Transcript PPT

17
CHAPTER
DYNAMIC P OWERP OINT™ S LIDES BY S OLINA L INDAHL
The Federal Budget:
Taxes and Spending
CHAPTER OUTLINE
Tax Revenues
Spending
Will the U.S. Government Go Bankrupt?
Revenues and Spending Undercount the Role
of Government in the Economy
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questions
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Food for Thought….
Some good blogs and other sites to get the juices flowing:
Introduction
The federal government spends over 18% of
GDP.
Taxes collected are just under 17%.
In this chapter we will answer the following
questions:
Where does all that money come from?
Where does it go?
How long can the government keep spending
more than it raises in taxes?
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Tax Revenues
Sources of Government Revenue (2010)
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Tax Revenues
The Individual Income Tax
Marginal tax rate: the tax rate paid on an
extra dollar of income.
Example: If the marginal tax rate is 10%,
tax owed on an additional $100 will be
(.10) x $100 = $10.
Marginal tax rate: important (it affects
incentives).
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Tax Revenues
U.S. Marginal and Average Tax Rates (2010)
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Tax Revenues
The Individual Income Tax
Average tax rate: total tax payment
divided by total income.
Example: If income is $50,000 and tax owed is
$7,500, the average tax rate is…
$7,500
 0.15 (15%)
$50,000
Marginal tax rates are set by government (the
average tax rate is calculated after tax owed is
known).
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Try it!
In the simple land of Rabushka, there is only one
tax rate, 20 percent, but workers don't have to
pay tax on the first $10,000 of their income. For
every dollar they earn above $10,000, they pay
20 cents on the dollar to the Lord High Mayor of
Rabushka. What is the average income tax rate
in Rabushka if a worker's income is $1,000,000?
a)
b)
c)
d)
20%
19.8%
22%
16%
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Tax Revenues
The Individual Income Tax
Exemptions and Deductions: not all
income is taxed.
Exemptions: reduce taxable income
Spouse, Dependents
Each exemption reduces taxable income by
$3,650.
Deductions: also reduce taxable income.
Apply only to specific expenses.
Example: mortgage interest
The Mortgage Interest Deduction: encouraging home buying since 1913
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Tax Revenues
Taxes on Capital Gains, Interest, and
Dividends
All of these are taxes on investment income.
Dividends—stockholders’ share of the profits.
Marginal Tax Rate = 15% for most people.
Marginal Tax Rate = 5% for low income people.
Capital Gains—the difference between the
price an asset was purchased at and its selling
price.
Marginal Tax Rate = 15%.
Capital losses can offset income from capital gains.
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Tax Revenues
Taxes on Capital Gains, Interest, and
Dividends
Political debate about how investment income
should be taxed.
Democrats—favor higher tax rates.
Why?: Rich people (who invest more than the poor)
should bear a higher share of the burden.
Republicans—favor lower tax rates.
Why?: Lower taxes provide incentive to invest and
create economic growth.
The Capital Gains Tax: an appropriate tax on lazy fatcats?
Or stifling the engine of growth?
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Tax Revenues
The Alternative Minimum Tax (AMT)
Designed in 1969 to make it impossible to
avoid all income tax.
Requires taxpayers to do two calculations:
Compute taxed owed under standard tax code.
Compute what they owe based on a flat rate of
26% or 28% with no deductions.
Pay the higher of the two.
Because the AMT is not adjusted for inflation,
more people pay than originally intended.
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Tax Revenues
Social Security and Medicare Taxes
FICA (Federal Insurance Contributions Act)
Payroll tax.
Employees pay 6.2% on earnings up to $106,800.
Employers pay 6.2% on the same earnings.
The larger share of the burden is on workers
because…
employers are able to shift some of the tax
back on workers by paying lower wages.
Chile (1981): privatization of social security-employers
no longer had to pay payroll taxes for their
employees.
Result? Wages rose.
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Tax Revenues
Social Security and Medicare Taxes
Medicare taxes—special payroll tax to
finance Medicare.
1.45% deducted from workers’ paychecks.
