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Chapter 24
Taxes and
Spending
Nariman Behravesh
Edwin
Mansfield
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Government Spending as a Share
of the Economy, 1930-2006
• The following slide shows total government
spending (federal, state, and local) as a share
of the economy.
• Total government spending accounted for
only 9.4% of GDP in 1930, and only one
third of this spending was at the federal level.
• Government spending, particularly at the
federal level, soared from 1930 to 1970.
• Total government spending rose from 9.4%
of GDP in 1930 to 30.2% of GDP in 1970.
• Since 1970, government spending has been
relatively constant at about one-third of the
U.S. economy.
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The Size of Government
Government Expenditures as a Share (%) of GDP
1930
1940
1950
1960
1970
3.0
6.5
8.4
7.3
14.7
16.5
21.1
7.6
19.4
21.0
1990
21.6
2006
State & local
15.7
6.3
1980
2000
Federal
9.4
24.1
10.9
30.2
11.8
12.6
19.0
12.9
20.3
13.5
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32.8
34.2
31.9
33.8
How the Federal Government Spends (2006)
Social
Security 20.7%
Defense 19.7%
Net
Interest 8.5%
Transportation
2.6%
Other
13.3%
Income
Security 13.3%
Medicare and health 21.9%
Sources: Economic Report of the President, 2007, and Statistical Abstract of the United States, 2007.
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How State and Local Governments Spend
Insurance trusts 8.9%
Education
28.8%
Public welfare
& Health 19.5%
Administration
& other 21.9%
Police &
Fire Protection 4.9%
Transportation 5.5%
Utilities &
liquor stores 6.9%
Sources: Economic Report of the President, 2007, and Statistical Abstract of the United States, 2007.
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Interest on debt 3.6%
Financing the Public
Sector: Taxation
In order to make available public and correct
inequity, government must free up resources
from the production of private goods.
• Taxes shift resources from private to public use
• Taxing households and businesses reduces their
incomes and spending, the private demand for
products decreases, as does the private demand for
resources.
• This is known as Deadweight Loss
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THE U.S. TAX STRUCTURE
Collection of Taxes
Federal Government
•Personal Income Tax
•Corporate Income Tax
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(Social Security)
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THE U.S. TAX STRUCTURE
Collection of Taxes
State Governments
•Personal Income Tax
•Sales Tax
County and City Governments
•Property Taxes
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TAXES
Tax Incidence
The Tax Incidence or Tax Burden is the
determination of who actually pays the
tax. Government must determine how to
appropriate taxes from the citizens.
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THE U.S. TAX STRUCTURE
INCIDENCE OF U.S. TAXES
Personal Income Tax
Individual
Corporate Income Tax
Stockholders – Consumers
Sales Taxes
Consumers
Property Taxes
Owner or Renter
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TAXES
Tax Incidence
•Benefits-Received Principle
•Ability-to-Pay Principle
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Benefits Received versus
Ability to Pay
• The benefits-received principle is the idea that
people who receive the benefit from governmentprovided goods and services should pay the taxes
required to finance them.
• The ability-to-pay principle is the idea that
people who have greater income should pay a
greater proportion of it as taxes than those who
have less income.
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THE
TAX BURDEN
• Progressive Tax
• Regressive Tax
• Proportional Tax
•Flat Tax
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Progressive, Proportional,
and Regressive Taxes
• A progressive tax is one whose average tax rate
increases as the taxpayer’s income increases.
• A regressive tax is a tax whose average tax rate
decreases as the taxpayer’s income increases.
• A proportional tax is a tax whose average tax rate
remains constant as the taxpayer’s income
increases.
• A flat tax is a tax which takes the same monetary
amount regardless of income.
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Progressive, Proportional,
and Regressive Taxes
• In general, progressive taxes fall relatively more
heavily on high-income households while
regressive taxes are those that fall relatively more
heavily on the poor.
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Progressive, Proportional,
and Regressive Taxes
• Taxes are classified as progressive, proportional,
or regressive, depending on the relationship
between
• average tax rate (total tax paid as a percentage of
income) and
• marginal tax rate (the rate paid on each
additional dollar of income).
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PRESIDENT
GROWTH
RATE
Tax year
Top marginal
tax rate (%)
Taxable
income over--
1913
7
500,000
1918
77
1,000,000
1922
58
200,000
HARDING
1923
43
200,000
COOLIDGE
1925
25
100,000
1932
63
1,000,000
1936
79
5,000,000
1940
81
5,000,000
8.1%
1942
88
200,000
18.5%
1951
94
400,000
EISENHOWER
8.7%
1965
70
200,000
KENNEDY
1.7%
1981
38.5
215,400
REAGAN
-0.2%
1986
28
29,750
1993
39.6
89,150
1994
39.6
250,000
2003
35
311,950
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WILSON
ROOSEVELT
-1.3%
4.3%
CLINTON
4.0%
BUSH
3.9%
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TAX APPLICATIONS:
Identify whether progressive,
regressive, or proportional
• Personal Income Tax
Progressive
• Sales Tax
Regressive
• Corporate Income Tax
Proportional
• Payroll Taxes
Regressive
• Property Taxes
Regressive
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Tax Progressivity in the
U.S.
• The majority view of economists is as follows:
• The Federal tax system is progressive.
• The state and local tax structures are largely
regressive. A general sales tax and property taxes are
regressive with respect to income.
• The overall U.S. tax system is slightly progressive.
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THE TAX ISSUE
The Liberal Position
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THE TAX ISSUE
The Conservative Position
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End
Chapter 24
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