary?

• What is FUTA? How do you receive FUTA?• What is a consumption tax? What is the most

common consumption tax and what is that rate in VA?

• List & Define the other types of consumption taxes.

Warm-up

• Eminent Domain is an action of the state to seize a citizen's private property, expropriate property, or seize a citizen's rights in property with due monetary compensation, but without the owner's consent. The property is taken either for government use or by delegation to third parties who will devote it to public or civic use or, in some cases, economic development. The most common uses of property taken by eminent domain are for public utilities, highways, and railroads.

• If you were a business owner would you support this practice? How can eminent domain work for and against business owners?

Growth and Development• Some tax money returns to businesses for

growth and development.• The Small Business Administration (SBA)

provides information, advice, gov. contracts, & loan guarantee for operations that fall within its size restrictions.

• SBA emphasizes underserved business owners like teens, women, racial minorities, and veterans.

• Business subsidies are can be given through enterprise zones and tax-increment financing.

Growth and Development• Enterprise zones are geographic areas in which businesses receive

economic incentives to encourage development there. (Entrepreneurs might be awarded grants to improve property or tax credits for hiring employees

• Tax-increment financing (TIF) is the strategy of spending tax money to encourage businesses to locate to an area, or improve their property there.

• The goal of TIF is to start growth and prosperity. TIF’s are usually riskier and takes longer for benefits to be realized.

• Designation last about 20 years.• Business indirectly benefit from gov. programs. Ex. Good roads

make ground transportation more efficient, arenas, museums, and tourist attractions bring consumers to merchants.

A deduction is an item or expense subtracted from your gross income in a tax return to reduce your tax burden. Employees’ Compensation Costs of Goods Sold Travel Vehicle Use Taxes Insurance Depreciation

A tax credit is a dollar-for-dollar reduction in taxes owed. While a deduction lowers taxable income, a credit lowers the tax itself.

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Using Deductions•Other common deductions include: employee compensation, costs of goods sold, travel, vehicle use, taxes, insurance, and depreciation.•In addition, new business owners can deduct start-up costs, for up to 5 years after opening a business. •If you use your home to carry out any business activity, you can deduct a percentage of utilities and home maintenance costs.

Using Tax CreditWhile a deduction lowers taxable income, a tax credit reduces the tax itself. Deductions are more permanent than credits.•Tax credits can be used for a variety of business activities like: using green energy, donating goods to a charitable group, hiring those who are reentering society from prison, making the workplace accessible to disabled people, offering lower rents/affordable housing to people with low to moderate income.•Tax credits are subject to phasing out depending on how popular they are with taxpayers and a particular industry.

Tax Evasion• Many people confuse tax avoidance with tax evasion. • As an individual citizen or business owner, mistaking the two can

be very costly.• Tax Evasion is the efforts by individuals, corporations, trusts and

other entities to evade taxes by illegal means. – Tax evasion often entails taxpayers deliberately

misrepresenting the true state of their affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting, such as declaring less income, profits or gains than the amounts actually earned, or overstating deductions.

• Tax Evasion can be punishable by imprisonment or heavy fines! – Ex. Martha Stewart, Wesley Snipes, Lauren Hill, Al Capone,

etc.

Closure

• Describe Enterprise Zones and TIFS. Explain how they contribute to growth and development.

• What is tax avoidance?• Explain the strategies that individuals and

businesses can use to avoid taxes.• Define and describe tax deductions and tax

credits. How are they different?• What is tax evasion? What are the penalties and

what is the major difference between tax avoidance and tax evasion?

Objectives

Understand the role of government regulationDescribe how laws require business owners to

protect employeesRecognize unfair business practices related to

customersDescribe requirements to protect the

environmentDescribe government resources that help small

business comply with regulations

Early on in U.S. history, business was largely free from government oversight.

In the 19th century, rapid growth through industrialization brought wealth. However, this growth brought with it some abuses.

In the late 1800s, the U.S. government began to exert some control over industry to protect smaller businesses from larger ones, workers from unsafe work sites, the health of the public, and the environment.

States often pass their own regulatory laws, some even stricter than federal laws.

Some entrepreneurs feel that regulation is an obstacle to growth while others feel it promotes the rights individuals, which makes the realization of entrepreneurial dreams possible.

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The Occupational Safety and Health Administration (OSHA) is the federal agency responsible for setting and enforcing (through inspections) standards of safety in the workplace. Some regulations that apply to many businesses include:Providing needed tools and equipment in good working order and training to

use themSupplying appropriate safety gear and garmentsDocumenting serious work related injury and illness, their causes, & # of

days missedDisplaying posters telling employees of their right to work in a safe, healthful

environment and to report possible violationsGiving workers access to records related to illness, injuries, or possible

exposure to harmful substances in the workplace

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Employee Protection

The Equal Employment Opportunity Commission (EEOC) enforces laws that promote a level playing field in the workplace.