1.45% deducted paid by employers.
Again, workers pay much of the employers’
premium in the form of lower wages.
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Tax Revenues
The Corporate Income Tax
35% in the U.S.—one of the highest in the world.
Tax code lets a good accountant reduce the legal
measure of income.
Example: Boeing—a large and profitable airplane
manufacturer.
Over a recent period of 5 years paid an average tax
rate of 0.7%.
Who pays the corporate income tax?
Shareholders and bondholders
Workers (in the form of lower wages)
Consumers (in the form of higher prices)
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Tax Revenues
The Bottom Line on the Distribution of Federal Taxes
Note: Includes all deductions, exemptions, corporate taxes, payroll taxes,
excise taxes, AMT, and assumptions about incidence.
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Tax Burden: Who Pays What?
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Tax Revenues
The Bottom Line on the Distribution of Federal
Taxes
Conclusion: Overall, the U.S. tax code is
progressive
Progressive tax rates are higher on people
with higher incomes.
Effective tax rate ranges from 4.1% - 31.2%
Flat tax: constant average tax rate on all
income levels.
Regressive tax: higher average tax rate
on people with lower incomes.
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SEE THE INVISIBLE HAND
What are the political chances for
a flat tax?
Eliminating the mortgage deduction
would result in lower house prices and
other side effects…
… What do you think?
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Tax Revenues
State and Local Taxes
Overall: smaller burden (half the level of
federal taxes)
States raise more of their revenues from
sales taxes.
Less progressive than the federal income
tax.
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Spending
Where does our tax money go?
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Spending
Social Security
At $721.5 billion in 2010—the single largest
government program in the world.
Run on a “pay as you go” basis
Current contributions pay for benefits of current
retirees.
No one has a social security
account in their name.
Ida May Fuller, receiving the first ever Social Security
check in 1940: She paid lived to age 100, paid $24.75 in
Social Security Taxes and received $22,888.92 in benefits.
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Net Benefits of Social Security
(Single male assuming various retirement years and average wages)
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Spending
Social Security
Some people advocate raising the full retirement
age.
Net benefits are declining over time.
Higher taxes on today’s workers funds larger
benefits for yesterday’s workers.
President Franklin D. Roosevelt, signing the Social Security Bill into
B Alaw.
CK T O
Spending
Defense
2010—Spending on defense was
$719,200,000,000 ($719.2 billion.)
Excludes most spending on the wars in
Iraq and Afghanistan.
The U.S. spends more on its military than
any other country.
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Top Ten Countries by Military
Expenditure (Billions of U.S. Dollars)
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Spending
Medicare and Medicaid
Medicare—reimburses the elderly for medical
spending.
With Social Security, amounts to the largest federal
spending program.
Medicaid—Covers the poor and the disabled.
Paid for jointly by federal and state governments.
Expenditures are half that of Medicare.
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Spending
Unemployment Insurance and Welfare
Common myth: most money spent by the federal
government goes to welfare programs.
Truth? Welfare is 9% of federal budget.
Two important categories of welfare:
Temporary Assistance for Needy Families (TANF):
Assistance for poor households with children.
Benefits are limited to 5 years in a lifetime.
Housing vouchers are given to subsidize a portion of rent.
Earned Income Tax Credit (EITC): is a direct cash
payment based on income.
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Spending
Everything else
No other programs are large compared to
Medicare, Social Security and defense spending.
Earmarks have received a lot of attention.
When a congressman puts an expenditure for
his/her district into a broader bill.
While often wasteful, cutting them out will not save
enough to fund significant new spending
programs.
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Spending
National Debt, Interest on the National Debt,
and Deficits
National Debt held by the public: All
federal debt held outside the United States
government.
As of 2011 equaled around $13.5 trillion.
Debt-to-GDP Ratio = over 60%
May be high for an individual but not necessarily
for the U.S. government.
Debt-to-GDP ratio has been much higher in the
past.
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Spending
National Debt, Interest on the National Debt, and Deficits
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Spending
National Debt, Interest on the National Debt,
and Deficits
Interest on the national debt
Payment of interest to bond holders in 2007
was $244 billion.
