Transcript Chapter 5- The Mixed Economy

Up Coming Stuff
GHS
English
Dept.
•Quiz Chapter 5 Friday, 10/14
•Bonus Work Chapter 5 Monday, 10/17
•All homework Chapters 4 & 5 Tuesday, 10/18
•Review Wednesday, 10/19
• Test on Chapter 4 & 5 – Thursday, 10/20!
GHS
English
Dept.
Pure Capitalism to Mixed Economy.
• If you could choose anywhere in the world to live where
would it be and why????
• If you had to rate countries in the world in terms of their
standards of living what characteristics would you use and
why?
• The next chapter begins to look at how the government
intervenes in an economic system to allocate resources.
• Chapter 5 gets us into some debatable issues dealing with
tax rates, subsidies, social equality etc.. Does the
government hurt or help??
• While watching the video look for those issues we have
talked about with reference to how a capitalist economy
works best.
• Also look for the policies of the government that lead to
inefficiencies.
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
subsidy
INPUTS
Tax Payments
GOVERNMENT
GOODS &
SERVICES
HOUSEHOLDS
FICA
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
private property
freedom of enterprise
freedom of choice
self-interest
competition
roundabout production
specialization
division of labor
medium of exchange
barter
money
Five Fundamental Questions
economic costs
normal profit
economic profit
expanding industry
declining industry
consumer sovereignty
dollar votes
derived demand
guiding function of prices
“invisible hand”
The Mixed Economy:
Private and Public Sectors
CHAPTER FIVE
The Seven Roles of Government:
1. Maintain Competition
2. Protect Private Property (Life & Liberty)
3. Stabilize the Economy
4. Provide Public Goods:
(Pure Private, Common Pool, Toll Goods, Pure Public)
5. Control Externalities/Spillovers:
(Pollution Control v Schools)
6. Taxes – Redistribute Income
HOUSEHOLDS AS INCOME RECEIVERS
FUNCTIONAL DISTRIBUTION
WAGES
RENT
INTEREST
PROFIT/LOSS
HOUSEHOLDS AS INCOME RECEIVERS
FUNCTIONAL DISTRIBUTION
WAGES
RENT
INTEREST
PROFIT/LOSS
PERSONAL DISTRIBUTION
SHOWS ALLOCATION OF
INCOME AMONG INDIVIDUAL
HOUSEHOLDS
I. How to measure economic
activity?
• A. Functional Distribution of Income
•
1. Measures wages, profits, interest and rent.
•
2. Profits are divided into two categories.
•
- proprietors income – profits of those
self-employed, doctors, lawyers, farmers.
•
- Capitalist income or corporation
income/ profits.
HOUSEHOLDS AS INCOME RECEIVERS
FUNCTIONAL DISTRIBUTION
WAGES
$7,103 Billion
PROPRIETOR’S
INCOME
900 Billion
CORPORATE
PROFITS
1,400 Billion
INTEREST
700 Billion
RENTS
200 Billion
71%
8%
12%
7%
2%
HOUSEHOLDS AS INCOME RECEIVERS
FUNCTIONAL DISTRIBUTION
WAGES
$7,103 Billion
70%
PROFITS
$2,349 Billion
21%
INTEREST
RENT
$750 Billion
$200 Billion
7%
2%
$10,402 Billion
WEASEL PUSS IS RED!
2004 GDP
I. How to measure cont…
• B. Personal Distribution of Income
•
1. Indicates how much total income is divided
among household units.
•
2. The government uses this as a reference to
how equitable or inequitable income is distributed
in the U.S.
•
3. The Lorenz Curve is a mathematically
derived index of income inequality.
HOUSEHOLDS AS INCOME RECEIVERS
PERSONAL DISTRIBUTION
Personal Income Received (Percent)
4.2% Lowest 20% Income Group
10.0% Second 20% Income Group
14.8% Middle 20% Income Group
Fourth 20% Income Group
Highest 20% Income Group
2004 US Census Bureau
22.1%
49.8%
Share of Income - Historically
Year
1968
Lowest Next
20%
20%
4.2
11.1
Middle Next
20%
20%
17.5
24.4
Highest
20%
42.8
1982
4.1
10.1
16.6
24.7
44.5
1992
3.8
13.4
15.8
24.2
46.9
2001
3.5
8.7
14.6
23.0
50.1
The Lorenz Curve
100
Percent of Income
80
Perfect Equality
60
40
Complete
Inequality
20
0
Copyright McGraw-Hill, Inc.
20
40
60
Percent of Families
80
100
The Lorenz Curve
100
Lorenz Curve
(actual distribution)
Percent of Income
80
Perfect Equality
60
40
Complete
Inequality
20
0
Copyright McGraw-Hill, Inc.
20
40
60
Percent of Families
80
100
The Lorenz Curve
100
Lorenz Curve
(actual distribution)
Percent of Income
80
Perfect Equality
60
40
Area between
the lines shows
the degree of
income inequality
20
Complete
Inequality
0
Copyright McGraw-Hill, Inc.
20
40
60
Percent of Families
80
100
The Lorenz Curve
100
Lorenz Curve
(actual distribution)
Percent of Income
80
Perfect Equality
Two Adjustments:
Taxes
Cash Transfer Payments
60
40
Area between
the lines shows
the degree of
income inequality
20
Complete
Inequality
0
Copyright McGraw-Hill, Inc.
