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Chapter 30

Chapter 30. Financing Government Taxes and Debt. Economic Principles. Commandeering resources Commandeering money (taxes) Regressive, proportional, and progressive tax structures. Economic Principles. Social Security taxes Government securities and public debt

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Chapter 30

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  1. Chapter 30 Financing Government Taxes and Debt Gottheil — Principles of Economics, 7e

  2. Economic Principles • Commandeering resources • Commandeering money (taxes) • Regressive, proportional, and progressive tax structures Gottheil — Principles of Economics, 7e

  3. Economic Principles • Social Security taxes • Government securities and public debt • Internally and externally financing the debt Gottheil — Principles of Economics, 7e

  4. EXHIBIT 1 PRODUCTION POSSIBILITIES CURVE Gottheil — Principles of Economics, 7e

  5. Exhibit 1: Production Possibilities Curve What is the opportunity cost of producing the first aircraft in Exhibit 1? • The opportunity cost of producing the first aircraft is 500 houses. Gottheil — Principles of Economics, 7e

  6. Commandeering Resources What is the most direct method available for a government to acquire resources? • The most direct method is to commandeer resources. Gottheil — Principles of Economics, 7e

  7. Commandeering Resources What is the most direct method available for a government to acquire resources? • This is how the pharaohs built the pyramids, and how governments built roads during the Middle Ages. Gottheil — Principles of Economics, 7e

  8. Commandeering Resources What is the most direct method available for a government to acquire resources? • The military draft is a modern form of commandeering resources for the military. Gottheil — Principles of Economics, 7e

  9. The Tax System How is the tax system related to commandeering resources? • The tax system commandeers money, not resources. Remember that resources are land, labor, capital, and entrepreneurship. Gottheil — Principles of Economics, 7e

  10. There’s More Than One Way to Levy Taxes Poll tax • A tax of a specific absolute sum levied on every person or every household. Gottheil — Principles of Economics, 7e

  11. There’s More Than One Way to Levy Taxes Regressive income tax • A tax whose impact varies inversely with the income of the person taxed. Poor people have a higher percentage of their income taxed than do rich people. Gottheil — Principles of Economics, 7e

  12. There’s More Than One Way to Levy Taxes 1. What is an example of a regressive income tax? • One example is a poll tax. Gottheil — Principles of Economics, 7e

  13. There’s More Than One Way to Levy Taxes 1. What is an example of a regressive income tax? • Another example is a tax on consumption, such as a sales tax. Since poor people spend all of their income on consumption, while rich people save a portion of their income, a consumption tax is regressive. Gottheil — Principles of Economics, 7e

  14. There’s More Than One Way to Levy Taxes Proportional income tax • A tax that is a fixed percentage of income, regardless of the level of income. Gottheil — Principles of Economics, 7e

  15. There’s More Than One Way to Levy Taxes 2. An example of a proportionate income tax is? • A flat-rate tax on personal income Gottheil — Principles of Economics, 7e

  16. There’s More Than One Way to Levy Taxes Progressive income tax • A tax whose rate varies directly with the income of the person being taxed. Rich people pay a higher tax rate—a larger percentage of their income is taxed—than do poor people. Gottheil — Principles of Economics, 7e

  17. There’s More Than One Way to Levy Taxes 3. What is an example of a progressive income tax? • The current system of federal income taxation is progressive. Gottheil — Principles of Economics, 7e

  18. There’s More Than One Way to Levy Taxes Corporate income tax • A tax levied on a corporation’s income before dividends are distributed to stockholders. Gottheil — Principles of Economics, 7e

  19. Are We Really Paying High Taxes? True or false: Taxes as a percentage of GDP are higher in the U.S. than in any other rich industrialized country. • False Gottheil — Principles of Economics, 7e

  20. Are We Really Paying High Taxes? True or false: Taxes as a percentage of GDP are higher in the U.S. than in any other rich industrialized country. • Tax revenues in the U.S. were 34.3 percent of GDP. Gottheil — Principles of Economics, 7e

  21. Are We Really Paying High Taxes? True or false: Taxes as a percentage of GDP are higher in the U.S. than in any other rich industrialized country. • In comparison, tax revenues as a percentage of GDP were 40.6 in the United Kingdom, 43.4 in Canada, 45.1 in Germany, and 51.1 in France. Gottheil — Principles of Economics, 7e

  22. There’s More Than One Way to Levy Taxes Property tax • A tax levied on the value of physical assets such as land, or financial assets such as stocks and bonds. Gottheil — Principles of Economics, 7e

  23. There’s More Than One Way to Levy Taxes Unit tax • A fixed tax in the form of cents or dollars per unit, levied on a good or service. Gottheil — Principles of Economics, 7e

  24. There’s More Than One Way to Levy Taxes Sales tax • A tax levied in the form of a specific percentage of the value of the good or service. Gottheil — Principles of Economics, 7e

  25. There’s More Than One Way to Levy Taxes Customs duty • A sales tax applied to a foreign good or service. Gottheil — Principles of Economics, 7e

  26. There’s More Than One Way to Levy Taxes Excise tax • Any tax levied on a good or service, such as a unit tax, a sales tax, or a customs duty. Gottheil — Principles of Economics, 7e

  27. There’s More Than One Way to Levy Taxes 4. Complete the following sentence: All excise taxes are ______. Gottheil — Principles of Economics, 7e

  28. There’s More Than One Way to Levy Taxes 4. Complete the following sentence: All excise taxes are regressive. Gottheil — Principles of Economics, 7e

  29. There’s More Than One Way to Levy Taxes 5. Which of the following is a unit tax? a. A 7% tax on gasoline sales b. A $10 tax on fishing rods c. A 20% flat tax on income Gottheil — Principles of Economics, 7e