Does it matter if a large amount of the debt is
owed to foreigners?
From a purely economic point of view the answer is
no.
What matters is how the borrowed dollars are
spent.
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Spending
National Debt, Interest on the National Debt,
and Deficits
Deficit: the annual difference between
federal spending and revenues.
The deficit is…
The difference between revenues and
spending.
The annual change in the national debt.
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U.S. Spending, Revenues and Deficit
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Will the U.S. Government
Go Bankrupt?
The Congressional Budget Office (CBO):
“under any plausible scenario, the federal
budget is on an unsustainable path…”
Main forces driving the projections
Demographics
The population is aging resulting in...
Higher Social Security and Medicare
payments.
Rising health costs per person
Rising more than twice as fast as GDP per
capita.
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Will the U.S. Government
Go Bankrupt?
Debt to GDP Ratio (%)
The Debt to GDP Ratio is Projected to Soar
Given Current Spending and Tax Trends
400
Actual
Projected
300
200
100
0
1960 1970 1980 1990 2000 2010 2020 2030 2040 2050 2060
Source: Congressional Budget Office, Long Term Budget Outlook 2007
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Try it!
If the generation of new ideas has
caused the Solow curve to shift to the
right (with no other changes) then the
debt-to-GDP ratio would
a)
b)
c)
d)
increase.
remain constant.
decrease.
be impossible to calculate.
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Spending and Revenue Projections by Category
as a Percentage of GDP
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Will the U.S. Government
Go Bankrupt?
The Future is Hard to Predict
The U.S. has a history of relatively low
taxes.
The American Revolution was in part about
taxes in spite of one of the lowest tax burdens
in the world.
The income tax is fairly new: began in 1913.
Taxes and federal spending increased
dramatically during WWI and WWII.
Since then, as a percent of GDP they have
remained fairly stable around 18%.
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Take a look…..
How will raising the debt ceiling impact U.S. bond
markets? Via PBS’s “Making Sen$e” series, Paul
Solman gives a balanced overview with clips,
interviews and analysis. (7:51 minutes)
http://www.youtube.com/watch?v=wNv__bi-AVw
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Will the U.S. Government
Go Bankrupt?
U.S. government spends a lower fraction of GDP than most other developed countries.
Total Government Spending
(as a Percentage of GDP)
Ireland
Switzerland
Australia
United States
Japan
Spain
Canada
United Kingdom
Germany
Italy
Netherlands
Belgium
Austria
Finland
France
Denmark
Sweden
34.2
35.5
36.2
36.5
38.2
38.6
41.1
43.9
46.8
48.5
48.6
49.3
50.6
50.7
53.4
56.3
57.3
0
20
40
60
Total government spending includes spending by federal, state and local governments.
Source: OECD in Figures, 2005
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Will the U.S. Government
Go Bankrupt?
So what will happen: will spending be cut or
will taxes be raised? No one knows.
Spending could increase substantially and U.S.
spending would be on par with German, Italy,
and the Netherlands today.
Cutting total spending substantially will require
cuts in Social Security benefits.
This will be politically difficult.
Other countries spend a smaller fraction of GDP
on health care but…
The growth in health care costs is similar throughout the
world.
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Revenues and Spending Undercount
the Role of Government in the Economy
The government’s influence on resources
goes beyond simple budget
measurements….
The EPA has a small-ish budget but a large
amount of regulatory influence over the
economy’s resources.
And when the military is filled by draft, the
opportunity cost to society is larger than with a
volunteer army.
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Try it!
Which of the following statements about the Social
Security program is correct?
a) The earlier you retire, the greater the benefits
you receive from the Social Security system.
b) Your Social Security withholdings from your
paychecks are deposited into an account for
you.
c) On average, retirees in the United States receive
about $8,000 per month in Social Security
payments.
d) Women, who generally live longer than men,
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benefit more from the system.
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Try it!
The annual difference between federal
spending and revenues is called:
a) a deficit.
b) the debt held by the public.
c) the national debt.
d) the debt to GDP ratio.
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