20
40
60
Percent of Families
80
100
GLOBAL PERSPECTIVE
Percentage of total income earned by
top fifth of income receivers
30
Brazil
South Africa
Guatemala
Mexico
United Kingdom
United States
Japan
Norway
40
50
60
70
GLOBAL PERSPECTIVE
Percentage of total income earned by
top 20% of income receivers
30
Brazil
South Africa
Guatemala
Mexico
United States
United Kingdom
Japan
Norway
40
50
60
70
Executive Pay in some
US. Industries is
300 Times Higher
than an Average
Worker’s Salary.
Causes of Growing Inequality
1 - Demand for Highly Skilled Workers
2 - Demographic Changes
3 - International Trade & Pressures
- Immigration + Illegal Immigration
- Union Decline
The Lorenz Curve AP Test 2004
graphically...
Wage Data 138,000,000
US Workers
US News and World Report
• 100,000,000 full time US
workers in 2001 earned
less than $35,000/yr.
• 84% earned less than
$65,000
• 10% earned between
$65,000 and $100,000
• 5.7% earned more than
$100,000
US News and World Report
Wage Data – Median Income
for a Person
• Median Income: $33,636
• Only 32.8% of all US
jobs paid over $45,000
• Two-thirds of all wage
earners work two jobs
• Two-thirds of all mothers
with children now work
• Median paycheck for
working wives: $18,000
Median Household Income: 2003
• USA Median Household Income: $42,409
• Half of US households
earn more and half of
US households earn less
• 1999 Peak Median
US Income: $43,915
• Wisconsin: $45,985
• Half of WI households
earn more and half of
WI households earn less
Source: US Census Bureau
Working Mothers
Vote Kerry
• 71.1 percent of
mothers work
• 53.7 percent of
mothers with children
under 1 year work
• Unemployment Rate
for unmarried mothers
with children under
age 18: 10.3%
– Jobless Rate 20.5%
Working Poor
• Of the 46,000,000
Americans who are
not yet married,
median earnings
$17,000
• For single womenhead of households,
median income:
$18,472
39,000,000 Working Poor
• One in five full time
40 hr./week US jobs
pays below the
poverty-line $18,244
for a family of four
• 20,000,000 children
live in families with
incomes below the
poverty line
Milwaukee Journal
28,000,000 Jobs
• 28,000,000 service
jobs pay less than
$8.84
• $8.84 is the hourly
rate that matches the
poverty-line $18,244
Milwaukee Journal
Helping the
39,000,000 Working Poor
•
•
•
•
•
Suggested Solutions???
Adult Education!
Job Training
Increased Minimum Wage
Subsidize Child Care for
low income workers
Milwaukee Journal
$36,388 – Low Income Family
• A family of four living on
an annual income of
$36,388 is considered to
be a low income family
• A family of four living on
an annual income of
$18,244 is considered to
be living in poverty.
Milwaukee Journal
Median Incomes US Families
• White:
$47,800
• Hispanic:
$33,000
• African
American:
$29,600
Milwaukee Journal
Median Family Net Worths
• White Families:
$88,000 up 17% since
1996
• Hispanic Families:
$8,000 up 14% since
1996
• African American
Families: $6,000 down
16% since 1996
Milwaukee Journal
The Lorenz Curve
100
Lorenz Curve
(actual distribution)
Percent of Income
80
Perfect Equality
60
40
Area between
the lines shows
the degree of
income inequality
20
Complete
Inequality
0
Copyright McGraw-Hill, Inc.
20
40
60
Percent of Families
80
100
CAUSES OF INCOME INEQUALITY
1 - Ability Differences
2 - Education and Training
3 - Discrimination
4 - Tastes and Risks
5 - Unequal Distribution of Wealth
6 - Market Power
7 - Luck, Connections, and Misfortune
EQUALITY-EFFICIENCY TRADEOFF
Labor Market Theory
The Real World Will Get You!
• Human Capital
– Education = Income
• Sorting Mechanism
–Hoops
• Radical View
–Rich Dad Poor Dad
• Dual Labor Market
–Good Job v Bad Job Market
Family Income USA
•
•
•
•
•
•
•
9.8%
8.9%
19%
16.3%
13%
14.4%
18.6%
$100,000+
$75-99,999
$50-74,999
$35-49,999
$25-34,999
$15-24,999
<$15,000
•
Family Income Distribution
2001
$355,000
– Top 1%
• $130,600
– Top 5%
• $93,800
– Top 10%
• 60,800
– Top 25%
• 33,400
– Top 50%
38,500,000+: Men, Women, and Children(13.1%)
The typical poor person in the US:
• Single Mom with Kids!
• White unemployed female under forty
• Found everywhere including Ozaukee County (2200+)!
$18,810 for a family of four!
$12,015 for a family of two!
$9,573 for a single person!!
Of the 200 largest US counties Waukesha with 3.0%
of its residents in Poverty ranked second lowest in the
US.
Of all 5,700+ US counties Ozaukee with 2.2% of its
Residents in Poverty ranked third lowest in the US.
