Transcript I. Intro to Income

Teaching Colorado’s new
Personal Financial Literacy content standards
All About Income
for
Elementary Teachers
Dr. Katie Sauer
Metropolitan State University of Denver
[email protected]
borrowing
wants
What is money?
spend
needs
allowance
gifts
money income
save
charity
pay back loan
adults’ skills & education
economy
taxes
Session Overview
I. Intro to Income
II. Two Main Determinants of Income
- human capital
- state of the economy
III. A Simple Model of the Labor Market
IV. Taxes Individuals Pay
I. Intro to Income
How much income does the average US household earn in a
year?
- statistics will be found for “median” or “mean” income
Median Income:
- rank all households by income
- household in middle = median household
Mean Income:
- add up all household’ income
- divide by number of households
How much are US median income and mean income?
median income = $49,777
mean income = $67,976
How much is Colorado’s median income?
$55,930
(This was 2009 data)
For recent data: US Census Bureau www.census.gov
For occupation / industry data: Bureau of Labor Statistics
www.bls.gov
Income comes from other sources than working.
Table 4.4 Personal income, 1988, 1998, 2008 and projected 2018: Sources of Personal Income
Billions of current dollars
Percent distribution
Category
1988
1998
2008
2018
1988
1998
2008
2018
Personal income
$ 4,253.7 $ 7,423.0 $ 12,100.7 $ 19,129.6 100.0
100.0
100.0
100.0
Compensation of employees
2,967.2
5,020.1
8,052.8
12,404.8
69.8
67.6
66.5
64.8
Wage & salary disbursements
2,452.9
4,183.4
6,548.0
10,043.1
57.7
56.4
54.1
52.5
Supplements to wages &
salary
514.3
836.7
1,504.8
2,361.8
12.1
11.3
12.4
12.3
Proprietors' income
341.6
627.8
1,072.4
1,647.7
8.0
8.5
8.9
8.6
Rental income
40.6
137.5
64.4
146.2
1.0
1.9
0.5
0.8
Personal income on assets
769.3
1,283.2
2,037.6
3,543.3
18.1
17.3
16.8
18.5
Personal interest income
639.5
933.3
1,208.5
2,194.9
15.0
12.6
10.0
11.5
Personal dividend income
129.7
350.0
829.1
1,348.3
3.0
4.7
6.9
7.0
Personal current transfer
receipts
496.6
978.6
1,869.1
3,005.2
11.7
13.2
15.4
15.7
Federal social benefits
377.5
716.8
1,378.6
2,196.5
8.9
9.7
11.4
11.5
State & local social benefits
98.5
235.8
455.8
757.5
2.3
3.2
3.8
4.0
Other, from business (net)
20.6
26.0
34.7
51.2
0.5
0.3
0.3
0.3
Less: Social insurance
contribution
361.5
624.2
995.7
1,617.6
8.5
8.4
8.2
8.5
Employment Projections Program, U.S. Department of Labor, U.S. Bureau of Labor Statistics
How is income spent?
Table 4.4 Personal income, 1988, 1998, 2008 and projected 2018
Billions of current dollars
Category
1988
1998
2008
2018
Use:
Personal income
Personal consumption
Personal taxes
Personal interest payments
Personal transfer payments
To government:
Federal
State & local
To the rest of the world (net)
Personal savings
Percent distribution
1988
1998
2008
2018
4,253.7 7,423.0 12,100.7 19,129.6 100.0 100.0 100.0 100.0
3,353.6 5,879.5 10,057.9 15,293.5 78.8 79.2 83.1 79.9
505.0 1,027.1 1,457.3 2,596.6 11.9 13.8 12.0 13.6
96.8
25.4
14.8
2.8
12.0
10.6
174.5
65.2
40.5
8.6
31.9
24.6
248.2
144.6
84.5
18.0
66.5
60.1
375.9
212.8
124.8
27.4
97.4
88.1
2.3
0.6
0.3
0.1
0.3
0.2
2.4
0.9
0.5
0.1
0.4
0.3
2.1
1.2
0.7
0.1
0.5
0.5
2.0
1.1
0.7
0.1
0.5
0.5
272.9
276.8
192.6
650.9
6.4
3.7
1.6
3.4
Employment Projections Program, U.S. Department of Labor, U.S. Bureau of Labor Statistics
II. What determines income from working?
A. Human Capital
B. State of the Economy
A. Human Capital encompasses a person’s knowledge,
ability, and skills.
Most human capital is built through education and
training.
Generally speaking, higher human capital is correlated
with higher income.
Educational Attainment--People 25 Years Old and Over,
by Total Money Earnings in 2008
Doctorate Degree
$99,995
Professional Degree
$125,622
Master's Degree
$71,236
Bachelor's Degree
Associate's Degree
Some college, no degree
High School Graduate (inc. GED)
9th to 12th grade
less than 9th grade
$60,954
$41,226
$38,676
$33,618
$24,686
$21,491
US Census Bureau / BLS: 2009 Current Population Survey, Annual Social and Economic
(ASEC) Supplement
Table from PINC-03
Investing in human capital has an opportunity cost:
When students are in class they aren’t being
productive in the economy.
