The Economic “Big Picture” Part 1: Income and Taxes
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Transcript of The Economic “Big Picture” Part 1: Income and Taxes
The Economic “Big Picture”Part 1: Income and Taxes
Dr. Katie Sauer
Metropolitan State College of Denver ([email protected])
Colorado Council for Economic Education4/28/2012
income spending
saving & investing
borrowing
economy
human capital
taxes
insurance
human capital
pay back debt
Session Overview
I. Intro to Income
II. Two Main Determinants of Income- human capital- state of the economy
III. A Simple Model of the Labor Market
IV. Taxes Individuals Pay
I. Intro to Income
How much income does the average US household earn in a year?- statistics will be found for “median” or “mean” income
Median Income:- rank all households by income- household in the middle of distribution
Mean Income:- add up all household’ income- divide by number of households
How much are US median income and mean income?
median income = $49,777mean income = $67,976
How much is Colorado’s median income?
$55,930
(This was 2009 data)
For recent data: US Census Bureau www.census.govFor occupation / industry data: Bureau of Labor Statistics
www.bls.gov
Table 4.4 Personal income, 1988, 1998, 2008 and projected 2018: Sources of Personal Income
CategoryBillions of current dollars Percent distribution
1988 1998 2008 2018 1988 1998 2008 2018
Personal income $ 4,253.7 $
7,423.0 $ 12,100.7 $ 19,129.6 100.0 100.0 100.0 100.0
Compensation of employees 2,967.2
5,020.1 8,052.8 12,404.8 69.8 67.6 66.5 64.8
Wage & salary disbursements 2,452.9
4,183.4 6,548.0 10,043.1 57.7 56.4 54.1 52.5 Supplements to wages & salary 514.3 836.7 1,504.8 2,361.8 12.1 11.3 12.4 12.3 Proprietors' income 341.6 627.8 1,072.4 1,647.7 8.0 8.5 8.9 8.6 Rental income 40.6 137.5 64.4 146.2 1.0 1.9 0.5 0.8
Personal income on assets 769.3
1,283.2 2,037.6 3,543.3 18.1 17.3 16.8 18.5 Personal interest income 639.5 933.3 1,208.5 2,194.9 15.0 12.6 10.0 11.5 Personal dividend income 129.7 350.0 829.1 1,348.3 3.0 4.7 6.9 7.0 Personal current transfer receipts 496.6 978.6 1,869.1 3,005.2 11.7 13.2 15.4 15.7 Federal social benefits 377.5 716.8 1,378.6 2,196.5 8.9 9.7 11.4 11.5 State & local social benefits 98.5 235.8 455.8 757.5 2.3 3.2 3.8 4.0 Other, from business (net) 20.6 26.0 34.7 51.2 0.5 0.3 0.3 0.3 Less: Social insurance contribution 361.5 624.2 995.7 1,617.6 8.5 8.4 8.2 8.5Employment Projections Program, U.S. Department of Labor, U.S. Bureau of Labor Statistics
Income comes from other sources than working.
Table 4.4 Personal income, 1988, 1998, 2008 and projected 2018
CategoryBillions of current dollars Percent distribution
1988 1998 2008 2018 1988 1998 2008 2018Use: Personal income 4,253.7 7,423.0 12,100.7 19,129.6 100.0 100.0 100.0 100.0 Personal consumption 3,353.6 5,879.5 10,057.9 15,293.5 78.8 79.2 83.1 79.9 Personal taxes 505.0 1,027.1 1,457.3 2,596.6 11.9 13.8 12.0 13.6 Personal interest payments 96.8 174.5 248.2 375.9 2.3 2.4 2.1 2.0 Personal transfer payments 25.4 65.2 144.6 212.8 0.6 0.9 1.2 1.1 To government: 14.8 40.5 84.5 124.8 0.3 0.5 0.7 0.7 Federal 2.8 8.6 18.0 27.4 0.1 0.1 0.1 0.1 State & local 12.0 31.9 66.5 97.4 0.3 0.4 0.5 0.5 To the rest of the world (net) 10.6 24.6 60.1 88.1 0.2 0.3 0.5 0.5 Personal savings 272.9 276.8 192.6 650.9 6.4 3.7 1.6 3.4
Employment Projections Program, U.S. Department of Labor, U.S. Bureau of Labor Statistics
How is income spent?
A. Human Capital encompasses a person’s knowledge, ability, and skills.
Most human capital is built through education and training.
Generally speaking, higher human capital is correlated with higher income.
