Lifeconomics and Financial Fitness For Life

1. Lifeconomics and Financial Fitness For Life A Continuing Education Workshop for Teachers

2. Outline • Your Government • Your Life • Your Money • Financial Fitness for Life Curriculum

3. What is economics? • Observing the world full of mysteries • Why does the government tax us? • Should you take that second job? • Should you fix the leak or call the roofer? • Why does a stock price fluctuate?

4. What is economics? • Trying to solve these mysteries in a manner consistent with human behavior. • Sometimes, hard to solve these… • … so we make assumptions, say there are only 2 goods in the world: Milk and Gasoline

5. What is economics? • Use simple models as representations of the ‘real world’. • Apply this to explain our mysteries.

6. Your Government How the government affects your everyday life

7. Calculating your tax burden (Ch 20) • Taxes: Do we pay - too much? - just enough? - not enough? • Tax Burden: the portion of income paid in form of taxes (federal, state, local etc)  39% (CA average) 2005

8. Tax Burden… • As income rises, taxes rise (both actual and proportion)  Progressive taxation (pay more taxes and at a higher rate)

9. Calculating Tax Burden • Only count direct taxes • Federal Tax Withheld  Box 2 W-2 • Add/ subtract extra taxes from return • Other federal taxes  SS, Medicare (Boxes 4,6) • State Tax (Box 17) • Adjust (add/ subtract) any taxes from return • Gas Tax (Both fed/ state taxes included in pump price) (p 113/ website)

10. Calculating Tax Burden • Sales Tax (on all purchases) (p113/website ) • Actual (add all taxes from all receipts) • Estimate: • Total Amount Spent x Tax Rate • (0.95) x Take home pay x Tax Rate • Property Tax (Home, Vehicle)  check bill • Total Tax • Total Income • Tax Burden = 7/ 8

11. Tax Burden Example • Bob wants to estimate his tax bill. In 2003 he made $14 000, received a tax refund of $100 and paid the following: Medicare $214; State tax $509; federal tax $1461; property tax $200; social security $742. He also purchased 400 gallons of gas and took home $10 000. What is his tax burden?

12. Estimating Tax Burden

13. Estimating Tax Burden Tax Burden = Proportion of income paid in taxes

14. Now you try it… Jack grossed $27 000 in 2003. He paid the following proportion of his gross income: 10% for federal tax, 2% state tax, 0% property tax, 12% other federal tax. Gas tax is 0.50/ gallon in his state. His old car consumed 3000 gallons of gasoline, and he managed to save 4% of his take home pay, $17 000. Sales tax in his state is 6%. What is Jack’s tax burden?

15. Answer • Federal = 2700 • State = 540 • Other = 3240 • Gas = 1500 • Sales = 680 • Total = 8660  32%

16. Using your tax bracket (Ch 21) • Tax burden also known as average tax rate i.e., on average, the taxes you pay out of each dollar of income. • Sometimes want to know how much more taxes you will pay if your income rises. • Or, how much you will save if invest in a tax-free investment • Here, average tax rate not all that helpful. Why?

17. Tax Bracket • Two reasons: • Some taxes stop at certain income • eg. SS max $94,200 (2006) • Federal tax is progressive, i.e. pay higher RATE at higher income • So need to know ‘marginal tax rate’ • Marginal Rate = additional tax pay for additional income aka tax bracket

18. What to count? • Only those taxes that one must automatically pay with higher income such as federal taxes (FICA = Federal Insurance Contributions Tax= SS + Medicare {7.65%} ), state income taxes. • Not count: property taxes, sales tax and gasoline tax (unless change spending)

19. Government and Money Then and Now…

20. Government spending elsewhere

21. Deficit as a % of GDP

22. Why the difference? • Governments in different countries vary expenditures (G) because priorities are different  choice made by society. • US: spends more on military • Others: spend more on social services • Even within a given country where the money goes can change over time.

