The U.S. EconomyIncome Earners

Spending and SavingBusiness Formations

TaxesFederal Finance

Expenditures for Government

What do you think?????????? The U.S. Government spends most money on:a) Foreign aidb) Defensec) Welfared) Interest on debt

2011 Income and Outlays – Federal Government

FY2012

Not recent, but not changed too much

2012Education Income

Distribution of total money - 2011

World Comparisons - 2000

GDP- What is it?

Total value of goods and services produced in a given year in the United States.

What are the component parts?C + I + G + X-M = GDPConsumption

InvestmentGovernment SpendingExports- Imports

2008 FY- Tax Policy Center

Produce Market / Factor Market

Remember the Circular Flow….Now we discuss businesses and types

Business formations3 major types -

• Sole Proprietor:

• A business owned by just one personindividual initiative, self-reliance ,hard-work

Most common form and simplest to form

Over 78% of all business in U.S. Financial investment need not be large.

Limited amount of red tape.

Owner has satisfaction of working for himself.

Flexibility of organization (hours, pay, etc)

Pays taxes only on personal income from business.

Can put money into private pensions.

Partner

• Easy to form.

• Usually has legal standing – 2 or more

• Combines skills of several people which enhances ability to create wealth.

• Easier to get funding and backing.

• Taxed only on personal income.

• Limited amount of red tape.

• Common formation for professionals.

CorporationA BODY THAT IS AUTHORIZED BY LAW TO ACT AS

A PRIVATE PERSONLegally endowed with various rights and duties

To receive, own, and transfer property.To make contractsTo sue and be sued.

Corporations

Characteristics:Shareholders share in the wealth.Limited Liability (responsibility of shareholders of a

corporation is held only to their investment in same)

May own tremendous wealth. Increased management skillsOwnership divided into equal parts called sharesCan raise large amounts of moneyCan borrow money through sale of bonds.

Bottom line…. July 18, 2011---- Congress needs to raise the Debt Ceiling

Congress needs to cut spending….Congress needs to close the loop holes for those who

do not pay taxes and those who have received subsidies like Oil Companies

Congress needs to grow up.That’s my rant!!!

-----------------------------------• Note: It is February, 2014….. The above still applies.

The following slides are theory

• The primary function of taxes is to transfer command over resources (purchasing power) from the private sector to the public sector.

Government has 3 methods for revenuea. user fees (minimal)b. taxes (progressive)c. Borrowing. (growing yearly)

• The Sixteenth Amendment to the U.S. Constitution (1915) granted the federal government authority to collect income taxes.

• It is now the largest single source of government revenue.

Income Taxes

Revenue sources – U.S. Govt. 2012

Benefit Received

Ability to Pay

Two ways to determine fair tax

Benefits Received:Tax the user- gas tax for drivers- fishing license-ramp fees for

boats- toll roads-bus and train tickets- Pay the government for benefits received- can’t pay for welfare

received!

Ability to Pay Should those who have

the greatest wealth pay the most in taxes regardless of the benefits they receive??

Should income and family size be assessed?

Determining fairest principle for a just tax is matter of values rather than economics and is determined by our political process.

Total Revenue yieldedEffect on Production (destroy incentive?)Bracket Creep (AMT )Moral consequences (sin taxes)Reflection of values shown in taxes imposedConvenience (withholding, quarterly, penalties)Shifting the burden (seller to consumer)Ability to pay (relation of tax base to tax rate)Tax rate= percentage that is taxedTax base = subject on which the tax is levied.

Other Factors in Evaluating Taxes

• Types of Taxes• Progressive = tax rate increases as the tax

base increases• Proportional = tax rate remains the same

regardless of the base• Regressive= tax rate decreases as the base

increases. (often cited as unfair because it places heaviest burden on the least able to pay ---sales tax--- social security tax.)

• What is your preference?

Federal government gets most of its revenue from individual and corporate income taxes.

Very small portion of revenue from estate and gift taxes.

Larger share from excise taxes (gasoline, jewelry, alcohol, cigarettes, motor vehicles, admission to entertainment events, tires)

Small portion from tariffs.Transfer of estates collected since 1916. The

Estate Tax is a tax on your right to transfer property at your death.