II. What determines income from working?A. Human CapitalB. State of the Economy
less than 9th grade
9th to 12th grade
High School Graduate (inc. GED)
Some college, no degree
Associate's Degree
Bachelor's Degree
Master's Degree
Professional Degree
Doctorate Degree
$21,491
$24,686
$33,618
$38,676
$41,226
$60,954
$71,236
$125,622
$99,995
Educational Attainment--People 25 Years Old and Over, by Total Money Earnings in 2008
US Census Bureau / BLS: 2009 Current Population Survey, Annual Social and Economic (ASEC) Supplement Table from PINC-03
Investing in human capital has an opportunity cost:When students are in class they aren’t being productive in the economy.
Increasing human capital can have benefits:- higher paycheck- better society- productive workers
Individuals, firms and governments are willing to pay the cost of investing in building human capital because they expect to see benefits in the future.
Governments fund public education because a better educated population contributes to faster and sustainabledevelopment.
Firms invest in employee training because they expect tocover the costs through higher profits from higher workerproductivity.
Individuals spend time and money on higher education because they expect to earn higher wages.
A degree or certification can signal that someone has likely built their human capital.
There may *not* be a return on education if
- it is of low quality
- the knowledge/skills learned don’t match market demand
- there is slow economic growth (low demand for new workers)
- workers are paid the same regardless of skill (centrally planned economies, bureaucratic systems)
Unemployment Rates by Educational Attainment (people age 25 and older)
Less than High School
High School
Some college or AA
4 year degree or higher
www.bls.gov
B. The state of the economy affects income
When the economy is doing well, firms are hiring, people find it relatively easy to find jobs.
The type of jobs needed in the economy change over time as the structure of the economy changes.
If you are skilled in a sector that becomes obsolete, you will need to acquire new skills to work in a different sector or you will be unemployed for a long time.
Data source: Bureau of Economic Analysis bea.gov
The US Business Cycle
-15
-10
-5
0
5
10
15
20
1930
1932
1934
1936
1938
1940
1942
1944
1946
1948
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Perc
ent C
hang
e in
RGD
P fr
om P
revi
ous Y
ear
Year
Annual US GDP growth rates1930 to 2010
Economic growth is calculated as:
%ΔRGDP = RGDP2 – RGDP1 x 100 RGDP1
where RGDP is Real Gross Domestic Product• dollar value of economic activity• inflation adjusted
2005 RGDP 2006 RGDPChina: ¥7,898.742 b ¥8,743.908 bUS: $11,048.625 b $11,413.625 b
Calculate each country’s growth rate from 2005 to 2006.
China’s growth rate2006 = 8743.908b – 7898.742b x 100 7898.742b
= 10.7%
US’s growth rate2006 = 11413.625b – 11048.625b x 10011048.625b
= 3.3%
III. A Simple Model of the Labor Market
The market wage is determined by the supply and demand for labor.
A. The Supply of Labor (workers)Because time is limited, many individuals face a tradeoff between working and not working.
- all time spent not working will be called leisure
Economists call this the leisure-labor tradeoff.
We often analyze it in terms of income earned vs time spent not working.
WeeklyHours of Leisure
Income Earned
168$0
theoretical maximum income
0 78
$ from 90 hours of work
$ from 40 hours of work
128
Represents all possible income-leisure tradeoffs for a given wage rate.
For a given wage, individuals have different preferences over income and leisure.
Income Income
Hours of Leisure
Hours of Leisure
Preference Curve
Preference Curve
Person who prefers more income and sacrifices leisure.
Person who prefers more leisure and sacrifices income.
When the wage increases, people typically respond in two ways:
1. As the wage increases, the opportunity cost of leisure also increases so people work more.
- for every hour you are *not* working, you are forgoing more money
2. As the wage increases high enough, the individual has more money and begins to value leisure more and thus works less.
We can illustrate this effect with a labor supply curve.
The Labor Supply Curve
As the wage rate increases, first people choose to work more hours, then they choose to work fewer hours.
http://en.wikipedia.org/wiki/Labour_economics
B. The Demand for Labor (firms)
The demand for labor is known as a derived demand because labor is not needed unless there is demand for the product being produced.
When a firm hires a worker, the firm incurs a cost but also receives a benefit.
- the cost of the worker is the wage- the benefit of the worker is the output the worker produces times the price the firm can sell that output for
Ideally, a firm would pay a worker a wage that is equal to the value of the worker’s output.
If the wage were less than the value of output a firm could get from hiring another worker, the firm would want to hire another worker.
If the wage were more than the value of output a firm could get from its workers, the firm would want to fire a worker.
In general, the lower the wage, the more workers a firm could hire.
Labor Demand
Number of Workers
Wage Rate
As the wage rate falls, a firm can hire more workers.
C. Putting Supply and Demand Together
The supply and demand for labor interact to determine the market wage for various occupations.
