Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Chapter 7 The Government Sector Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-1 Objectives • • • • • • • Government spending The graphing of the C + I + G line Types of taxes The average and marginal tax rates Sources of government revenue Principles of taxation The economic role of government Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-2 Introduction: The Growing Economic Role of Government • Most of the growth over the past seven decades was due to the Depression and World War II • Since 1945 the roles of government at the federal, state, and local levels have expanded – The seeds of that expansion were sown during the Roosevelt administration • The government exerts four basic influences – – – – It spends more than $3.0 trillion It levies even more in taxes It redistributes hundreds of billions of dollars It regulates the economy Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-3 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-4 State and Local Government Spending • Main expenditures – Education – Health – Welfare • Spending is a little more than half the level of federal spending • Police protection and prisons are now straining state and local budgets Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-5 Government Purchases versus Transfer Payments • The federal, state, and local governments spends over $3.0 trillion a year – GDP = C + I + G + Xn – Approximately half are “transfer payments” • The largest transfer payment is social security • These payments end up in the “C” part GDP – Approximately half are “government purchases” • The largest government purchase is defense • These end up in the “G” part of GDP Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-6 Graphing the C + I + G + Xn Line To keep the graph as simple as possible, we are assuming the government spends a constant amount of money regardless of the level of disposable income 3,000 C+I+G C+I 2,000 C 1,000 45û 1,000 2,000 Disposable income ($) Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 3,000 7-7 Graphing the C + I + G + Xn Line How much is G? 3,000 C+I+G C+I 2,000 C Answer: 400 1,000 45û 1,000 2,000 Disposable income ($) Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 3,000 7-8 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax Total Taxes Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Average Tax Rate 7-9 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level 0 - $100 Marginal Tax Rate 0 % Tax Total Taxes 0 $0 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Average Tax Rate 0.0 % 7-10 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level 0 - $100 $101 - $200 Marginal Tax Rate 0 % Tax $0 Total Taxes $0 Average Tax Rate 0.0 % $10 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-11 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level 0 - $100 Marginal Tax Rate 0 % $101 - $200 Tax $0 Total Taxes $0 Average Tax Rate 0.0 % $10 Additional Taxes Paid MTR = ( $10) -------------------------------- ---------Additional Taxable Income ($100) Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-12 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax 0 - $100 0 % $0 $101 - $200 10 % $10 Total Taxes $0 Additional Taxes Paid MTR = Average Tax Rate 0.0 % ( $10) -------------------------------- ---------Additional Taxable Income ($100) Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-13 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax 0 - $100 0 % $0 $101 - $200 10 % $10 Total Taxes $0 Additional Taxes Paid MTR = Average Tax Rate 0.0 % ( $10) -------------------------------- ---------- Additional Taxable Income ($100) The Marginal Tax Rate (MTR) is the rate you pay on the last dollars you earned Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-14 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax Total Taxes 0 - $100 0 % $0 $0 $101 - $200 10 % $10 $10 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Average Tax Rate 0.0 % 7-15 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax Total Taxes 0 - $100 0 % $0 $0 $101 - $200 10 % $10 $10 Total Taxes Paid ATR = Average Tax Rate 0.0 % ( $10) -------------------------------- ---------Entire Income Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. ($200) 7-16 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax Total Taxes Average Tax Rate 0 - $100 0 % $0 $0 0.0 % $101 - $200 10 % $10 $10 5.0 % Total Taxes Paid ATR = ( $10) -------------------------------- ---------Entire Income Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. ($200) 7-17 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax Total Taxes Average Tax Rate 0 - $100 0 % $0 $0 0.0 % $101 - $200 10 % $10 $10 5.0 % Total Taxes Paid ATR = ( $10) -------------------------------- ---------Entire Income Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. ($200) 7-18 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax Total Taxes Average Tax Rate 0 - $100 0 % $0 $0 0.0 % $101 - $200 10 % $10 $10 5.0 % Total Taxes Paid ATR = ( $10) -------------------------------- ---------Entire Income ($200) The Average Tax Rate (ATR) is the overall rate you pay on your entire income Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-19 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax Total Taxes Average Tax Rate 0 - $100 0 % $0 $0 0.0 % $101 - $200 10 % $10 $10 5.0 % $201 - $300 12 % $12 $22 7.3 % Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-20 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax Total Taxes Average Tax Rate 0 - $100 0 % $0 $0 0.0 % $101 - $200 10 % $10 $10 5.0 % $201 - $300 12 % $12 $22 7.3 % $301 - $400 15 % $15 $37 9.3 % Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-21 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax Total Taxes Average Tax Rate 0 - $100 0 % $0 $0 0.0 % $101 - $200 10 % $10 $10 5.0 % $201 - $300 12 % $12 $22 7.3 % $301 - $400 15 % $15 $37 9.3 % $401 - $500 28 % $28 $65 13.0 % Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-22 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax Total Taxes Average Tax Rate 0 - $100 0 % $0 $0 0.0 % $101 - $200 10 % $10 $10 5.0 % $201 - $300 12 % $12 $22 7.3 % $301 - $400 15 % $15 $37 9.3 % $401 - $500 28 % $28 $65 13.0 % $501 - $600 50 % $50 $115 19.2 % Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-23 The Average Tax Rate and the Marginal Tax Rate This is a hypothetical illustration Income Level Marginal Tax Rate Tax Total Taxes Average Tax Rate 0 - $100 0 % $0 $0 0.0 % $101 - $200 10 % $10 $10 5.0 % $201 - $300 12 % $12 $22 7.3 % $301 - $400 15 % $15 $37 9.3 % $401 - $500 28 % $28 $65 13.0 % $501 - $600 50 % $50 $115 19.2 % > $600 80 % Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-24 Types of Taxes • Direct tax – A tax with your name on it • Indirect tax – A tax on things Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-25 Types of Taxes • Progressive taxes – Places a greater burden on those best able to pay and little or no burden on the poor • Proportional taxes – Places an equal burden on the rich, the middle class, and the poor • Regressive taxes – Places a heavier burden on the poor than on the rich Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-26 Nominally Progressive, Proportional, and Regressive Taxes Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-27 