Transcript taxes - Cengage Learning

Chapter 30
FINANCING GOVERNMENT
Taxes and Debt
© 2013 Cengage Learning
Gottheil — Principles of Economics, 7e
1
Economic Principles
Commandeering resources
Commandeering money (taxes)
Regressive, proportional, and
progressive tax structures
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Gottheil — Principles of Economics, 7e
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Economic Principles
Social Security taxes
Government securities and public
debt
Internally and externally financing
the debt
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EXHIBIT 1 PRODUCTION POSSIBILITIES CURVE
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Exhibit 1: Production
Possibilities Curve
What is the opportunity cost of
producing the first aircraft in Exhibit 1?
• The opportunity cost of producing the first
aircraft is 500 houses.
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Commandeering Resources
What is the most direct method
available for a government to acquire
resources?
• The most direct method is to commandeer
resources.
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Commandeering Resources
What is the most direct method
available for a government to
acquire resources?
• This is how the pharaohs built the pyramids,
and how governments built roads during the
Middle Ages.
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Commandeering Resources
What is the most direct method
available for a government to acquire
resources?
• The military draft is a modern form of
commandeering resources for the military.
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The Tax System
How is the tax system related to
commandeering resources?
• The tax system commandeers money, not
resources. Remember that resources are
land, labor, capital, and entrepreneurship.
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There’s More Than One Way to
Levy Taxes
Poll tax
• A tax of a specific absolute sum levied on
every person or every household.
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There’s More Than One Way to
Levy Taxes
Regressive income tax
• A tax whose impact varies inversely with the
income of the person taxed. Poor people have a
higher percentage of their income taxed than do
rich people.
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There’s More Than One Way to
Levy Taxes
1. What is an example of a regressive
income tax?
• One example is a poll tax.
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There’s More Than One Way to
Levy Taxes
1. What is an example of a regressive
income tax?
• Another example is a tax on consumption, such
as a sales tax. Since poor people spend all of
their income on consumption, while rich people
save a portion of their income, a consumption
tax is regressive.
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There’s More Than One Way to
Levy Taxes
Proportional income tax
• A tax that is a fixed percentage of income,
regardless of the level of income.
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There’s More Than One Way to
Levy Taxes
2. An example of a proportionate
income tax is?
• A flat-rate tax on personal income
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There’s More Than One Way to
Levy Taxes
Progressive income tax
• A tax whose rate varies directly with the
income of the person being taxed. Rich
people pay a higher tax rate—a larger
percentage of their income is taxed—than
do poor people.
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There’s More Than One Way to
Levy Taxes
3. What is an example of a progressive
income tax?
• The current system of federal income
taxation is progressive.
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There’s More Than One Way to
Levy Taxes
Corporate income tax
• A tax levied on a corporation’s income before
dividends are distributed to stockholders.
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Are We Really Paying High Taxes?
True or false: Taxes as a percentage of
GDP are higher in the U.S. than in any
other rich industrialized country.
• False
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Are We Really Paying High Taxes?
True or false: Taxes as a percentage of
GDP are higher in the U.S. than in any
other rich industrialized country.
• Tax revenues in the U.S. were 34.3 percent
of GDP.
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Are We Really Paying High Taxes?
True or false: Taxes as a percentage of
GDP are higher in the U.S. than in any
other rich industrialized country.
• In comparison, tax revenues as a percentage
of GDP were 40.6 in the United Kingdom, 43.4
in Canada, 45.1 in Germany, and 51.1 in France.
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There’s More Than One Way to
Levy Taxes
Property tax
• A tax levied on the value of physical assets
such as land, or financial assets such as
stocks and bonds.
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There’s More Than One Way to
Levy Taxes
Unit tax
• A fixed tax in the form of cents or dollars per
unit, levied on a good or service.
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There’s More Than One Way to
Levy Taxes
Sales tax
• A tax levied in the form of a specific percentage
of the value of the good or service.
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There’s More Than One Way to
Levy Taxes
Customs duty
• A sales tax applied to a foreign good or service.
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There’s More Than One Way to
Levy Taxes
Excise tax
• Any tax levied on a good or service, such as
a unit tax, a sales tax, or a customs duty.
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There’s More Than One Way to
Levy Taxes
4. Complete the following sentence:
All excise taxes are ______.
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There’s More Than One Way to
Levy Taxes
4. Complete the following sentence:
All excise taxes are regressive.
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There’s More Than One Way to
Levy Taxes
5. Which of the following is a unit
tax?
a. A 7% tax on gasoline sales
b. A $10 tax on fishing rods
c. A 20% flat tax on income
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There’s More Than One Way to
Levy Taxes
5. Which of the following is a unit
tax?
a. A 7% tax on gasoline sales
b. A $10 tax on fishing rods
c. A 20% flat tax on income
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There’s More Than One Way to
Levy Taxes
6. True or false: In any given year, Social
Security taxes collected by the
government equal the Social Security
payments that the government makes.