  30. There’s More Than One Way to Levy Taxes 5. Which of the following is a unit tax? a. A 7% tax on gasoline sales b. A $10 tax on fishing rods c. A 20% flat tax on income Gottheil — Principles of Economics, 7e

  31. There’s More Than One Way to Levy Taxes 6. True or false: In any given year, Social Security taxes collected by the government equal the Social Security payments that the government makes. • False. The surplus funds are invested in government bonds, which pay interest to the Social Security system. Gottheil — Principles of Economics, 7e

  32. EXHIBIT 2 2006 TAX RATE SCHEDULE FOR MARRIED PERSONS FILING JOINTLY Source: Internal Revenue Service, Instructions for Form 1040 (Washington, D.C.: Department of the Treasury, 2006). Gottheil — Principles of Economics, 7e

  33. Exhibit 2: 2006 Tax Rate Schedule for Married Persons Filing Jointly Suppose that a married couple filing jointly had $100,000 in taxable income. According to Exhibit 2, how much federal income tax must this couple pay? • On the first $7,000 they pay 10%, which equals $700. Gottheil — Principles of Economics, 7e

  34. Exhibit 2: 2006 Tax Rate Schedule for Married Persons Filing Jointly Suppose that a married couple filing jointly had $100,000 in taxable income. According to Exhibit 2, how much federal income tax must this couple pay? • On the next $21,400 they pay 15%, which equals $3,200. Gottheil — Principles of Economics, 7e

  35. Exhibit 2: 2006 Tax Rate Schedule for Married Persons Filing Jointly Suppose that a married couple filing jointly had $100,000 in taxable income. According to Exhibit 2, how much federal income tax must this couple pay? • On the next $40,400 they pay 25%, which equals $10,100. Gottheil — Principles of Economics, 7e

  36. Exhibit 2: 2000 Tax Rate Schedule for Married Persons Filing Jointly Suppose that a married couple filing jointly had $100,000 in taxable income. According to Exhibit 2, how much federal income tax must this couple pay? • On the final $31,100 they pay 28%, which equals $10,296. Gottheil — Principles of Economics, 7e

  37. Exhibit 2: 2006 Tax Rate Schedule for Married Persons Filing Jointly Suppose that a married couple filing jointly had $100,000 in taxable income. According to Exhibit 2, how much federal income tax must this couple pay? • Thus the married couple pays a total of $(700 + $3210 + $10,100 + 8,736) = $22,746. Gottheil — Principles of Economics, 7e

  38. EXHIBIT 3 FEDERAL, STATE, AND LOCAL GOVERNMENT REVENUES: 2007 ($ BILLIONS) Source:Survey of Current Business (Washington, D.C.: U.S. Department of Commerce, August 2008). Gottheil — Principles of Economics, 7e

  39. Exhibit 3: Federal, State, and Local Government Revenues: 2007 Complete the sentence: ______ taxes are the largest single source of combined government tax revenues. Gottheil — Principles of Economics, 7e

  40. Exhibit 3: Federal, State, and Local Government Revenues: 2007 Complete the sentence: Income taxes are the largest single source of combined government tax revenues. Gottheil — Principles of Economics, 7e

  41. EXHIBIT 4 FEDERAL GOVERNMENT’S SURPLUSES AND DEFICITS AND AS PERCENT OF GDP: 1990–2007 (in constant 2000$) Source: Statistical Abstract, The United States: 2006 (Washington, D.C.: U.S. Department of Commerce, 2008). Gottheil — Principles of Economics, 7e

  42. Exhibit 4: Federal Government’s Surpluses and Deficits and as Percent of GDP: 1990–2007 True or false: The federal government ran a budget surplus during the years between 1990 and 2007. • False. The federal government ran a budget deficit during that time period. Gottheil — Principles of Economics, 7e

  43. Financing Government Spending Through Debt Public debt • The total value of government securities—Treasury bills, notes, and bonds—held by individuals, businesses, other government agencies, and the Federal Reserve. Gottheil — Principles of Economics, 7e

  44. EXHIBIT 5 OWNERSHIP OF THE U.S. PUBLIC DEBT: 2010 (percentage of total) Source:Federal Reserve Bulletin (Washington, D.C., September 2011). Gottheil — Principles of Economics, 7e

  45. Exhibit 5: Ownership of the U.S. Public Debt: 2010 Which of the following correctly identifies the top two owners of the U.S. public debt: a. Depository institutions b. Federal Reserves and intergovernmental holdings c. Foreigners Gottheil — Principles of Economics, 7e

  46. Exhibit 5: Ownership of the U.S. Public Debt: 2010 Which of the following correctly identifies the top two owners of the U.S. public debt: • a. Depository institutions • Federal Reserves and intergovernmental holdings and foreigners • Pension funds Gottheil — Principles of Economics, 7e

  47. Financing Government Sending through Debt Which form of federal government debt is sold in denominations as low as $1,000 and carry maturities of 2 to 10 years? • U.S. Treasury notes Gottheil — Principles of Economics, 7e

  48. Tracking Government Debt What caused gross federal debt to more than double between the early 1980s and the early 1990s? • Tax cuts in 1981 and again in 1986 • Rising government spending in the 1980s • Recessions in the early 1980s and again in the early 1990s Gottheil — Principles of Economics, 7e

  49. EXHIBIT 6A THE FEDERAL DEBT Source:Statistical Abstract of the United States, 2006 (Washington, D.C.: U.S. Department of Commerce, 2006). Gottheil — Principles of Economics, 7e

  50. EXHIBIT 6B THE FEDERAL DEBT Source:Statistical Abstract of the United States, 2006 (Washington, D.C.: U.S. Department of Commerce, 2006). Gottheil — Principles of Economics, 7e

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