Wisconsin Poverty
• 528,000 people or
9.8% of WI residents
• WI residents without
health insurance
593,000
• National rank 36th
lowest poverty in
poverty rate
Poverty in America: 2003 Data
• 37.6 Million Americans
– Up 1.7 million from 2002
– 12.1 million are children
• 12.1% of Americans
• Wisconsin’s poverty rate
2003: 8.2%
• Poverty Line 2003:
– $18,244 for a family of 4
– $9,359 for a single person
Source: US Census Bureau, Journal/Sentinel
State Rankings on Poverty
Families Living Below the Poverty Line
1. Mississippi
2. Louisiana
3. New Mexico
4. West Virginia
5. Kentucky
46. Iowa
47. Connecticut
48. Wisconsin
49. Minnesota
50. New Hampshire
16.0%
15.8%
14.5%
13.9%
12.7%
6.0%
5.6%
5.5%
5.1%
4.3%
Total US Poor:
32,500,000
Average Per State:
9.2%
State Rankings on Families Receiving Welfare
1. Alaska
2. Hawaii
3. Oklahoma
4. California
5. New York
46. Maryland
47. Kansas
48. Nevada
49. Alabama
50. Wisconsin
8.7%
7.2%
5.1%
4.9%
4.9%
2.4%
2.36%
2.35%
2.24%
1.71%
Total Welfare
Recipients:
Less than 22,000,000
The Working Poor
• Income less than
$8.00/Hour
• Yearly incomes less
than $25,000 for a
family of 4
• 30% of Americans:
74,000,000 people!
• Uninsured Americans
58,000,000
The Working Poor
• Hourly wages needed
to afford a One
Bedroom Apartment
– $8.89
• Chance of a Welfare
Recipient getting a
$8.89/Hour Forty
Hour/Week Job?
– 97 to 1
Data: National Coalition for the Homeless
Want Ads
Functional Distribution of
Income
7% 2%
12%
8%
Wages
Pro Inc
Corp Inc
Interest
Rent
How is the 10.4 Trillion
71%Dollars earned in the
Economy?
HOUSEHOLDS AS INCOME RECEIVERS
PERSONAL DISTRIBUTION
Personal Income Received (Percent)
4.2% Lowest 20% Income Group
10.0% Second 20% Income Group
14.8% Middle 20% Income Group
Fourth 20% Income Group
Highest 20% Income Group
22.1%
49.8%
How is that income allocated??? What is in societies best interest???
Another way to measure!!!
C. Household Income! Disposal
Spending+Saving+Taxes=GDP
GDP
• W+P+i+R
• Weasel puss is red
• 1. All Income is spent
or saved or lost to
taxes!
• What is the
distribution of
spending, saving, and
taxes?
HOUSEHOLDS AS SPENDERS
WHERE DOES OUR INCOME GO?
6%
to personal savings
Milwaukee Journal
1997 DATA
HOUSEHOLDS AS SPENDERS
WHERE DOES OUR INCOME GO?
6% 14% to personal taxes excluding
Social Security
Affective tax rate for Americans:
14% + 7.5% = 21.5%
Taxes as % of GDP = 29.9%
1997 DATA
Taxes as a Percent of GDP
•
•
•
•
•
•
•
•
Sweden
Denmark
Netherlands
Belgium
France
Austria
Germany
Italy
Source OECD
56.1%
49.9%
46.0%
44.3%
43.8%
41.0%
38.1%
37.8%
•
•
•
•
•
•
•
•
Ireland
Britain
Canada
Spain
Greece
Japan
Australia
USA
37.6%
36.5%
35.3%
34.4%
33.2%
30.6%
30.1%
29.9%
HOUSEHOLDS AS SPENDERS
WHERE DOES OUR INCOME GO?
6% 14%
S
A
V
I
N
G
S
T
A
X
E
S
80% to personal consumption
Consumer
Spending about
80% of income
1997 DATA
HOUSEHOLDS AS SPENDERS
WHERE NOTES:
DOES OUR INCOME GO?
6% 14%
Spending Classifications
83% to personal consumption
1- Durables 12%
1997 DATA
HOUSEHOLDS AS SPENDERS
WHERE NOTES:
DOES OUR INCOME GO?
6% 14%
Spending Classifications
83% to personal consumption
1- Durables
2- Nondurables 30%
1997 DATA
HOUSEHOLDS AS SPENDERS
NOTES:
WHERE DOES
OUR INCOME GO?
6% 14%
Spending Classifications
83% to personal consumption
1-Durables 12%
2-Nondurables 30%
3-Services 58%
1997 DATA
II. Business Organizations
Plant – Firm - Industry
Proprietorships
Partnerships
Corporations
Hybrids
THE BUSINESS POPULATION
A. Terminology....
1- PLANT
One Location
THE BUSINESS POPULATION
A. Terminology....
1- PLANT
2- FIRM
One business
organization - May
have one or
more plants
THE BUSINESS POPULATION
NOTES:
Terminology....
1- PLANTVertical
Combinations
2- FIRM
One business
organization - May
have one or
more plants
THE BUSINESS POPULATION
NOTES:
Terminology....
1- PLANTVertical
Combinations
2- FIRM Horizontal
One business
Combinations
organization - May
have one or
more plants
THE BUSINESS POPULATION
NOTES:
Terminology....
1- PLANTVertical
Combinations
2- FIRM Horizontal
One business
Combinations
organization - May
have one or
Conglomerates
more plants
THE BUSINESS POPULATION
A. Terminology....
1- PLANT
2- FIRM
3- INDUSTRY
B. US Business Organizations
1. Type of Business
•
•
•
•
Proprietorships
Partnerships
Corporations
Hybrids/Corps
Percent of Market
75%
7%
18%
Total Number
17,000,000
1,500,000
4,000,000
500,000
23,000,000
(Both Bush and VP Dick Cheney claimed in the
last year’s debates that 900,000 "small
businesses" would be hurt by restoration of taxes
on $200,000+ incomes.)
