Download Public Policy and Taxation

Public Policy and Taxation
Fiscal Policy
• Using Government Spending and taxation
to correct the economy.
GDP Gap
• Okun’s Law—For every 1% of
unemployment, the GDP of a country
declines by 2%.
– We are currently at 10% Unemployment
– Therefore we a a 20% GDP Gap
– With a current GDP of $14,463.4, the GDP
could potentially be at 17,356.08 if we were
fully employed.
– We have a gap of 2892.68
How do we get GDP to go up and
get people back to work?
• What are the components of GDP?
– C+I+G+(X-M)
• If we increase any one of those
components GDP will increase and people
will go back to work.
Philosophies on Fiscal Policy
• Keynesian Economics– Influence the
demand for goods and services by
increasing government spending.
• Supply-Side Economics– Influence the
supply of goods through tax breaks to
businesses and individuals as an incentive
to work more, and invest more.
• Classical--- Do nothing and the economy
will correct itself.
Keynesian Philosophy
• John Maynard Keynes
– Used by FDR
– New Deal
Keynes Philosophy
• Keynes philosophy is based on his
theories on consumption and the
multiplying effect.
• Keynes believes the single most important
factor in your spending( Consumption) is
_____________?_________________.
Keynes Believes the Government
needs to get actively involved to
correct the economy.
• The New Deal
– TVA
– CCC
– WPA
• Government gave people jobs to increase
their income and subsequently their
Consumption and finally GDP and
Employment.
How it Works
• Government initiates new spending
(Deficit) that counts toward GDP.
• MPC=.5
–
–
–
–
–
–
–
–
New Spending = $1.00
2nd round
=$0.50
3rd round
=$0.25
4th round
=$.125
5th round
=$.0625
6th round
=$.03125
7th round
=$.02
TOTAL
$2.00
Benefits
• Gives immediate helping hand to those on
the bottom socioeconomic rung.
• Effects felt in a short period
Negatives
• Inflation
• Deficit Spending (Increases the National
Debt)
Supply-Side
• Reaganomics/Voodoo Economics/Trickle
Down
– Use Tax breaks to encourage business growth
and worker productivity.
Arthur Laffer
• Notable Supply-Side Economist who
became influential during the Reagan
Administration
How it works
• The Government gives tax breaks to
companies
Benefits
• No inflation
How it Works
• Tax Break to Producer
– Tax Break = $1.00(this round of spending
doesn’t count because nothing new is
produced.
–
–
–
–
–
–
–
2nd round
3rd round
4th round
5th round
6th round
7th round
TOTAL
=$0.50
=$0.25
=$.125
=$.0625
=$.03125
=$.02
$1.00
Negatives
• Takes longer for $ to trickle to the bottom
rung
Taxes
• Income Tax- Tax on a persons yearly
income
2004 Tax Federal Income Tax
Bracket
Single
Taxable
income is
over
But not
over
The tax is
Plus
Of the
amount
over
$0
$7,150
$0.00
10%
$0
7,150
29,050
715.00
15%
7,150
29,050
70,350
4,000.00
25%
29,050
70,350
146,750
14,350.00
28%
70,350
146,750
319,100
35,717.00
33%
146,750
92,592.50
35%
319,100
319,100
Taxes Cont’d
• Progressive Tax-- A tax that taxes higher
incomes at a higher rate
• Regressive Tax– Taxes lower incomes at a
higher rate than higher incomes.
• Proportional—Everyone pays the same
proportion
Progressive Tax
If taxable income
is over--
But not
over--
The tax is:
$0
$7,550
10% of the amount over $0
$7,550
$30,650
$755 plus 15% of the amount over 7,550
$30,650
$74,200
$4,220.00 plus 25% of the amount over
30,650
$74,200
$154,800
$15,107.50 plus 28% of the amount over
74,200
$154,800
$336,550
$37,675.50 plus 33% of the amount over
154,800
$336,550
no limit
$97,653.00 plus 35% of the amount over
336,550
Regressive Tax
• EMS Tax---52.00---• DISCLOSURE STATEMENT: You are entitled to
receive a written explanation of your rights with
regard to the audit, appeal, enforcement, refund
and collection of local taxes by calling Capital
Tax Collection Bureau’s Harrisburg Division at
(717) 234-3217 during the hours of 8 a.m. – 4
p.m., Monday through Thursday and 8:30 a.m. –
4 p.m., Friday.