Increasing human capital can have benefits:
- higher paycheck
- better society
- productive workers
Individuals, firms and governments are willing to pay the
cost of investing in building human capital because they
expect to see benefits in the future.
Governments fund public education because a better
educated population contributes to faster and sustainable
development.
Firms invest in employee training because they expect to
cover the costs through higher profits from higher worker
productivity.
Individuals spend time and money on higher education
because they expect to earn higher wages.
A degree or certification can signal that someone has likely
built their human capital.
There may *not* be a return on education if
- it is of low quality
- the knowledge/skills learned don’t match market
demand
- there is slow economic growth (low demand for
new workers)
- workers are paid the same regardless of skill
(centrally planned economies, bureaucratic
systems)
Unemployment Rates by Educational Attainment
(people age 25 and older)
Less than High School
High School
Some college or AA
4 year degree or higher
www.bls.gov
B. The state of the economy affects income
When the economy is doing well, firms are hiring, people
find it relatively easy to find jobs.
The type of jobs needed in the economy change over time
as the structure of the economy changes.
If you are skilled in a sector that becomes obsolete, you
will need to acquire new skills to work in a different
sector or you will be unemployed for a long time.
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Percent Change in RGDP from Previous Year
The US Business Cycle
Annual US GDP growth rates
1930 to 2010
20
15
10
5
0
-5
-10
-15
Data source: Bureau of Economic Analysis
Year
bea.gov
III. A Simple Model of the Labor Market
The market wage is determined by the supply and demand
for labor.
A. The Supply of Labor (workers)
Because time is limited, many individuals face a tradeoff
between working and not working.
- all time spent not working will be called leisure
Economists call this the leisure-labor tradeoff.
We often analyze it in terms of income earned vs time spent
not working.
Income Earned
theoretical
maximum
income
Represents all
possible incomeleisure tradeoffs for a
given wage rate.
$ from 90 hours
of work
$ from 40 hours
of work
$0
0
78
128
Weekly
168 Hours of Leisure
For a given wage, individuals have different preferences
over income and leisure.
Person who prefers more
income and sacrifices
leisure.
Income
Person who prefers more
leisure and sacrifices
income.
Income
Preference Curve
Preference
Curve
Hours of
Leisure
Hours of
Leisure
When the wage increases, people typically respond in two
ways:
1. As the wage increases, the opportunity cost of leisure
also increases so people work more.
- for every hour you are *not* working, you are
forgoing more money
2. As the wage increases high enough, the individual has
more money and begins to value leisure more and thus
works less.
We can illustrate this effect with a labor supply curve.
The Labor Supply Curve
http://en.wikipedia.org/w
iki/Labour_economics
As the wage rate increases, first people choose to work
more hours, then they choose to work fewer hours.
B. The Demand for Labor (firms)
The demand for labor is known as a derived demand
because labor is not needed unless there is demand for the
product being produced.
When a firm hires a worker, the firm incurs a cost but also
receives a benefit.
- the cost of the worker is the wage
- the benefit of the worker is the output the worker
produces times the price the firm can sell that
output for
Ideally, a firm would pay a worker a wage that is equal to
the value of the worker’s output.
If the wage were less than the value of output a firm
could get from hiring another worker, the firm would
want to hire another worker.
If the wage were more than the value of output a firm
could get from its workers, the firm would want to fire a
worker.
In general, the lower the wage, the more workers a firm
could hire.
Wage Rate
As the wage rate falls,
a firm can hire more
workers.
Labor
Demand
Number of Workers
C. Putting Supply and Demand Together
The supply and demand for labor interact to determine the
market wage for various occupations.
Wage Rate
Labor
Supply
market wage
Labor
Demand
actual workers hired
Number of Workers
Ex: The demand for dental services has remained pretty
stable while many new dental hygienists are graduating.
Wage Rate
Labor
Supply
New Labor
Supply
market wage
new wage
Two potential
outcomes:
1. the wage falls,
the new workers
are hired
Labor
Demand
actual workers hired
more workers hired
Number of Workers
Wage Rate
Labor
Supply
New Labor
Supply
2. dental offices
are already hiring
the number of
hygienists that
are needed, new
hygienists are
unemployed
market wage
Labor
Demand
actual workers hired
hygienists who want
to work
The wage may or
may not fall.
Number of Workers
Ex: Professional Engineer
Wage Rate
Labor
Supply
vs
Bartender
Wage Rate
Labor
Supply
Labor
Demand
Number of Workers
Labor
Demand
Number of Workers
Often times firms will pay a wage that is above the
market wage.
- attract better workers
- reduce turnover
Sometimes workers unionize and collectively bargain for
wages that are higher than the market wage.
IV. Tax System
Policymakers have two considerations when it comes to
taxes:
efficiency and equity
A. Taxes and Efficiency
The primary goal of a tax is to raise money for the
government.
There are many ways to raise a given amount of
money.
Tax system A is more efficient than tax system B if it
raises the same amount of money but at a lower cost.