Small Businesses US
• The United States Small Business
Administration classifies companies with fewer
than 500 employees as "small." There are
more than 5 million such businesses that have
payrolls, and they employ about half of the
nation's private-sector workers. Of those 5
million firms, 4.3 million have fewer than 20
employees each. The small business owner's
reputation as underdog and risk-taker is a
hard-earned one. Every year sees 600,000 to
800,000 companies start up, just as 500,000
or so go under.
• Let's give credit where credit is due. Bush has cut
taxes for all Americans, which has helped small
business owners continue to generate 60 to 80
percent of all new jobs annually. (US Chamber of Commerce)
B. US Business Organizations
2. Type of Business
• Proprietorships
• Partnerships
• Corporations
Percent of Market Sales
6%
5%
89%
Top 10 US Corporations by Revenues
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Wal-Mart
Exxon Mobile
General Motors
Ford Motor
General Electric
Citigroup
Chevron Texaco
Philip Morris
IBM
Microsoft
$217,799,000,000
$187,510,000,000
$177,260,000,000
$162,412,000,000
$125,679,000,000
$112,022,000,000
$106,245,000,000
$89,942,000,000
$85,866,000,000
$83,654,000,000
Top 10 International Corporations by Revenues
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Wal-Mart
Exxon Mobile
Shell
General Motors
Ford Motor
Daimler Chrysler
BP
General Electric
Citigroup
Mitsubishi
$217,799,000,000
$187,510,000,000
$177,281,000,000
$177,260,000,000
$162,412,000,000
$152,446,000,000
$148,062,000,000
$125,679,000,000
$112,022,000,000
$110,787,000,000
C. LEGAL FORMS OF BUSINESS
ENTERPRISES
1. Sole Proprietorship
Advantages...
•Easy to Organize
•Proprietor is Own “Boss”
C. LEGAL FORMS OF BUSINESS
ENTERPRISES
1. Sole Proprietorship
Advantages...
•Easy to Organize
•Proprietor is Own “Boss”
Disadvantages...
•Limited Resources
•No Help With Decision Making
•Unlimited Liability
C. LEGAL FORMS OF BUSINESS
ENTERPRISES
2. Partnership
Advantages...
•Also Easy to Organize
•More Management Skills
•Greater Resources Available
C. LEGAL FORMS OF BUSINESS
ENTERPRISES
2. Partnership
Advantages...
•Also Easy to Organize
•More Management Skills
•Greater Resources Available
Disadvantages...
•Difficulty Making Decisions
•Possibly Limited Financial Resources
•Partnership Continuity Problems
•Unlimited Liability
C. LEGAL FORMS OF BUSINESS
ENTERPRISES
3. Corporation
Advantages...
•Most Effective Raising Capital - Stocks, Bonds
•Limited Liability******
•Easy Expansion of Size & Scope
•Infinite Life
LEGAL FORMS OF BUSINESS ENTERPRISES
Corporation
Advantages...
•Most Effective Raising Capital - Stocks, Bonds
•Limited Liability
•Easy Expansion of Size & Scope
•Infinite Life
Disadvantages...
•Corporate Regulations & Legal Expenses
•Some Unscrupulous Practices
•Double Taxation
•Separation of Ownership & Control
LEGAL FORMS OF BUSINESS ENTERPRISES
NOTES:
Corporation
Advantages....
•Most Effective
Raising Capital - Stocks, Bonds
Principal•Limited Liability
•Easy Expansion
of Size & Scope
Agent
•Infinite Life
Problem
Disadvantages
•Corporate Regulations & Legal Expenses
•Some Unscrupulous Practices
•Double Taxation
•Separation of Ownership & Control
Principle Agent Problem
B
U
S
H
Ken Lay – CFO Enron
• Partnership and
Proprietorship the
owner/owners is/are the
principle agents!
• Corporate America has
a board of directors and
CEO that serve as the
principle agents for
stockholders!
10 Highest Paid CEO’s in the US December 2001
1. Michael Dell
Dell Computers
$235,192,000
2. Sanford Weill
Citigroup
$216,183,000
3. Gerald Levin
AOL Time Warner
$164,388,000
4. John Chambers
Cisco Systems
$157,305,000
5. Henry Silverman Cendant
$137,447,000
6. Louis Gerstner Jr. IBM
$103,410,000
7. Joseph Nacchio
Qwest Com.
$97,387,000
8. Walter Sanders
Advanced Micro
$92,246,000
9. Steven Jobs
Apple Computers
$90,000,000
10. Jeffery Skilling
Enron
$84,449,000
Corporations
• 90% of Revenue
• 80% of Output
• Wal-Mart’s revenue
greater than the GDP of
170 nations
• Wal-Mart and GM
combined revenues
exceed total revenue of
all US farms combined
LEGAL FORMS OF BUSINESS ENTERPRISES
Corporation
Advantages...
•Most Effective Raising Capital - Stocks, Bonds
•Limited Liability
•Easy Expansion of Size & Scope
•Infinite Life
Disadvantages...
•Corporate Regulations & Legal Expenses
•Some Unscrupulous Practices
•Double Taxation
•Separation of Ownership & Control
LEGAL FORMS OF BUSINESS ENTERPRISES
NOTES:
Corporation
Advantages....