• Capital Gains– Profits made from the
selling of real estate or other investments.
• Deductions– expenses that may be
subtracted from your taxable income.
• Exemptions—A fixed amount that
individuals are allowed to subtract for
themselves and their dependents.
• Credit--- Subtraction from your tax liability
Other Taxes
• Excise Tax----A tax levied on the manufacture,
sale, or consumption of certain (particular) nonessential goods or services
• Social Insurance—Social Security.
• Estate Tax/Death Tax-- Up to 55%
• Gift Tax– up to $11,000 per year tax free. Then
up to 55%.
• Customs Duties– Tax on imported goods.
1 Wages, tips,
other
compensation
13,164.00
2 Federal
Income Tax
Withheld
1,316.40
3 Social
Security
W
ages
13,164.00
4 Social
Security Tax
Withheld
816.17
b Student's social
security number
123-45-6789
18 State
Income Tax
Withheld
263.28
19 State
Disability
Insurance
131.64
d Student's Name
Sample Student
This is a simplified version
of FORM W2
c Employer's Name
Your Class Name Goes
Here
Where “IT” Comes From
National Debt
• Debt Clock
$100
$10,000
$1 Million
$100 Million
$1 Billion
$1 Trillion
Right here
is the man.
Historic Debt
Monetary Policy
• Controls the flow of money in the economy
to stabilize the value of the dollar.
Monetary Policy Tools
• Interest rates
• Reserve Ratio
• Buying and Selling Securities
Interest Rate
• Interest Rate– A fee paid for borrowing
money or received for lending money.
• Higher Interest rates _______ people to
spend money and _______ people to save
money.
• Lower Interest Rates ________people to
spend money ___________people to save
money.
What would the Fed Do?
• If they wanted to expand the money
supply.
• If they wanted to contract the money
supply.
Required Reserve Ratio
• Amount of $ a bank must hold in reserve.
(based on a % of an account)
How Do Banks Make Money?
Example
• Tim Burr deposits $200,000 in Anybank
USA.
• The Required Reserve Ratio is 10%.
• How Much of Tim’s money must the bank
hold in reserve?
• What do they do with the rest?
Mr. Yocum borrows $180,000 to
buy my new car.
I go to Hoffman
Ford with my
borrowed
$180,000 and buy
my new car.
What happens next?
• Hoffman Ford deposits his money in
Anybank USA.$180,000
• How much of this money can they lend
out?
Do you mean there is more?
Bob borrows $162,000
to buy his new estate.
The bank has created more money
in Supply.
• Don’t believe me?
• Take a look!!!
• From the 200,000 deposit:
– 180,000 Mr. Yocum spent on new car
– 162,000 spent on their lovely estate.
– Total $342,000
– An We could keep going
Buying and selling securities
• What is a savings bond?
Series EE
How does the Series EE Bond
Work?
• You Pay ½ of face value and wait for the
maturation period.
What are Treasury bills?
• Treasury bills (or T-bills) are short-term
securities that mature in one year or less from
their issue date. You buy T-bills for a price less
than their par (face) value, and when they
mature we pay you their par value. Your interest
is the difference between the purchase price of
the security and what we pay you at maturity (or
what you get if you sell the bill before it
matures). For example, if you bought a $10,000
26-week Treasury bill for $9,750 and held it until
maturity, your interest would be $250.
What are Treasury notes and
bonds*?
• Treasury notes and bonds* are securities that
pay a fixed rate of interest every six months until
your security matures, which is when we pay
you their par value. The only difference between
them is their length until maturity. Treasury notes
mature in more than a year, but not more than
10 years from their issue date. Bonds*, on the
other hand, mature in more than 10 years from
their issue date. You usually can buy notes and
bonds* for a price close to their par value.