Labor Demand
Number of Workers
Wage RateLabor Supply
market wage
actual workers hired
Ex: The demand for dental services has remained pretty stable while many new dental hygienists are graduating.
Labor Demand
Number of Workers
Wage RateLabor Supply
market wage
actual workers hired
New Labor Supply
Two potential outcomes:1. the wage falls, the new workers are hired
new wage
more workers hired
2. dental offices are already hiring the number of hygienists that are needed, new hygienists are unemployed
The wage may or may not fall.Labor
Demand
Number of Workers
Wage RateLabor Supply
market wage
actual workers hired
New Labor Supply
hygienists who want to work
Ex: Professional Engineer vs Bartender
Labor Demand
Number of Workers
Wage Rate Labor Supply
Labor Demand
Number of Workers
Wage Rate
Labor Supply
Often times firms will pay a wage that is above the market wage.
- attract better workers- reduce turnover
Sometimes workers unionize and collectively bargain for wages that are higher than the market wage.
IV. Taxes Individuals Pay
1. Federal Taxes• Income Tax
• Payroll TaxesThe Social Security tax (FICA) 6.2%
The Medicare Tax 1.45%
• Estate Tax • Gift Tax • Gasoline Tax 18.4cents per gallon
Calculating your Federal Income Tax
1. compute gross income- wages, salaries- interest, dividends, rental income
2. compute adjusted gross incomesubtract off:
- retirement savings contributions- alimony- educator expenses- contributions to HSAs- job-related moves expenses- interest paid on student loans
- if self-employed:- health insurance premiums- 50% of paid payroll taxes
3. Subtract any exemptions - fixed amount of money that is deducted for the taxpayer, spouse, dependents
- indexed for inflation2011: $3,700 per person
4. Decide on deduction type
Standard Deduction:$11,600 for married couples filing jointly $5,800 for singles $5,800 for married individuals filing separately $8,500 for heads of household
Itemized Deduction:
- medical and dental expenses exceeding 7.5% of AGI
- other taxes paid (state, local income tax)
- interest on mortgage
- charitable donations
- casualty and theft losses
- union dues and job travel expenses
5. Compute Federal Income Tax Owed
Here are the tax brackets for a single person for 2011:Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,500 15% $8,500 $34,500 25% $34,500 $83,600 28% $83,600 $174,400 33% $174,400 $379,150 35% $379,150
Suppose you are single in 2011 and your AGI is $50,000.
Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,500 15% $8,500 $34,500 25% $34,500 $83,600 28% $83,600 $174,400 33% $174,400 $379,150 35% $379,150
On the first $8500, you pay 10% in taxes.8500 x 0.10 = 850
Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,500 15% $8,500 $34,500 25% $34,500 $83,600 28% $83,600 $174,400 33% $174,400 $379,150 35% $379,150
On the next portion of income, you pay 15% in taxes.34500 – 8500 = 26000
26000 x 0.15 = 3900
Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,500 15% $8,500 $34,500 25% $34,500 $83,600 28% $83,600 $174,400 33% $174,400 $379,150 35% $379,150
On the next portion of income, you pay 25% in taxes.50000 – 34500 = 15500
15500 x 0.25 = 3875
The total amount you pay in taxes is:
= (0.10)(8500) + (0.15)(34500-8500) + (0.25)(50000-34500) = 850 + 3900 + 3875 = 8625
The marginal tax rate is the tax rate paid on an additional dollar of income.
If your AGI is $50,000 and then you earn one extra dollar of income, that dollar is taxed at a rate of 25%.
Your current marginal tax rate is 25%.
The average tax rate is the total taxes paid, divided by total income.
= 8625 / gross income x 100
Suppose your gross income is $60,000.
= 8625 / 60000 x 100
= 14.4% is your average tax rate
2. Colorado State Taxes for Individuals
Income Tax (4.63%)
Sales Tax (2.9%)
Consumer Use Tax (purchases that did not include Colorado sales tax … internet, mail order, phone) (2.9%)
Estate and Trust Income Tax (4.63%)
Gasoline Tax (22cents per gallon)
Cigarette Tax (4.2cents per cigarette, 2.9% per pack, 40% on other tobacco products)
Alcohol Tax (8cents per gallon beer/cider, 7.33cents per liter wine, 60.26cents per liter of spirits)
3. Local Taxes and Fees
Motor Vehicle RegistrationProperty TaxCity Sales Tax
4. Special District TaxesRTD levies a sales/use tax of 1.0% .
The Football District has a 0.1% sales/use tax.
The Scientific and Cultural Facilities District has a 0.1% sales/use tax.
How your taxes are spent http://www.whitehouse.gov/taxreceipt 1. Federal
2. Colorado http://www.colorado.gov/taxtracks/