Limited•Most Effective
Raising Capital - Stocks, Bonds
•Limited Liability
•Easy Expansion of Size & Scope
•Infinite Life
Liability
Companies
Disadvantages
•Corporate Regulations
& Legal Expenses
(LLCs)
•Some Unscrupulous Practices
•Double Taxation
•Separation of Ownership & Control
4. Hybrids
• LLC
– Taxed like a
partnership
– Limited Liability like a
corporation
• S-Corporations
– Fewer than 35
employees
– Limited liability
– No double taxation
III. Five Major Roles of
Government in a Capitalist
Economy
• Provide Social and
Legal Framework
• Maintain Competition
• Redistribute Income
• Correct Market Failure
• Stabilize the Economy
ECONOMIC FUNCTIONS OF GOVERNMENT
A. LEGAL
AND
SOCIAL
FRAMEWORK
1. Seeks to strengthen the market system.
ECONOMIC FUNCTIONS OF GOVERNMENT
“Microsoft will
Rule the World!’
Bill Gates 2002
B. MAINTAINING
COMPETITION
ECONOMIC FUNCTIONS OF GOVERNMENT
Notes:
1.MONOPOLY- illegal
MAINTAINING
COMPETITION
ECONOMIC FUNCTIONS OF GOVERNMENT
Notes:
1.MONOPOLY- illegal
2. NATURAL
MAINTAINING
MONOPOLIES
COMPETITION
ECONOMIC FUNCTIONS OF GOVERNMENT
Notes:
1. MONOPOLY- illegal
2. NATURAL
MAINTAINING
MONOPOLIES
COMPETITION
MARKET BIASES &
SHORTCOMINGS CAN
COMPEL ACTION BY
GOVERNMENT
ECONOMIC FUNCTIONS OF GOVERNMENT
C. REDISTRIBUTION
OF INCOME....
1. Transfer Payments
Of $10,000.00 Paid in Federal Income Tax:
$2,620.00 goes to the military
$2,260.00 goes to pay the interest on
the national debt
$1,900.00 goes to health care
$550.00 goes to income security
$340.00 goes to benefits for veterans
$320.00 goes to education
$250.00 goes to nutrition spending
$160.00 goes to housing
$160.00 goes to the environment Excludes
FICA @
$40.00 goes to job training
$1,400.00 goes to all other expenses 7.5%
Ten Largest Militaries in the World
1. China
2. US
3. India
4. North Korea
5. Russia
6. South Korea
7. Pakistan
8. Turkey
9. Iran
10. Vietnam
2,340,000
1,365,800
1,303,000
1,082,000
1,004,000
683,000
612,000
609,000
513,000
484,000
Total US Military
Spending:
$352,000,000,000
Top Military Spenders
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
USA
$352,000,000,000
Japan
$46,700,000,000
Britain
$36,000,000,000
France
$33,600,000,000
China
$31,100,000,000
Germany
$27,700,000,000
Saudi Arabia
$21,600,000,000
Italy
$21,100,000,000
Iran
$17,500,000,000
South Korea
$13,500,000,000
The sum of spending by the
India
$12,900,000,000
other top 25 countries does
not equal US spending!
Russia
$11,400,000,000
Countries with the Highest Life
Expectancy
USA
Worldwide
77.5
66.0
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Japan
Sweden
Iceland
Australia
Israel
Martinique
Switzerland
Canada
France
Norway
81.5 yrs.
80.1 yrs.
79.4 yrs.
79.2 yrs.
79.2 yrs.
79.1 yrs.
79.1 yrs.
79.0 yrs.
79.0 yrs.
78.9 yrs.
ECONOMIC FUNCTIONS OF GOVERNMENT
C. REDISTRIBUTION
OF INCOME....
1. Transfer Payments
2. Personal Income Tax
Taxes in the USA
• 3. Theories of
Taxation:
– Ability to Pay
– Benefits Received
• 4. Types of Taxes:
– Progressive
– Proportional
– Regressive
Apportioning the Tax Burden
Benefits-Received Principle
Apportioning the Tax Burden
Benefits-Received Principle
Ability-to-Pay Principle
Apportioning the Tax Burden
Benefits-Received Principle
Ability-to-Pay Principle
• Progressive Tax &
Marginal Tax Rates!
Progressive Tax
•
•
•
•
•
•
•
•
The fraction of income paid in taxes increases as a person’s income
increases.
Marginal tax rate - rate at which the tax is paid on each additional unit
of income.
Example - Earning $50,000 – What do you pay in taxes given the
following rates?
1 – 41,200
15%
$8,644
41,201 – 99,600
28%
What is your average tax??
99,601 – 151,750 31%
17%
151,751 – 271,050 36%
271,050 39.6%
Apportioning the Tax Burden
Benefits-Received Principle
Ability-to-Pay Principle
• Progressive Tax
• Regressive Tax
Apportioning the Tax Burden
Benefits-Received Principle
Ability-to-Pay Principle
• Progressive Tax
• Regressive Tax
• Proportional Tax
Proportional and Regressive
• Proportional is a tax where the fraction of income paid in taxes
remains constant as a person’s income increases. A flat tax.
• Regressive is a tax where the fraction of income paid in taxes
increases the lower your income.
• Sales taxes are what seem to be a proportional tax but indeed are
regressive.
Family 1
Family of 4
Family 2
• Example
35,000
5,000
6%
$300
.8%
75,000
Food expenses
5,000
tax rate – flat tax
6%
tax paid
$300
of income
.4%
Tax Applications:
Identify whether progressive, regressive, or proportional
• Personal Income Tax
• Sales Tax
• Corporate Income Tax
• Payroll Taxes
• Property Taxes
Taxes as a Percent of GDP
•
•
•
•
•
•
•
•
Sweden
Denmark
Netherlands
Belgium
France
Austria
Germany
Italy
Source OECD
56.1%
49.9%
46.0%
44.3%
43.8%
41.0%
38.1%
37.8%
•
•
•
•
•
•
•
•
Ireland
Britain
Canada
Spain
Greece
Japan
Australia
USA
37.6%
36.5%
35.3%
34.4%
33.2%
30.6%
30.1%
29.9%
ECONOMIC FUNCTIONS OF GOVERNMENT
C. REDISTRIBUTION
OF INCOME....