23. Components of the federal budget

24. Where do Federal Dollars go? • During Vietnam war, almost half of govt spending on military. Today, again increase in defense spending. • After end of cold war, big decrease in military spending. • Where did the savings end up? SS and Medicare • As population ages, this will increase. • Much borrowing (deficit spending) during ’80s. • Interest payments will continue to make larger portion of govt spending

25. Where the government dollars go…

26. Who suffers? • As deficit keeps rising, either need to tax more or cut spending. • Generally taxes fallen over the last few years. • So spending cuts. • Which programs get cut? • Natural Resources and Environment (NRE); Education and other training (Edu); Housing, food and unemployment assistance (Hou) • Where has spending increased? Health  rising costs

27. Social programs as % of G

28. Who pays the taxes?

29. Sources of Government Revenue

30. Who pays the taxes? • Individual Income Taxes: Unchanged over 4 decades • Corporate taxes: Fell by large amount (especially during the ’80s) • SS: Increased as more people entered workforce (women, baby boomers) • Excise Taxes: Tax on gasoline, alcohol and cigarettes, also fell

31. Declining Democracy • How does society change its priorities? • In a democracy, through elections. • People vote for those who best represent their interests. • Voter apathy increased over last 40 years. • Who votes most often? • How to influence?

32. Declining Democracy

33. How do others compare? • 1996: Italy – 87%; Japan – 60%; India – 60%; Guatemala – 31%; Cameroon – 41%; Canada – 55% • Other ways to influence govt: lobby groups • 1998: $1.42 B industry  $2.7 M/ member of Congress

34. Will the real deficit and debt stand up (Ch 23) • Today, national debt approx $8.4 trillion; 1995: $5 T; 1929: $17 B • Does this mean that it increased 49312% since 1929 and 68% since 1995? • Two problems: • Not adjusted for purchasing power (that dollars are worth different in various periods). • Does not count for the changing size of the economy

35. Realistically Speaking… • If your debt is $10 000, would not worry much if income was $100 000. But would if income was $20 000. • Similarly debt as a percent of GDP (national income) is what matters rather than the actual debt.

38. The surReal Deficit… • Similar true of federal deficit • As indicated by graph, high deficit during war years • Looking at these figures, both annual deficit and total debt have increased as a percent of GDP.

39. Dollar values over different time periods (Ch 1) • Earned $30 000 in 1985; earned $50 000 in 2005. Did you really earn more in 2005 than in 1985? • Depends, things tend to cost more over time (purchasing power declines or cost-of-living rises) so later years $ buy less than prior years • How do you calculate how much money is worth over time, i.e., how do you compare prices from different time periods? Purchasing power converter (PPC) p 4 • Multiply $ from any year by the PPC (based on say 2005 $) value in terms of 2005$

40. Example using PPC • 1985: $30 000; 2005: $50 000 • PPC1985 = 1.80 • $(1985) x PPC(1985) = $ (2005) • $30000 x 1.80 = $54 000 in 2005$ • So it would take $54 000 in 2005 to buy what $30 000 bought in 1985. Actual salary in 2005 is $50 000, in terms of purchasing power, you are worse off in 2005 than in 1985.

41. PPC for selected years 1950 - 2005

42. Another example • Govt spent $3M for a program in 1965, in 1995 same program spent $10 M. In which year was the govt program spending more in terms of purchasing power? • PPC1965 = 6.15; PPC1990 = 1.48 • $ (1965) x PPC (1965) = $ (2005) • $3 M x 6.15 = $18.5 M • $(1990) x PPC (1990) = $ (2005) • $10 M x 1.48 = $14.8 M • So $14.8M was spent in 1995 (2005 $) vs $18.5 M spent in 1965 (2005 $). So more was spent in 1965 in terms of purchasing power.

43. Now you try it! • In 1983 gasoline cost $1.20 per gallon. Today (2005) it costs $2.70. Are the prices ‘really’ higher today? • PPC1983 = 1.95 (2005 $) • $(1983) x PPC (1983) = $ (2005) • 1.20 x 1.95 = $2.34 • So gas prices are actually cheaper compared to 1983 in terms of 2005 purchasing power.

44. Caveats about PPC • When comparing prices over years, must make sure product is essentially the same in both years. • If different features or better technology, then can not use PPC. • When comparing salaries need to make sure that no major changes in working conditions. Use take-home salary. PPC only accounts for higher prices, not higher taxes (or lower).

45. All – Time US Box Office Receipts

46. The Most Popular Movies of All Time, Inflation Adjusted