What is barter?
The direct exchange of one
good for another good,
rather than for money
What is the problem
with barter?
It requires a
coincidence of wants
What is money?
Anything that serves as
a medium of exchange,
unit of account, and
store of value
What is the advantage
of money?
The use of money
simplifies and therefore
increases market
transactions
What are the
functions of money?
• Medium of exchange
• Unit of account
• Store of value
What is a
medium of exchange?
The primary function of
money to be widely
accepted in exchange
for goods and services
What is a
unit of account?
The function of money to
provide a common
measurement of the
relative value of goods
and services
What does it mean that
money is liquid?
It is available to spend in
exchange for goods and
services without any
additional expense
Are credit cards
money?
No, credit cards fail to
meet the store-of-value
criterion and are
therefore not money
What is the best level of
scarcity for money ?
The supply of money
must be great enough
to meet ordinary
transactions needs, but
not be so plentiful that
it becomes worthless
What are other
properties
of
money?
Money must be …
• portable
• divisible
• uniform
• acceptable
What is
commodity money?
Anything that serves as
money while having
market value in other uses
Is our money backed up
by gold or silver?
No, our paper money was
exchangeable for gold until
1934, and in 1963 Congress
removed the right to
exchange $1 bills for silver
What is fiat money?
Money accepted by law
and not because of
redeemability or
intrinsic value
What makes our dollar
bills fiat money?
All our bills claim that “This
note is legal tender for all
debts public and private”
What does
legal tender mean?
Legally dollar bills
cannot be refused as
payment for a debt
What is currency?
Money, including coins
and paper money
Business Regulation
• Trusts—business combination formed to
limit competition and fix prices.
– Standard oil
• Regulation of public utilities
• Food Production regulation
• Regulations on advertising
– Cigarette advertising on radio and TV was
banned
• Consumer Product safety commission
Labor laws
• CHILD LABOR
• What is the youngest age at which a
person can be employed?
• Must young workers be paid the minimum
wage?
• What hours can youth work?
• What kinds of work can youth perform?
• Must a youth have a work permit to work?
Workplace safety
• OSHA
• Worker’s Compensation
Unemployment compensation
• $comes from a tax on employers which
buys a form of insurance.
Agriculture Policy
• Land-Grant Colleges—Grants funds from
public lands to schools for the teaching of
agriculture, veterinary medicine etc…
Environmental Policy
• National Parks
Mesa Verde
Mammoth Cave
Grand Teton
Badlands
Crater Lake
Arches
Energy Policies
• OPEC– Organization of PetroleumExporting Countries
Nuclear Power
• TMI
• March 28, 1979 a partial meltdown
occurred where some radioactive material
was released into the atmosphere.
• Within 30 seconds, a 2billion dollar
investment was rendered worthless.
Fuel alternatives
• Hydro electric
• Geothermal
• Solar Power
Hydroelectric Dam
Solar Power
Windmill Fields in Centralia, PA
Social Programs
• Social Security
Overview
• How Social Security Works
– Financing Social Security
– How Benefits Are Determined
• Financial Troubles
• How to Fix It
– Raise Taxes
– Cut Benefits
– Increase Investment Returns
• A two-tier System
How Many People Get Social
Security?
• 47.7 million people receive Social Security each
month
• 1 in 6 Americans get Social Security benefits
• Nearly 1 in 4 households get income from
Social Security
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
Who Gets Social Security?
•
•
•
•
•
30.0 million retired workers
4.8 million widows and widowers
6.2 million disabled workers
0.8 million adults disabled since childhood
3.1 million children
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
How Much Does Social Security
Pay?
