Download Deficit Finance

Personal Income Tax
Basic Structure
What is fair?
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People with equal incomes should pay
equal taxes?
People should pay in proportion to the
benefits they receive
Is progressivity fair?
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Do rich people receive proportionally greater
benefits than poor people?
Property rights
Are there better public schools in rich
neighborhoods? Better public infrastructure?
Better quality environment?
What is Income?
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Money value of the net increase in an
individual’s power to consume during a period
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How much you consume this period without reducing
your ability to consume in future periods
Are your job benefits income?
Are unrealized capital gains income?
Is income in kind income?
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Housework and child care?
Imputed rent?
My garden and furniture?
Business expenses
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Capital investments and depreciation
Three martini lunches
Excludable income
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Interest on state and local bonds
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Why does government allow this?
Is it efficient?
Potential for arbitrage
Capital gains
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Why a deferred rate?
Why a lower rate?
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Earned vs. unearned income
Double taxation
What about inflation?
Some types of savings
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Does it stimulate savings?
Exemptions and Deductions
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Exemptions and progressivity
Are deductions fair and efficient?
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Relative prices
Mortgage deductions and land speculation
State and local taxes
Why have all these deductions?
Tax simplification
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Importance of transaction costs
1040 form with 127 pages
1,300,000 words in tax code
1986 tax code changes
2001 tax code changes
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Sunset provisions
AMT
Tax Reform
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Flat tax
Green taxes/Land taxes
Tobin Tax
Wealth taxes
Estate taxes
Deficit Finance
Definitions
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Deficit– flow variable measured over time
(usually 1 year), difference between
expenditures and revenue
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On-budget deficit: ignores social security and postal
service
Off-budget deficit: social security and postal service
Unified budget deficit: the two together
Surplus– an historical curiosity, no longer
relevant
Debt– stock variable measured at a point in
time, sum of all accumulated deficits
Facts and figures
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Federal Debt currently about 7.3 trillion
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How big is a trillion?
~ 3 trillion held by government
~0.6 trillion held by Fed
~1.7 trillion held by foreigners
Per capita Fed debt about $24,910
Rate of increase about $1.73 billion per
day, or $2000 per person per year
State and local debt ~$1.4 trillion
Federal deficit
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$billions
Total Debt
4,000.00
3,500.00
3,000.00
2,500.00
2,000.00
1,500.00
1,000.00
500.00
0.00
Debt, deficits and inflation
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Inflation erodes value of debt
2% inflation x 7 trillion debt = 140 billion
“inflation tax”
US could simply print money to pay off the
debt with inflation tax
Capital accounts vs. current
accounts
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Debt does not distinguish between
consumption and investment
Should tangible assets be included?
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Privatization and the deficit
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What would be the net result if we account
for natural resource loss?
Developing countries
US
Why doesn’t the government distinguish?
Should obligations be included?
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~ 9 trillion in social security obligations
~ 6 trillion in Medicare obligations
~1.75 trillion in pension obligations
Burden of Debt
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Interest payments = ~10% of federal
expenditures
Is it spent on consumption or investment?
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If rate of return on investment is higher than interest,
no problem
Is it internal?
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Does internal debt impose a burden on future
generations?
Studies suggest that debt now = higher future taxes,
transfer of resource from future to present
Crowding out
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What happens to interest rates when
demands for loans increase?
What is the impact on business?
What is the impact on foreign countries
holding US dollar debt?
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Reagan deficits and Latin American Debt crisis
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percent of foreign to total privately held debt
0.6
0.5
0.4
0.3
0.2
0.1
0
percent of foreign to total debt
Why do foreigners assume US
debt?
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It is safe
Dollar is strong
Risk adjusted interest rates are competitive
What else do you do with a trade surplus?
What happens if dollar gets weak?
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Foreigners will not buy bonds and will sell dollars
What does this do to the dollar?
Interest rates must be raised to attract money
What does this do to business?
Tax or Borrow?
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Really a question of tax now or tax later?
Beneficiary pays principle
Intergenerational equity issue
Keynesian answer:
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Borrow when economy is weak, accumulate
debt
Tax when economy is booming, pay off debt