• False. The surplus funds are invested in
government bonds, which pay interest to the
Social Security system.
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EXHIBIT 2 2006 TAX RATE SCHEDULE FOR MARRIED
PERSONS FILING JOINTLY
Source: Internal Revenue Service, Instructions for Form 1040 (Washington, D.C.: Department of the
Treasury, 2006).
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Exhibit 2: 2006 Tax Rate Schedule for
Married Persons Filing Jointly
Suppose that a married couple filing jointly
had $100,000 in taxable income. According to
Exhibit 2, how much federal income tax must
this couple pay?
• On the first $7,000 they pay 10%, which
equals $700.
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Exhibit 2: 2006 Tax Rate Schedule for
Married Persons Filing Jointly
Suppose that a married couple filing jointly
had $100,000 in taxable income. According to
Exhibit 2, how much federal income tax must
this couple pay?
• On the next $21,400 they pay 15%, which
equals $3,200.
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Exhibit 2: 2006 Tax Rate Schedule for
Married Persons Filing Jointly
Suppose that a married couple filing jointly
had $100,000 in taxable income. According to
Exhibit 2, how much federal income tax must
this couple pay?
• On the next $40,400 they pay 25%, which
equals $10,100.
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Exhibit 2: 2000 Tax Rate Schedule for
Married Persons Filing Jointly
Suppose that a married couple filing jointly
had $100,000 in taxable income. According to
Exhibit 2, how much federal income tax must
this couple pay?
• On the final $31,100 they pay 28%, which
equals $10,296.
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Exhibit 2: 2006 Tax Rate Schedule for
Married Persons Filing Jointly
Suppose that a married couple filing jointly
had $100,000 in taxable income. According to
Exhibit 2, how much federal income tax must
this couple pay?
• Thus the married couple pays a total of
$(700 + $3210 + $10,100 + 8,736) = $22,746.
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EXHIBIT 3 FEDERAL, STATE, AND LOCAL GOVERNMENT
REVENUES: 2007 ($ BILLIONS)
Source: Survey of Current Business (Washington, D.C.: U.S. Department of Commerce, August 2008).
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Exhibit 3: Federal, State, and Local
Government Revenues: 2007
Complete the sentence:
______ taxes are the largest single
source of combined government tax
revenues.
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Exhibit 3: Federal, State, and Local
Government Revenues: 2007
Complete the sentence:
Income taxes are the largest single
source of combined government tax
revenues.
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EXHIBIT 4 FEDERAL GOVERNMENT’S SURPLUSES
AND DEFICITS AND AS PERCENT OF GDP:
1990–2007 (in constant 2000$)
Source: Statistical Abstract, The United States: 2006 (Washington, D.C.: U.S. Department of Commerce, 2008).
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Exhibit 4: Federal Government’s
Surpluses and Deficits and as
Percent of GDP: 1990–2007
True or false: The federal government
ran a budget surplus during the years
between 1990 and 2007.
• False. The federal government ran a budget
deficit during that time period.
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Financing Government
Spending Through Debt
Public debt
• The total value of government securities—
Treasury bills, notes, and bonds—held by
individuals, businesses, other government
agencies, and the Federal Reserve.
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EXHIBIT 5 OWNERSHIP OF THE U.S. PUBLIC DEBT: 2010
(percentage of total)
Source: Federal Reserve Bulletin (Washington, D.C., September 2011).
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Exhibit 5: Ownership of the U.S.
Public Debt: 2010
Which of the following correctly identifies
the top two owners of the U.S. public debt:
a. Depository institutions
b. Federal Reserves and intergovernmental
holdings
c. Foreigners
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Exhibit 5: Ownership of the U.S.
Public Debt: 2010
Which of the following correctly identifies
the top two owners of the U.S. public debt:
a. Depository institutions
b. Federal Reserves and intergovernmental
holdings and foreigners
c. Pension funds
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Financing Government Sending
through Debt
Which form of federal government debt
is sold in denominations as low as
$1,000 and carry maturities of 2 to 10
years?
• U.S. Treasury notes
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Tracking Government Debt
What caused gross federal debt to
more than double between the early
1980s and the early 1990s?
• Tax cuts in 1981 and again in 1986
• Rising government spending in the 1980s
• Recessions in the early 1980s and again in
the early 1990s
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EXHIBIT 6A THE FEDERAL DEBT
Source: Statistical Abstract of the United States, 2006 (Washington, D.C.: U.S. Department of Commerce, 2006).