Federal Government Tax System

The Most Important Federal Taxes (cont'd)

• Capital Gain– The positive difference between the purchase

price and the sale price of an asset • You buy a share of stock for $5 and sell for $15: you

have a capital gain of $10.

• Capital Loss– The negative difference between the purchase

price and the sale price of an asset

1% $410,096

10% $113,018

25% $66,532

50% $32,879

Kiplinger report 2009Income earners (family 4)

Breakdown- 2011

2009Top 1% = $410, 096Top 10% = $113,018Top 25% = $66, 532Top 50% = $32,879

Poverty Guidelines- 2013

1 Person = $11,490Family of four = $23,550For every additional person (child) the

government gives $4,000 more.

MEDICARE

Medicare Tax…. 2.9% on all wage income Medicare is paid (no cap) Government does not collect payroll taxes on

nonwage income (such as interest, dividends, or rents

Payroll Taxes

• HISTORY OF SOCIAL SECURITYBegan in 1935 as OASDHIProgram of compulsory savings financed from

compulsory payroll taxes levied on employees and employers.

Social Security is a regressive tax

The wage base is increased every January as long as the fund is deficient… which is probably forever now because:

People live longer, retire earlier, more drawing on fund (disabled, single parents, etc.)

Ratio of retirees/workers will be significantly reduced by year 2010.

Eighteen year olds today (2002) will pay over a million and a half dollars into SS. Benefits received????

SS payroll tax today is (FICA= 6.2% SS) of your wages are withheld. Your employer matches that amount for the required contribution to the SS Fund up to the wage base amount for that year.

Wage base 2013 is $113,000. Increases automatically every calendar year approximately $3,000.

Social Security

Redistribution through public sector will reduce the size of the economic pie:

Weakens the link between productive activity and reward (taxes increased reduce individual reward for hard work-less productive.

As public policy redistributes large share of income,more resources flow into increasing it

Economics of Transfer Payments

Higher taxes to finance redistribution will induce taxpayers to focus less on income producing activities and more on income shelters *higher incomes have greater opportunity here

When leakages flow in taxes rather than in savings (money is unproductive)

Money that is productive generates more capital

More capital generates more jobs.More jobs generates more income.

Economics of Transfer

The government is called upon to distribute merit goods when the market does not provide enough.

A merit good is a good or service society deems everyone is entitled to some minimal quantity . Public goods have two particular characteristics. They are:

1.Non-excludable - once the goods are provided, it is not possible to exclude people from using them even if they haven't paid. This allows 'free-riders' to consume the good without paying.

2.Non-rival - this means that consumption of the goods by one person does not diminish the amount available for the next

Merit Goods

• Taxes paid today go to pay benefits for people drawing today.

• Do you think there is a “special fund” where the SS dollars go???

70% of SS goes to retirees - avg monthly benefit of $898.20

15% to disabled workers and familiesMay, 2003- avg benefit for disabled workers was

$837.7015% goes to widows, widowers, and families – avg

check of $850.80By 2030-twice as many older Americans 35 million

to 70 million. Now there are 3.4 workers for every beneficiary… by 2030 there will be just 2.1 workers for each beneficiary.

More Grim Statistics Concerning SS

Question is:What kind of an economy do we Joe Q’s want?

The primary function of taxes is to transfer command over resources (purchasing power) from the private sector to the public sector.

Why from private to public? Why not the other way around?

So, it all gets back to Joe Q Citizen… Taxes paid to government.

Gross Public Debt.state,local,fed

• Virtually all of the recent growth in federal expenditure has come from increased income transfers, not purchases of goods and services.

Why is the U.S. Economy owing billions of dollars?“If you subsidize something you get more of it.”

Dr. Milton Friedman, Free to Choose

• Government failure occurs when government intervention fails to improve economic outcomes.

• Government waste implies that the public sector isn’t producing as many services as it could with the sources at its disposal.

• With such inefficiency, we are producing inside our production-possibilities curve.

Opportunity costThe issue of government waste encompasses

questions of efficiency and opportunity cost.

Perceptions of Waste

“POWER CORRUPTS AND ABSOLUTE POWER CORRUPTS ABSOLUTELY!”

Lord Acton

“POWER TO TAX IS POWER TO DESTROY”Chief Justice John Marshall…. McCullough vs Maryland