Download Taxes, Deficits, Surpluses, and the Public Debt

Ch. 11: More On government
Spending and Taxes: Beyond
Fiscal Policy
Del Mar College
John Daly
©2003 South-Western Publishing, A Division of Thomson Learning
Major Spending Programs
Functions of
Government include
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–
–
–
Economic stabilization
Protection
Allocation
Distribution
• Where Does the
Government Get the
Money it Spends?
Major Federal Taxes
• Personal Income Tax: paid on a person’s
taxable income. Taxable income is income
minus any exemptions and deductions.
• Corporate Income Tax: paid on a
corporation’s profits
• Social Security Tax: paid from a person’s
income and from an employer.
Major Federal
Taxes (Graph)
Income Tax Structure
• Progressive Income Tax: the tax rate increases as
a person’s taxable income level rises. A
progressive tax is usually capped at some tax rate.
• Proportionate Income Tax: the same tax rate is
used for all levels. This is sometimes called a flat
tax.
• Regressive Income Tax: the tax rate decreases as
a person’s taxable income level rises.
Progressive Income Taxes and Equal
After-Tax Pay For Equal Work
• The idea of Equal Pay for Equal Work often
arises in discussions comparing jobs
performed by both men and women.
• Sometimes, this idea is extended to equal
after-tax pay for equal work.
• The progressive income tax structure can
turn equal pay for equal work into unequal
after-tax pay for equal work.
Who Pays Most of the Federal
Individual Income Tax?
Income Group
All Taxpayers
Top 1%
Top 5%
Top 10%
Top 25%
Top 50%
Bottom 50%
Average
Income Tax
Rate
13.8%
28.5
23.4
20.8
17.5
15.4
4.4
Average
Income Tax
Paid
$ 4,998
150,788
48,758
30,249
16,050
9,534
462
Who Pays Most of the Federal
Individual Income Tax?
Income Group
% Share of
Total Income
Top 1%
14.6
% Share of
Federal Income
Taxes
30.2
Top 5%
28.8
48.8
Top 10%
40.2
60.5
Top 25%
63.4
80.3
Top 50%
85.5
95.4
Bottom 50%
14.5
4.6
National Consumption Tax and
Value Added Tax
• A National Consumption Tax would be similar to
a state sales tax except that it would be applied to
all Americans.
• A Value-Added Tax (VAT) is essentially a
multistage tax that is collected from firms at each
stage in the production and distribution process.
The base of a VAT is the value added to a good at
each stage of its production. The value added is
equal to the price a firm receives for a good minus
its purchases of material inputs from other firms.
Q&A
• Explain the differences among progressive,
proportional, and regressive income tax structure.
• What federal taxes together accounted for 91.9 %
of all government receipts in 1999?
• Is a progressive income tax at times inconsistent
with both equal pay for equal work and equal
after-tax pay for equal work?
Major Government Spending
Programs
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•
•
•
•
•
National Defense
Income Security
Health
Medicare
Social Security
Net Interest on the
Public Debt.
• Other
Mandatory Vs. Discretionary
Spending
• Mandatory spending can be viewed as
automatic spending or spending that is not
subject to annual review.
• Discretionary spending is spending subject
to annual review.
• In 1969, 70% of all federal spending was
discretionary. In 1999, 26% of all federal
funding was discretionary.
Q&A
• In 1999, what percentage of federal
government spending went for net interest
on the public debt, Social Security, and
Medicare (combined)?
• What is the difference between mandatory
spending and discretionary spending?
Deficits and the Public Debt
• Public debt is the total
amount the federal
government owes its
creditors.
• Cyclical deficit refers to that
part of the budget deficit that
is part of an economic
downturn.
• The Structural deficit is the
remainder of the budget
deficit that would exist if the
economy were operating at
full employment.
Why know the Difference
between Structural and Cyclical
Deficit?
We must focus on
structural deficit to get
a correct reading of
fiscal policy.
The Size and Type of Deficit
• Two important matters were: the size of the deficit
and how it was measured.
• Currently, the revenues from Social Security taxes
are greater than the benefits paid – meaning the
Social Security System has a surplus.
• In 1998, there would not have been a budget
surplus if an adjustment had been made for the
Social Security surplus. In fact, there would have
been a deficit.