Type of Beneficiary
All Retired Workers
Aged widow(er), non-disabled
Disabled worker
Average
Monthly
Benefit
$1,044
$1,008
$979
Aged couple-both receiving
$1,713
Widowed mother and two children
$2,167
www.ssa.gov/OACT/COLA/colaeffect.html
Social Security and Poverty
• 2007 Poverty Levels
– Single individuals – $10,210 ($851/month)
– Married couples – $13,690 ($1,141/month)
• With Social Security only 9% were poor
– in 2000
• Without it, 48% would have been poor
Financing Social Security
• Workers and their employers pay with Social
Security taxes
• Workers pay
– 6.2% of their earning for Social Security, and
– 1.45% of their earnings for Hospital Insurance under
Medicare (Part A)
• Employers pay an equal amount
• The total is 12.4% for Social Security and 2.9%
for HI
• Social Security tax base is $97,500 in 2007
Worker Benefits
• Workers over 62 are eligible
– If they have worked 10 years
• Benefits are based on a workers earnings
history
– Career-average earnings
– Average Indexed Monthly Earnings (AIME)
Full Retirement Age
Year of Birth
1937 or earlier
Full Retirement Age
65
1938 - 1942
plus 2 months per year
1942 – 1954
66
1955 - 1959
plus 2 months per year
1960 and later
http://www.ssa.gov/retire2/retirechart.htm
67
How do benefits compare to earnings?
Retired worker age 65, 2005
$90,000
$80,000
Past Wages
Benefits
$60,000
$55,400
$40,000
$35,300
35%
$20,000
42%
25%
$22,500
$19,600
$15,800
57%
$14,800
$9,000
$0
"low"
"medium"
Earnings Amount
"high"
"maximum"
How many people rely on Social
Security for most of their income?
• 90% of people 65 and older get Social
Security
• Nearly 2 in 3 (66%) get half or more of
their income from Social Security
• About 1 in 5 (22%) get all their income
from Social Security
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
Most elderly don’t receive pensions
Percent with Employer-Sponsored Pensions
All age 65+
Couples
Unmarried men
Unmarried women
41%
51%
39%
32%
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
Family Benefits
• Spouses, dependents, and survivors
• Husband or wife gets 50% of worker’s
PIA
– Together, couple gets 150%
• Widow or widower gets 100% of worker’s
PIA
• A joint and two-thirds annuity
• Dual entitlement rule limits benefits
Estimates for 2006 Finances
Trust Fund income = $745 billion (taxes)
Trust Fund outgo = $555 billion (benefits)
Surplus =
$190 billion
By law, surpluses are invested in U.S.
government securities and earn interest that
goes to the trust funds.
Social Security Administration 2007 Trustees’ Report
The Long-Range Forecast
(Best estimate)
• In 2017, tax revenues into the trust funds
forecasted to be less than benefits due that
year. Interest on the reserves and the
assets themselves will help pay for benefits
until 2041.
• In 2041, reserves are projected to be
depleted. Income is forecast to cover 75%
of benefits due then.
• By 2081, assuming no change in taxes,
benefits or forecasts, revenue would cover
70% of benefits due then.
Only 3 Ways to Fix Social Security
• Raise Taxes
• Cut Benefits
• Increase Investment Returns
– Private investment
– Either government or individual
Options: Raise Taxes
OPTION
• Increase tax rate by 2%
total
• Tax all earnings
• Tax 90% of earnings
• Include new state &
local govt. workers
• Tax SS benefits like
pensions
% of Deficit Eliminated
104%
National Academy of Social Insurance, Social Security Brief No. 18 (2005); American Academy of
Actuaries (2004).
93%
40%
10%
20%
Options: Cut Benefits
OPTION
% of Deficit Eliminated
• Raise retirement age (to
28%
67 faster & index)
• Reduce COLA by ½%
41%
each year
• Cut benefits by 5% for
those starting to get
32%
benefits in 2005
• Increase # years in wage
21%
avg. to 40
National Academy of Social Insurance, Social Security Brief No. 18 (2005); American Academy of
Actuaries (2004).
Options: Increase Investment
Returns
OPTION
• Investments in equities
% of Deficit Eliminated
36% - 50%
National Academy of Social Insurance, Social Security Brief No. 18 (2005); American Academy of
Actuaries (2004).