•1. Transfer Payments
FICA to People
• 2-4. Taxes
5. Market Intervention
Minimum wages and subsidies.
ECONOMIC FUNCTIONS OF GOVERNMENT
D. REALLOCATION OF RESOURCES...
1. The government will intervene
when it feels a market
failure has taken place.
2. The market produces the
wrong type or amount
of goods.
3. The market fails to
allocate any resources
for the production of a good.
ECONOMIC FUNCTIONS OF GOVERNMENT
D. REALLOCATION OF RESOURCES....
4. Spillovers or Externalities
- Spillover Costs
When a producer avoids some
of the costs of producing
a product.
Example – pollution
A larger output is produced
than is socially acceptable.
ECONOMIC FUNCTIONS OF GOVERNMENT
REALLOCATION OF RESOURCES....
Spillovers or Externalities
Spillover Costs
- Correcting For Spillover Costs
•Legislation
ECONOMIC FUNCTIONS OF GOVERNMENT
REALLOCATION OF RESOURCES....
Spillovers or Externalities
Spillover Costs
Correcting For Spillover Costs
•Legislation
•Specific Taxes
Correcting for Spillover Costs
P
Spillover
s + Tax
costs
S
New market price
paid by consumers
Price too Low!
Amount of
Tax needed
to correct
Negative
externality!
D
0
Qd = Q s
Overallocation
Q
Correcting for Spillover Costs
P
Spillover
costs
S + Tax
S
Tax
Consumer pays
Producer Receives
TAX
To Fix
Spillover cost
0
D
Q
Overallocation Corrected
ECONOMIC FUNCTIONS OF GOVERNMENT
REALLOCATION OF RESOURCES....
Spillovers or Externalities
Spillover Benefits
The Underallocation of Resources
You don’t directly get all the utility or receive all the benefits,
so you don’t consume as much as you could if you did
receive all of the benefits.
Example - Education
ECONOMIC FUNCTIONS OF GOVERNMENT
REALLOCATION OF RESOURCES....
Spillovers or Externalities
Spillover Benefits
Correcting for Spillover Benefits....
• Increase Demand
Correcting for Spillover Benefits
P
S
Spillover
Benefits
Initially
priced too
low!!!
D + Subsidy
Underallocation
Correction
0
Federal Grants for Education
D
Q
Correcting for Spillover Benefits
P
Amount of the subsidy needed to correct externality!
S
Subsidy
to consumer
Price is
Increased!
D + Subsidy
Underallocation
Corrected
0
D
Q
ECONOMIC FUNCTIONS OF GOVERNMENT
REALLOCATION OF RESOURCES....
Spillovers or Externalities
Spillover Benefits
Correcting for Spillover Benefits....
• Increase Demand
• Increase Supply
Correcting for Spillover Benefits
P
S
S + Subsidy
Subsidy
to producers
Price for
consumers
falls
Subsidy
to business
Underallocation D
Corrected
Q
0
Madison costs less than Marquette
ECONOMIC FUNCTIONS OF GOVERNMENT
REALLOCATION OF RESOURCES....
Spillovers or Externalities
Spillover Benefits
Correcting for Spillover Benefits....
• Increase Demand
• Increase Supply
• Government Provision
5. Ownership Rights
• Some goods need to be
produced because they produce
a societal benefit but would not
be produced if the gov’t did not
intervene.
• In order to determine when the
gov’t should intervene they
classify goods according to
categories.
• Exclusion principle - One of the
main determining factors is if
the good will be adequately
produced in the market. Does
the purchaser have an exclusive
right to that good?
Pure Private Goods
• No Shared
Consumption!
• Exclusion
permitted!
• Hands off my
burger!!
• Depletability
Toll Goods
• You pay to use a
resource
• Using the resource
doesn’t deplete its
supply or usefulness
• You may be denied
use if you fail to pay
• Applies to private
goods
Pure Public Goods
• Indivisible – too large
for individuals to
consume.
• Free Rider Problem
• The benefits to one
user does not exceed
the cost!
• Highways, space
shuttle, aircraft carrier
Private Goods:
Divisibility &
Depletability
Public Goods:
Indivisible
Public or Social Goods Are...
Indivisible
Subject to the free-rider problem
May Provide Large Spillover
Benefits
Quasi-public Goods
Can be produced by market or government but have large
spillover benefits.
Common Pool Goods
• Joint ownership
• Fish in Lake Michigan
• The UN plan to save
the Whales and
Dolphin
• Gate Foundation to
purchase from UN all
whales and dolphins!
Public Goods & Services
Note:
The Exclusion Principle
Does Not Apply
Public Goods & Services
Note:
The Exclusion Principle
Does Not Apply
Some Goods & Services
Would Not Be Produced
By The Market System
Public or Social Goods Are...
The Free Rider Problem:
Visitors to Ozaukee County may use this public good
even if they have never paid at tax in this county.
Public or Social Goods Are...
Indivisible
Subject to the free-rider problem
May Provide Large Spillover
Benefits
E. Stabilization of the Economy
1. Should the Government take a
Role?
2. Action is taken to deal with issues
of unemployment and inflation.
