Transcript Chapter 30 Taxes and government debt

Chapter 30
Financing Government:
Taxes and Debt
4/8/2016
©1999 South-Western College Publishing
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In what possible three ways
do we pay for government
spending?
• Taxes
• Debt
• Inflation (via
printing of
money)
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What does government
spending have to do with
Opportunity Costs?
A dollar spent by the
military on an airplane is
a dollar that cannot be
spent on a new house
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Taxes, taxes, taxes
Or how we pay for
government
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Why Pay Taxes?
• Quote from Oliver
Wendell Holmes: “Taxes
are the price we pay for
civilization”
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Classifying taxes in relation
to income
• Proportional
• Progressive
• Regressive
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What is a Proportional
Income Tax?
A tax that is a fixed
percentage of income,
regardless of the level of
income, a flat rate tax
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What is a Progressive
Income Tax?
A tax whose rate varies
directly with the income
of the person taxed; rich
people pay a higher rate
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What is a Regressive
Income Tax?
A tax whose impact varies
inversely with the
income of the person
taxed; as a percentage,
poor people pay the most
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Classifying taxes in relation
to income
• Proportional: as income rises, the same %
of income is paid in tax (flat tax)
• Progressive: as income rises, a higher %
of income is paid in tax (graduated rate)
• Regressive: as income rises, a lower % of
income is paid in tax
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10% Proportional tax
Income
$30,000
Tax
$3,000
Tax/income
.10 (10%)
$40,000
$4,000
.10 (10%)
$50,000
$5,000
.10 (10%)
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Progressive tax:
Hypothetical marginal tax
brackets
Income from 0-$20,000 taxed at 10%
Income from 20-$40,000 taxed at 20%
Income over $40,000 taxed at 30%
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Progressive tax
Income
$30,000
Tax
$4,000
Tax/income
.13 (13%)
$40,000
$6,000
.15 (15%)
$50,000
$9,000
.18 (18%)
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Examples of regressive
taxes
• Poll taxes
• Sales taxes
• Social security tax
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What is a Poll Tax?
A tax of a specific absolute
sum levied on every
person or every household
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Why are sales and Excise
Taxes regressive?
Because low income
people spend a larger
percentage of their
income on purchases
than high income people
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Major Federal Taxes
• Personal income tax
• Social security taxes
(payroll tax)
• Corporate income tax
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State and local taxes
States: sales and income
taxes
Local: property and real
estate taxes
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What is a Corporate
Income Tax?
A tax levied on a
corporation’s income
before dividends are
distributed to stockholders
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For information and
statistics concerning taxes:
http://www.us.gov
http://www.irs.ustreas.gov/p
rod/tax_stats
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How are Income Taxes
Progressive in the U.S.?
Most people are in either the
15% or 28% tax bracket,
but some are in the 31%,
36%, or 39.6% bracket
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What are Exemptions
and Deductions?
They are both subtracted
from gross income to
determine taxable income
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Visit a few
organizations that
advocate tax reform:
http://www.atr.org
http://www.ctj.org
http://www.cats.org
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Theories of taxation
• Ability to pay: tax in accordance
with ableness to pay--suggests
using income and wealth taxes
• Benefits theory: tax those who
benefit from the programs that the
taxes are used to finance--gas
taxes, license fees
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Tax Incidence
• Who really pays a tax
and thus bears its
burden?
• Incidence is complicated
by tax shifting
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Shifting of taxes
• Forward: to the
consumer
• Backward: to the worker
or resource supplier
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Government budgets
If G=T, balanced budget
If G>T, deficit
If G<T, surplus
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What is a Federal Deficit?
A Deficit occurs when
the government spends
more than it receives
in tax revenues
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Where does government
get the money when
there is a deficit?
Borrow the money by
selling treasury bonds,
notes, etc. known as
government securities
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What are the different
kinds of securities?
Treasury ...
• Bills
• Bonds
• Notes
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What is a Treasury Note?
A Treasury bond that
matures in 2 to 10
years and is sold in
denominations as
low as $1,000
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What is a
U.S. Savings Bond?
A nonmarketable
Treasury bond that is
the most commonly
held form of public debt
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What is a Treasury Bond?
A Treasury Bond takes 30
years to mature and is
sold in denominations as
low as $1,000
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What is a
Treasury Bill?
A bond that matures in 3, 6,
or 12 months with
minimum denominations
of $10,000 and multiples
of $5,000 above this
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What is the Public
(national) Debt?
The total value of government
securities held by individuals,
businesses, other government
agencies, foreigners, and the
Federal Reserve
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Budget Philosophies
1. Annually balanced
2. Cyclically balanced
3. Functional finance
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Annually balanced
budget
Try to set G=T each year
Problem: could be
destabilizing to the
economy
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•Start with G=T
• Recession hits
•G rises, T falls, deficit
(cyclical) arises
•In order to balance budget,
either raise T or lower G,
but this is contractionary
policy
•Could worsen recession
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Cyclically balanced
budget
Balance the budget over
the course of the business
cycle, not necessarily
each year
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GDP
Cyclically balanced budget
Expansions,
run surpluses
Recessions,
run deficits
Time
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Functional finance
Balance the economy, not
the budget: shoot for full
employment, stable
prices, regardless of the
budget
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Cyclical vs structural
budget
Structural: what the budget would be
with existing tax laws and spending
programs, assuming full employment
Cyclical: difference between the actual
budget and the structural
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Example
Say present deficit is 200 billion,
unemployment rate is 7%: assume
full employment is 5%: at full
employment suppose the deficit would
only be 50 billion: then 50 billion is
the structural deficit, the other 150
billion is the cyclical deficit
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Why is an internally financed
public debt not a burden to
future generations?
Because even though
people pay taxes to finance
the debt, they also receive
interest payments
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Why is an externally
held debt a burden to
future generations?
Because people pay taxes
to finance the debt
without receiving the
interest payments
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What are some problems
with the National Debt?
• Not everyone holds the debt
• It promotes overconsumption
• It can create inflation
• It can crowd out private
investment
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For the latest statistics
on the Public Debt:
http://www.publicdebt.treas.gov
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Visit the national debt
clock
National Debt Clock
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• When the government spends a dollar,
do we always pay for that dollar?
• In what possible three ways do we pay
for that dollar?
• What does government spending have
to do with Opportunity Costs?
• What are alternative ways to levy
taxes?
• What is a Social Security Tax?
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• How are Income Taxes
Progressive in the U.S.?
• What does it mean that each dollar
of income is taxed on the Margin?
• What is a Federal Deficit?
• What is the Public Debt?
• What are the different kinds of
securities? Treasury …
• What are some problems with the
National Debt?
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END
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