Sources of Federal Revenue • Personal Income Tax – The personal income tax is the largest source of federal revenue – Accounts for 44 percent of all federal tax revenue – Low income people pay little or no federal income tax Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-28 Federal Personal Income Tax:The Top Marginal Tax Rate, 1954-2003 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-29 Top Marginal Tax Rates Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-30 Sources of Federal Revenue • The Social Security and Medicare taxes are the Payroll Tax • What you pay is matched by your employer • The social security tax by law is set at 6.2% with a wage based limitation of $87,000 • The inflation rate of the previous year raises the wage base • The Medicare tax of 1.45% applies to wages and salaries only. Income such as rental income, interest, dividends, and profit is exempt Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-31 Sources of Federal Revenue • You pay 6.2% in payroll tax on wages up to $87,000 and 1.45% on all wages and salaries • The Payroll Tax is the fastest growing source of federal revenue Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-32 The Incidence of the Social Security Tax at Various Income Levels Level of Earned Income Taxes Paid Average Tax Rate $ 10,000 $ 620.00 6.2% 87,000 5,394.00 6.2% 100,000 5,394.00 5.4% 1,000,000 5,394.00 0.54% Note: The current social security tax by law is set at 6.2% with a wage based limitation of $87,000 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-33 The Corporate Income Tax • The corporate income tax is a tax on a corporation’s profits – The maximum rate is 35% • All corporations earning profits of at least $335,000 pay an average tax rate of 35% – Loopholes in the tax law allow many corporations to pay much lower taxes Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-34 Excise Taxes • An excise tax is a sales tax aimed at specific goods and services • Accounts for about 4 percent of federal revenue • Most excise taxes are levied by the federal government – State and local governments often levy taxes on the same items Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-35 Excise Taxes • Excise taxes tend to reduce consumption of certain products of which the federal government takes a dim view • Excise taxes are usually regressive Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-36 The Estate Tax • The estate tax is a tax on the estates of people when they die – It is a graduated tax that rises to 55% • It is levied only on estates valued at $675,000 or more – More than 90% of estate taxes are paid by people with incomes above $200,000 a year Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-37 Sources of State and Local Tax Revenue • Personal income tax – Accounts for about half of all state revenue • Sales Tax – Is a source of almost half of all taxes collected by the states – Is a highly regressive tax • Property taxes – Provides 80 percent of all local tax revenue – Can influence business decisions about where to locate Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-38 The State and Local Fiscal Dilemma • Since World War II, state and local governments have been expected to provide an increasing number of services – Most notable are health, welfare, education, police protection and prisons • In 2003 states increased tuition at public colleges, cut Medicaid eligibility and benefits, and laid off state employees – In addition localities spent billions of dollars on new security measures without receiving any federal assistance • Unfunded mandates – The Federal government often places obligations on states without providing the money to pay for them Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-39 The State and Local Fiscal Dilemma • Neighboring states and local governments are in direct competition with one another for tax dollars – If one government’s tax rates rise too far above the levels of its neighbors, it citizens will vote with their feet • The 1998 Internet Tax Freedom Act declared a three-year moratorium for online sales Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-40 Government Tax Rates as a Percentage of GDP, 1929 and 2003 Economic Report of the President, 2003 Tax Rates are almost three times as high as they were in 1929 Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-41 Tax Receipts as a Percentage of GDP in the United States and Selected Western European Countries, 1999 Organization for Economic Cooperation and Development 60 50 40 30 20 10 *Please note: These are 1999 f igures. By 2000, U.S. tax receipts were just 30.6 percent of GDP, and, assuming a major tax cut in 2001 they may soon f all below 30 percent of GDP. Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-42 Economic Role of Government • Provision of Public Goods and Services • Redistribution of Income • Stabilization • Economic Regulation Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-43 Provision of Public Goods and Services • Some examples – – – – – – – Defense of the country Maintenance of internal order A nationwide highway network Provision of a money supply Public education Running the criminal justice system Environmental protection Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-44 Redistribution of Income • The government does redistribute hundreds of billions of dollars every year – Social security redistributes money from those currently working to those who have retired – Welfare for the poor • Examples are food stamps, Medicaid, disability payments, and unemployment benefits – Welfare for the rich • Examples are subsidies to corporate farmers and tax breaks for defense contractors, oil companies, and other large corporations Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-45 Stabilization • Two basic goals of the federal government – Stable prices with little or no inflation – Low unemployment • An economic rate of growth high enough to keep the unemployment rate to a minimum Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-46 Economic Regulation • The government provides the economic rules of the game – This must be done within the social and political context in which the economy operates • The government must allow individuals and business firms to operate with the maximum degree of freedom • There is little agreement as to how far economic freedom may be extended without interfering with society as a whole or the economic rights of specific individuals or business firms Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-47 Adam Smith’s Dos and Don’ts • Do – Protect society from the violence and invasion of other countries – Establish an exact administration of justice – Erect and maintain certain public works and institutions where private enterprise could not profit from doing so • Don’t do anything else Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-48 Conclusion • Until the 1930s, the federal government more or less followed the role prescribed by Adam Smith • The government’s economic role has expanded tremendously these last seven decades • It will probably continue to grow in the coming years Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-49 Big government, like rock ‘n’ roll, is here to stay. Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 7-50