ECONOMIC FUNCTIONS OF GOVERNMENT
In A Recession
STABILIZATION....when
GDP: Growing to Slowly
Or High Unemployment
• Cut Taxes
• Raise Government
Spending
• Run a Deficit
ECONOMIC FUNCTIONS OF GOVERNMENT
In A Period of Inflation
STABILIZATION....
GDP: Growing too Fast
Prices Rising out of Control
• Raise Taxes
• Cut Government
Spending
• Run a Surplus
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
INPUTS
GOVERNMENT
GOODS &
SERVICES
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
THE CIRCULAR FLOW REVISITED
$ COSTS
NET TAXES FLOW
RESOURCE
TO GOVERNMENT
MARKET
FROM BUSINESSES
RESOURCES
BUSINESSES
GOVERNMENT
GOODS &
SERVICES
$ INCOMES
INPUTS
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
THE CIRCULAR FLOW REVISITED
$ COSTS
RESOURCE
GOVERNMENT
GOODS & SERVICES MARKET
FLOW TO BUSINESSES
RESOURCES
BUSINESSES
GOVERNMENT
GOODS &
SERVICES
$ INCOMES
INPUTS
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
THE CIRCULAR FLOW REVISITED
$ COSTS
RESOURCE
MARKET
RESOURCES
BUSINESSES
GOVERNMENT
GOODS &
SERVICES
$ INCOMES
NET TAXES FLOW
TO GOVERNMENT
FROM HOUSEHOLDS
INPUTS
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
GOVERNMENT
GOODS &
SERVICES
GOODS & SERVICES
FLOW TO HOUSEHOLDS
FROM GOVERNMENT
INPUTS
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
EXPENDITURES
FLOW TO
ACQUIRE RESOURCES
RESOURCES
BUSINESSES
RESOURCE
MARKET
INPUTS
GOVERNMENT
GOODS &
SERVICES
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
GOVERNMENT
GOODS &
SERVICES
RESOURCES
FLOW TO
INPUTS
GOVERNMENT
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
INPUTS
GOVERNMENT
GOVERNMENT
EXPENDITURES
GOODS &
FLOW
TO
SERVICES
PRODUCT MARKET
HOUSEHOLDS
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
INPUTS
GOVERNMENT
HOUSEHOLDS
GOODS & SERVICES
FLOW TO
GOODS
&
GOVERNMENT
SERVICES
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
THE CIRCULAR FLOW REVISITED
$ COSTS
$ INCOMES
RESOURCE
MARKET
RESOURCES
BUSINESSES
subsidy
INPUTS
Tax Payments
GOVERNMENT
GOODS &
SERVICES
HOUSEHOLDS
FICA
GOODS &
SERVICES
PRODUCT
MARKET
$ REVENUE
$ CONSUMPTION
The Federal Budget!
Total Revenues (Taxes)
– Total Costs (Expenditures)
+ Budget Surplus
0 Balanced Budget
- Budget Deficit
2004 Deficit:
$480 Billion
Sum of all yearly
Projected deficits is the National
2005
Debt of:
333
7.4 Trillion Dollars!
Billion
GOVERNMENT GROWTH
Purchases & Transfers...
•Government Purchases
GOVERNMENT GROWTH
Purchases & Transfers...
•Government Purchases
•Transfer Payments
The Federal Budget
Federal Expenditures
How Does Government
Spend Its Money????
The Federal Budget
Federal Expenditures
Income Security
38%
The Federal Budget
Federal Expenditures
Income Security
Health
38%
20%
The Federal Budget
Federal Expenditures
Income Security
Health
National Defense
38%
20%
18%
The Federal Budget
Federal Expenditures
Income Security
Health
National Defense
Interest on Public Debt
38%
20%
18%
15%
The Federal Budget
Federal Expenditures
Income Security
Health
National Defense
Interest on Public Debt
All Other
38%
20%
18%
15%
9%
The Federal Budget Funded on a Percentage Basis of
Income Tax Dollars
26.2% goes to the military
22.6% goes to pay the interest on the national debt
19.0% goes to health care
5.5% goes to income security
3.4% goes to benefits for veterans
3.2% goes to education
2.5% goes to nutrition spending
1.6% goes to housing
Remember…..
1.6% goes to the environment FICA funds Social
0.4% goes to job training
Security Payments!
14.0% goes to all other expenses
Of $10,000.00 Paid in Federal Income Tax:
$2,620.00 goes to the military
$2,260.00 goes to pay the interest on
the national debt
$1,900.00 goes to health care
$550.00 goes to income security
$340.00 goes to benefits for veterans
$320.00 goes to education
$250.00 goes to nutrition spending
$160.00 goes to housing
Excludes
$160.00 goes to the environment
FICA @
$40.00 goes to job training
7.5%
$1,400.00 goes to all other expenses
The Federal Budget
Federal Receipts/Revenues
How Does Government
Raise Its Money????