- minimize administrative burden, while
collecting money
B. Taxes and Equity
Equity has to do with how the tax burden is distributed.
- much disagreement!
The Benefits Principal of taxation is the idea that
people should pay taxes based on the benefits they
receive from the government.
- gasoline tax
- national defense
- park fee
The Ability-to-Pay Principle of taxation is the idea that
people should pay taxes according to how well that
person can shoulder the burden.
C. The Cost of Taxes
Taxes exert a cost on the economy. (fiscal drag)
1. taxes reduce your purchasing power
2. taxes cause people to change their behavior
3. taxes can cause deadweight loss
4. taxes discourage investment
5. taxes discourage work
IV. Taxes Individuals Pay
1. Federal Taxes
• Income Tax
• Payroll Taxes
The Social Security tax (FICA) 6.2%
The Medicare Tax 1.45%
• Estate Tax
• Gift Tax
• Gasoline Tax
18.4 cents per gallon
Calculating your Federal Income Tax
1. compute gross income
- wages, salaries
- interest, dividends, rental income
2. compute adjusted gross income
subtract off:
- retirement savings contributions
- alimony
- educator expenses
- contributions to HSAs
- job-related moves expenses
- interest paid on student loans
- if self-employed:
- health insurance premiums
- 50% of paid payroll taxes
3. Subtract any exemptions
- fixed amount of money that is deducted for the
taxpayer, spouse, dependents
- indexed for inflation
2012: $3,800 per person
4. Decide on deduction type
Standard Deduction:
$11,900 for married couples filing jointly
$5,950 for singles
$5,950 for married individuals filing separately
$8,700 for heads of household
Itemized Deduction:
- medical and dental expenses exceeding 7.5%
of AGI
- other taxes paid (state, local income tax)
- interest on mortgage
- charitable donations
- casualty and theft losses
- union dues and job travel expenses
5. Compute Federal Income Tax Owed
Here are the tax brackets for a single person for 2013:
Marginal Tax
Tax Bracket
Rate
over
but not over
10%
$0
$8,925
15%
$8,925
$36,250
25%
$36,250
$87,850
28%
$87,850
$183,250
33%
$183,250
$398,350
35%
$398,350
$400,000
39.6%
$400,000
Suppose you are single in 2013 and your AGI is $50,000.
You pay different tax rates on different portions of your
income.
Marginal Tax
Rate
10%
15%
25%
28%
33%
35%
39.6%
Tax Bracket
over
$0
$8,925
$36,250
$87,850
$183,250
$398,350
$400,000
On the first $8925, you pay 10% in taxes.
8925 x 0.10 = $892.50
but not over
$8,925
$36,250
$87,850
$183,250
$398,350
$400,000
Marginal Tax
Rate
10%
15%
25%
28%
33%
35%
39.6%
Tax Bracket
over
$0
$8,925
$36,250
$87,850
$183,250
$398,350
$400,000
but not over
$8,925
$36,250
$87,850
$183,250
$398,350
$400,000
On the next portion of income, you pay 15% in taxes.
36250 – 8925 = 27,325
27325 x 0.15 = $4098.75
Marginal Tax
Rate
10%
15%
25%
28%
33%
35%
39.6%
Tax Bracket
over
$0
$8,925
$36,250
$87,850
$183,250
$398,350
$400,000
but not over
$8,925
$36,250
$87,850
$183,250
$398,350
$400,000
On the next portion of income, you pay 25% in taxes.
50000 – 36250 = 13,750
13750 x 0.25 = $3437.50
The total amount you pay in taxes:
= (0.10)(8,925) + (0.15)(36,250 – 8,925) + (0.25)(50,000 – 36,250)
= 892.50
+ 4098.75
+ 3437.50
= $8,428.75
The marginal tax rate is the tax rate paid on an
additional dollar of income.
If your AGI is $50,000 and then you earn one extra
dollar of income, that dollar is taxed at a rate of 25%.
Your current marginal tax rate is 25%.
The average tax rate is the total taxes paid, divided by
total income.
= 8428.75 / gross income
x 100
Suppose your gross income is $60,000.
= 8428.75 / 60000 x 100
= 14.05% is your average tax rate
2. Colorado State Taxes for Individuals
Income Tax (4.63%)
Sales Tax (2.9%)
Consumer Use Tax (purchases that did not include
Colorado sales tax … internet, mail order, phone)
(2.9%)
Estate and Trust Income Tax (4.63%)
Gasoline Tax (22cents per gallon)
Cigarette Tax (4.2cents per cigarette, 2.9% per pack,
40% on other tobacco products)
Alcohol Tax (8cents per gallon beer/cider, 7.33cents
per liter wine, 60.26cents per liter of spirits)
3. Local Taxes and Fees
Motor Vehicle Registration
Property Tax
City Sales Tax
4. Special District Taxes
RTD levies a sales/use tax of 1.0% .
The Football District has a 0.1% sales/use tax.
The Scientific and Cultural Facilities District has a 0.1%
sales/use tax.
E. How your taxes are spent
1. Federal
http://www.whitehouse.gov/taxreceipt
2. Colorado
http://www.colorado.gov/taxtracks/