The Size and Type of Deficit
• Eisner has argued the budget deficit that
matters is the real budget deficit, not the
nominal budget deficit. To obtain the real
deficit, the public debt should be adjusted
each year for inflation and then subtracted
from the actual or nominal deficit.
Real Budget Deficit = Nominal budget deficit – (Public debt X Inflation rate)
The Public Debt
• Is equal to the total amount the government
owes its creditors.
• About 31 % of this debt was held by
agencies of the US government – one
agency owing money to another.
• The gross public debt is the entire debt,
while the net public debt is the part (69% in
1999) held by the public.
The Public Debt
Who Bears the Burden of the
Public Debt?
• The Current
Generation Bears the
Public Debt?
• The Future Generation
Bears the Public Debt?
The Current Generation Bears the
Public Debt?
• Public borrowing only imposes a burden on the current
generation.
• The current generation must give up private goods to pay
for the increased national defense, so the current generation
bears the debt.
• If we lump both taxpayers and bondholders together and
realize that together they make up future generations, the
future generation doesn’t owe any debt, because paying the
debt merely details the transfer of funds.
• But this doesn’t take into account current budget deficits
reducing capitol investment by the current generation: It
doesn’t take Crowding Out into account.
The Future Generation Bears the
Public Debt?
• Although resources are drawn from the private sector
when debt-financed public expenditures are made, the
people who give up these resources do not pay for, or
bear the burden of, the public expenditures secured.
• The bondholders have entered into a voluntary trade.
They decide to consume a little less today in order to
consume more (when the bonds are paid off).
• The bondholders do not gain anything since they are
trading one asset (bonds) for another (money) of equal
value and the taxpayers lose something: taxes to pay
the bonds off.
Budget Surpluses
• There was also disagreement as to what should be done
with the surpluses.
• Some wanted to “save Social Security”; although more
money was going into Social Security than was being
paid out, this was expected to end in the future.
• If budget deficits were translated into “higher future
taxes”, then it follows that budget surpluses were
translated into “lower future taxes.”
• The personal savings rate in the economy was near zero,
and consumer spending was strong.
• Even though budget surpluses were being discussed, few
Americans seemed exited by tax cuts.
Q&A
• How is the cyclical deficit computed?
• Suppose the nominal deficit is $100 billion, the
inflation rate is 1%, and the public debt is $4,000
billion. What is the real budget deficit?
• Explain the argument that states the current
generation bears the burden of the public debt.
• Explain how budget surpluses may be viewed as
tax cuts.
• What is the unified budget?
Social Security: A Primer
• Social Security taxes are paid by both employees and
employers. Medicare taxes are paid the same way.
• If a person earned more than $68,400 in 1999, he or she
continued to pay the Medicare portion of the tax on all
earnings.
• Social Security and Medicare taxes are divided among
numerous trust funds.
• Two Social Security funds are OASI (Old Age &
Survivors Insurance) trust fund used to pay retirement
and survivor’s benefits. DI (Disability Insurance) is used
to pay benefits to people with disabilities and their
families.
Social Security: A Primer
• There are two Medicare trust funds: HI (Hospital
Insurance) used to pay for the services under Part
A of Medicare; SMI (Supplementary Medical
Insurance) trust fund is to pay for the services
under Part B of Medicare. Together these are
referred to as the Medicare Trust Fund
• Every day tax revenues roll into these funds. The
money is paid from these funds and any left over
is invested daily in US government securities.
• The average monthly Social Security payment to a
retired worker in 2002 is $874.
Social Security In the Future: The
Numbers
• In 1965, Americans 65 and older made up 9% of
the population. In 1995, they were 13% of the
population. By 2030, they will be 20% of the
population.
• In 1995 there were five workers contributing to
Social Security taxes for every one Social Security
beneficiary. In 2030, it is predicted that there will
be five workers for every TWO Social Security
beneficiaries.
• It is predicted by 2013, payroll taxes are expected
to fall short of spending benefits.
Q&A
• What was the average
monthly Social Security
payment to a retired
worker in 2002?
• What was the combined
tax rate (for Social
Security) in 2002?
• Social Security is a payas-you-go system. What
does this mean?