The Federal Budget
Federal Receipts/Revenues
Personal Income Tax45%
The Federal Budget, 1996
Notes:
Federal
Receipts
Personal
MARGINAL
Income Tax45%
TAX
RATES
The Federal Budget, 1996
Notes:
Federal
Receipts
Personal
MARGINAL
Income Tax45%
TAX
RATES
AVERAGE
TAX
RATES
The Federal Budget
Federal Receipts/Revenues
Personal Income Tax45%
Payroll Taxes
35%
The Federal Budget
Federal Receipts/Revenues
Personal Income Tax45%
Payroll Taxes
35%
Corporate Income Tax 12%
The Federal Budget
Federal Receipts/Revenues
Personal Income Tax45%
Payroll Taxes
35%
Corporate Income Tax 12%
Excise or Sales Taxes 4%
The Federal Budget
Federal Receipts/Revenues
Personal Income Tax45%
Payroll Taxes (FICA) 35%
Corporate Income Tax 12%
Excise or Sales Taxes 4%
All Other
4%
STATE & LOCAL FINANCE
State Expenditures
Public Welfare
1994 DATA
32%
STATE & LOCAL FINANCE
State Expenditures
Public Welfare
Education
1994 DATA
32%
21%
STATE & LOCAL FINANCE
State Expenditures
Public Welfare
Education
Health & Hospitals
1994 DATA
32%
21%
10%
STATE & LOCAL FINANCE
State Expenditures
Public Welfare
Education
Health & Hospitals
Highways
1994 DATA
32%
21%
10%
10%
STATE & LOCAL FINANCE
State Expenditures
Public Welfare
Education
Health & Hospitals
Highways
Public Safety
1994 DATA
32%
21%
10%
10%
8%
STATE & LOCAL FINANCE
State Expenditures
Public Welfare
Education
Health & Hospitals
Highways
Public Safety
All
Other
1994 DATA
32%
21%
10%
10%
8%
21%
STATE & LOCAL FINANCE
State Receipts
Sales Taxes
1994 DATA
49%
STATE & LOCAL FINANCE
State Receipts
Sales Taxes
Income Taxes
(Personal & Corporate)
1994 DATA
49%
32%
STATE & LOCAL FINANCE
State Receipts
Sales Taxes
Income Taxes
(Personal & Corporate)
Corporate Income Tax
1994 DATA
49%
32%
7%
STATE & LOCAL FINANCE
State Receipts
Sales Taxes
Income Taxes
(Personal & Corporate)
Corporate Income Tax
Property Taxes
1994 DATA
49%
32%
7%
2%
STATE & LOCAL FINANCE
State Receipts
Sales Taxes
Income Taxes
(Personal & Corporate)
Corporate Income Tax
Property Taxes
Death & Gift Taxes
1994 DATA
49%
32%
7%
2%
1%
STATE & LOCAL FINANCE
State Receipts
Sales Taxes
Income Taxes
(Personal & Corporate)
Corporate Income Tax
Property Taxes
Death & Gift Taxes
Licenses Other Taxes
1994 DATA
49%
32%
7%
2%
1%
9%
STATE & LOCAL FINANCE
Local Expenditures
Education
1994 DATA
42%
STATE & LOCAL FINANCE
Local Expenditures
Education
42%
Welfare, Health, & Hospitals 14%
1994 DATA
STATE & LOCAL FINANCE
Local Expenditures
Education
42%
Welfare, Health, & Hospitals 14%
Housing & Sewerage
8%
1994 DATA
STATE & LOCAL FINANCE
Local Expenditures
Education
42%
Welfare, Health, & Hospitals 14%
Housing & Sewerage
8%
Public Safety
10%
1994 DATA
STATE & LOCAL FINANCE
Local Expenditures
Education
42%
Welfare, Health, & Hospitals 14%
Housing & Sewerage
8%
Public Safety
10%
Highways
5%
1994 DATA
STATE & LOCAL FINANCE
Local Expenditures
Education
Welfare, Health, & Hospitals
Housing & Sewerage
Public Safety
Highways
All Others
1994 DATA
42%
14%
8%
10%
5%
21%
STATE & LOCAL FINANCE
Local Receipts
Property Taxes
1994 DATA
75%
STATE & LOCAL FINANCE
Local Receipts
Property Taxes
Sales & Excises
1994 DATA
75%
15%
STATE & LOCAL FINANCE
Local Receipts
Property Taxes
Sales & Excises
Personal & Corporate
Income Taxes
1994 DATA
75%
15%
6%
STATE & LOCAL FINANCE
Local Receipts
Property Taxes
Sales & Excises
Personal & Corporate
Income Taxes
All Other
1994 DATA
75%
15%
6%
4%
STATE & LOCAL FINANCE
Local Receipts
Property Taxes
Sales & Excises
Personal & Corporate
Income Taxes
All Other
LOTTERIES
1994 DATA
75%
15%
6%
4%
STATE & LOCAL FINANCE
Local Receipts
Property Taxes
75%
Sales & Excises
15%
Personal & Corporate
Income Taxes
6%
All Other
4%
Fiscal Federalism
LOTTERIES
1994 DATA
STATE & LOCAL FINANCE
Local Receipts
Property Taxes
75%
Sales & Excises
15%
Personal & Corporate
Income Taxes
6%
All Other
4%
Fiscal Federalism
LOTTERIES
1994 DATA
Page 2
functional distribution of
income
personal distribution of
income
durable good
non-durable good
services
plant
firm
vertical combination
horizontal combination
Copyright McGraw-Hill, Inc.
1999
conglomerate
combination
industry
sole proprietorship
partnership
corporations
stocks
bonds
limited liability
double taxation
principal-agent problem
Page 1
monopoly
spillover costs
spillover benefits
exclusion principle
public goods
free-rider problem
quasipublic goods
government
purchases
transfer payments
Copyright McGraw-Hill, Inc.
1999
personal income tax
marginal tax rate
average tax rate
payroll taxes
corporate income tax
sales & excise taxes
property tax
fiscal federalism
lotteries
Next:
The United States
in the
Global Economy
Chapter 6