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EXHIBIT 6B THE FEDERAL DEBT
Source: Statistical Abstract of the United States, 2006 (Washington, D.C.: U.S. Department of Commerce, 2006).
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Exhibit 6: The Federal Debt
1. During what time period did the
gross federal debt grow most
rapidly?
• During the period between approximately
1980 and 2005
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Exhibit 6: The Federal Debt
2. Based on the data in panel b of
Exhibit 6, in what year was federal
debt as a percentage of GDP the
largest?
• 1945. Spending on the war effort caused
federal debt to be 125 percent of GDP.
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Exhibit 6: The Federal Debt
3. True or false: Gross federal debt as a
percentage of GDP has increased
sharply during the 1990s.
• False. Gross federal debt as a percentage of
GDP flattened out and then declined in the
1990s.
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Exhibit 6: The Federal Debt
4. Compare panels a and b in Exhibit 6.
What caused debt as a percentage of
GDP to flatten out and then decline
in the 1990s?
• Panel a shows that the gross federal debt
increased through 1996.
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Exhibit 6: The Federal Debt
4. Compare panels a and b in Exhibit 6.
What caused debt as a percentage of
GDP to flatten out and then decline in
the 1990s?
• In order for debt as a percentage of GDP to
flatten out when debt is still growing, GDP
must grow as fast as debt.
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Exhibit 6: The Federal Debt
4. Compare panels a and b in Exhibit 6.
What caused debt as a percentage of
GDP to flatten out and then decline in
the 1990s?
• In the late-1990s gross federal debt actually
began to decline.
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EXHIBIT 7
GROSS PUBLIC DEBT AS A PERCENT OF GDP
FOR SELECTED ECONOMIES: 2007
Source: The 2008 World Factbook, 2008.
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Exhibit 7: Gross Public Debt as
a Percent of GDP for Selected
Economies: 2007
What does Exhibit 7 suggest about the
U.S. debt ratio of 65.7 percent GDP
compared to other countries?
• It is not out of line and even and is a
near match of France’s and Germany’s.
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Hatred of Tax Collection is the
Way of the World
In which of the following countries do
tax collectors wear commando
uniforms and carry weapons:
a. Sweden
b. France
c. Russia
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Hatred of Tax Collection is the
Way of the World
In which of the following countries do
tax collectors wear commando
uniforms and carry weapons:
a. Sweden
b. France
c. Russia
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Does Debt Endanger Future
Generations?
In one sense the answer is no. While
the interest on future government debt
must be paid by taxing the future
economy, people in the future who own
government bonds receive that interest
as income.
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Does Debt Endanger Future
Generations?
In another sense the answer is yes.
For example, if future bondholders are
rich, then the rich receive the interest
income while the poor only bear the
burden of higher taxes.
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Does Debt Endanger Future
Generations?
In addition, increased government debt
purchased by the Fed will increase the
money supply, which can be
inflationary.
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Does Debt Endanger Future
Generations?
Another problem with increased
government debt is that it tends to
crowd out private investment, which
slows the rate of economic growth.
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Does Debt Endanger Future
Generations?
External debt
• Public debt held by foreigners.
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Does Debt Endanger Future
Generations?
Recall from Exhibit 5 that foreigners
are a major owner of U.S. public debt.
In this case, future generations of U.S.
citizens bear the burden of higher
taxes to pay the interest that flows to
foreigners.
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Are Deficits and Debt
Inevitable?
What was the impact of the Reagan
tax agenda in the 1980s on the
federal budget deficit?
• Supply-side advocates convinced Reagan
that cutting tax rates would cause GDP to
grow so much that tax revenues would
actually increase.
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Are Deficits and Debt
Inevitable?
What was the impact of the Reagan tax
agenda in the 1980s on the federal
budget deficit?
• Supply-side expectations notwithstanding, the
tax reforms did not do much to increase tax
revenues during the 1980s. At the same time,
government spending continued to grow.
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Are Deficits and Debt
Inevitable?
What was the impact of the Reagan tax
agenda in the 1980s on the federal
budget deficit?
• The combination of tax cuts and government
spending growth produced in the 1980s the
largest annual budget deficits in the history of
the United States.
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Are Deficits and Debt
Inevitable?
The combination of the Clinton
presidency, the Republican
Congress, and sustained economic
growth eliminated budget deficits by
the late-1990s.
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Are Deficits and Debt
Inevitable?
Bush’s Jobs and Growth Tax Relief
Reconciliation Act may have helped
alleviate the post-1990s recession and
the 9/11 downturn. However, budget
deficits returned.
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The Aftermath of the 2008 Financial
Meltdown
The president, aided by an obliging
Congress, sought to pull the economy
out of its doldrums by incurring
record-setting deficits which raised
the public debt level above $13 trillion
by 2010.
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