The Fair Labor Standards Act, a federal law, guarantees most hourly workers a minimum hourly wage, a maximum number of hours worked, and extra pay for working overtime.Some states also add requirements for

severance pay- pay when employees are terminated due to reasons other than performance.

Labeling The Fair Packaging and Labeling Act requires that all product packaging

identify the item, its manufacturer, and the quantity, either in weight or number.

The Food, Drug, and Cosmetic Act and its various amendments forbid any false or deceptive labeling.

Product Safety The FDA and the USDA are also concerned with food and drug safety.

They forbid the sale of adulterated products—those containing harmful substances, processed in ways that may be harmful to health, or modified to mask poor quality. If a manufacturer finds out that one of their products does not meet

certain standards then they may recall, notice to customer to return a product that may cause harm or injury, the product.

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Fair Competition is based on the factors of price, quality, and service; not on the abuse of near-monopoly powers, competitor bashing, predatory pricing, etc.

The Federal Trade Commission (FTC) enforces detailed truth-in-advertising laws that cover promotion in all of its forms. FTC requires ads to be: Truthful and Non-Deceptive- Ad must not mislead the customer on any

significant point that would affect their buying decision. Ex. An item shown must be on sale.

Supported by Evidence- Business must have proof of any stated or implied claims. Health claims must be backed by scientific research and letters from

“satisfied customers” must be made available to confirm they exist. Fair- Ads must not lead customers to “substantial injury” as by not

mentioning possible dangers, conditions or requirements, or unwanted outcomes that customers could not have foreseen. Customers must be told of fees that may increase advertised price.

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Other Customer Issues Price fixing refers to competing companies agreeing to set the price of

goods or services or the terms of business deals. Ex. All farmers at a farmers market can’t agree to charge the

same price for their produce or give the same discount to a restaurant.

Price discrimination is charging competing buyers different prices for the same product. It would be legal however to charge buyers in different parts of

the state different prices to stay competitive. A monopoly (cornering the market) describes the situation where a single

supplier becomes a market’s only provider of a certain product. Ex. Some famous monopolies in US history include: American

Tobacco, Standard Oil, ATT (MA Bell), Microsoft- because of its operating systems' continuing hostility to competitors' software.

Antitrust laws forbid anticompetitive mergers and business practices. Ex. Sherman Act of 1890 which outlaws “every contract, combination or

conspiracy in restraint of trade or commerce.” Penalties of Heavy fines and prison sentences up to 10 years!

Licenses and Zoning Laws A license is a legal document issued by a state or local government

that allows a business to provide a regulated product or service.Licenses give consumers assurance that a business or

individual meets standards of professionalism & reliability like a beauty salon or physician.

Some highly regulated industries (broadcasting, meat preparation, & investment consulting) require federal licenses.

Permits- legal documents that allow businesses to take certain actions. Ex. Homebuilder may need a permit to add a driveway to home or close street lanes due to construction.

Zoning laws (ordinances) are designed to help ensure that businesses are good neighbors in the community.Ex. A sheep farm would be located in an agricultural zone while

a textile factory that turns wool into fabric would be located in an industrial zone!

Then again a shop that sells the fabric would be located in a commercial zone and a seamstress that makes clothing in his or her !home might be located in a residential zone

The Environmental Protection Agency (EPA) is the primary government agency in the US for enforcing environmental regulations.

The Clean Air Act is legislation designed to reduce smog and air pollution.

The Clean Water Act is the federal law that governs water pollution, including rivers, lakes, and oceans.

Punishment for violating EPA laws can be costly. A business can be fined thousands of dollars each day until it meets standards.

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Exceptions have been created to help small businesses deal with government regulations. Here are some examples:Employers with fewer than 10 employees are not

required to document minor workplace accidents.Businesses with fewer than 15 workers are exempt from

some provisions of the Americans with Disabilities Act.Tax credits are available for small businesses that follow

sustainable practices, which help them meet EPA standards.

Regulating agencies sometimes look to small businesses to assist them in developing rules and guidelines.

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Closure• Why did businesses begin to exert control over American Businesses in the

1800’s?• List the 5 requirements of OSHA regulations that apply to many businesses.• Describe the EEOC and the Fair Labor Standards Act.• List and describe labeling laws.• What two agencies are concerned with food and drug safety?• What are adulterated products? • What is a recall? Give two examples of recalled products.• What is Fair Competition?• List and describe the FTC’s requirements for ads. Give an example of each! • Define and give examples of 3 other anticompetitive practices (i.e. price fixing).• What is a license and why is it important?• What is a permit? Give an example of when a business or person may need one.• What is the job of the EPA?• Describe two laws that are in place to reduce a businesses harmful impact on the

environment.• Small businesses will need help complying with certain gov’t regulations. List

some examples of help for small businesses.