All About Income for Elementary Teachers

1. Teaching Colorado’s new Personal Financial Literacy content standards All About Income for Elementary Teachers Dr. Katie Sauer Metropolitan State Universityof Denver dr.katherine.sauer@gmail.com

2. borrowing wants What is money? spend needs allowance gifts money income save charity pay back loan taxes adults’ skills & education economy

3. 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

4. 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 middle = median household Mean Income: - add up all household’ income - divide by number of households

5. How much are US median income and mean income? median income = $49,777 mean income = $67,976 How much is Colorado’s median income? $55,930 (This was 2009 data) For recent data: US Census Bureau www.census.gov For occupation / industry data: Bureau of Labor Statistics www.bls.gov

6. Income comes from other sources than working. Employment Projections Program, U.S. Department of Labor, U.S. Bureau of Labor Statistics

7. How is income spent? Employment Projections Program, U.S. Department of Labor, U.S. Bureau of Labor Statistics

8. II. What determines income from working? A. Human Capital B. State of the Economy 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.

9. 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

10. 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

11. Individuals, firms and governments are willing to pay the costof investing in building human capital because they expect to see benefitsin the future. Governmentsfund public education because a better educated population contributes to faster and sustainable development. Firms invest in employee training because they expect to cover the costs through higher profits from higher worker productivity. Individuals spend time and money on higher education because they expect to earn higher wages.

12. A degree or certification can signalthat someone has likelybuilt their human capital.

13. 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)

14. 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

15. 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.

16. The US Business Cycle Data source: Bureau of Economic Analysis bea.gov

17. 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.

18. Income Earned theoretical maximum income Represents all possible income-leisure tradeoffs for a given wage rate. $ from 90 hours of work $ from 40 hours of work Weekly Hours of Leisure $0 0 78 128 168

19. For a given wage, individuals have different preferences over income and leisure. Person who prefers more income and sacrifices leisure. Person who prefers more leisure and sacrifices income. Income Income Preference Curve Preference Curve Hours of Leisure Hours of Leisure

20. 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.

21. The Labor Supply Curve http://en.wikipedia.org/wiki/Labour_economics As the wage rate increases, first people choose to work more hours, then they choose to work fewer hours.

22. 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.

23. 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.

24. Wage Rate As the wage rate falls, a firm can hire more workers. Labor Demand Number of Workers

25. C. Putting Supply and Demand Together The supply and demand for labor interact to determine the market wage for various occupations. Wage Rate Labor Supply market wage Labor Demand actual workers hired Number of Workers

26. Ex: The demand for dental services has remained pretty stable while many new dental hygienists are graduating. Wage Rate Labor Supply Two potential outcomes: 1. the wage falls, the new workers are hired New Labor Supply market wage new wage Labor Demand actual workers hired Number of Workers more workers hired

27. 2. dental offices are already hiring the number of hygienists that are needed, new hygienists are unemployed The wage may or may not fall. Wage Rate Labor Supply New Labor Supply market wage Labor Demand actual workers hired Number of Workers hygienists who want to work

28. Ex: Professional Engineer vs Bartender Labor Supply Wage Rate Wage Rate Labor Supply Labor Demand Labor Demand Number of Workers Number of Workers

29. 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.

30. IV. Tax System Policymakers have two considerations when it comes to taxes: efficiency and equity

31. A. Taxes and Efficiency The primary goal of a tax is to raise money for the government. There are many ways to raise a given amount of money. Tax system A is more efficient than tax system B if it raises the same amount of money but at a lower cost. - minimize administrative burden, while collecting money

32. B. Taxes and Equity Equity has to do with how the tax burden is distributed. - much disagreement! The Benefits Principal of taxation is the idea that people should pay taxes based on the benefits they receive from the government. - gasoline tax - national defense - park fee The Ability-to-Pay Principle of taxation is the idea that people should pay taxes according to how well that person can shoulder the burden.

33. C. The Cost of Taxes Taxes exert a cost on the economy. (fiscal drag) 1. taxes reduce your purchasing power 2. taxes cause people to change their behavior 3. taxes can cause deadweight loss 4. taxes discourage investment 5. taxes discourage work

34. IV. Taxes Individuals Pay • 1. Federal Taxes • Income Tax • Payroll Taxes • The Social Security tax (FICA) 6.2% • The Medicare Tax 1.45% • Estate Tax • Gift Tax • Gasoline Tax 18.4 cents per gallon

35. Calculating your Federal Income Tax 1. compute gross income - wages, salaries - interest, dividends, rental income

36. 2. compute adjusted gross income subtract 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

37. 3. Subtract any exemptions - fixed amount of money that is deducted for the taxpayer, spouse, dependents - indexed for inflation 2012: $3,800 per person

38. 4. Decide on deduction type Standard Deduction: $11,900 for married couples filing jointly $5,950 for singles $5,950 for married individuals filing separately $8,700 for heads of household

39. 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

40. 5. Compute Federal Income Tax Owed Here are the tax brackets for a single person for 2013: Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,925 15% $8,925 $36,250 25% $36,250 $87,850 28% $87,850$183,250 33% $183,250$398,350 35% $398,350 $400,000 39.6% $400,000

41. Suppose you are single in 2013 and your AGI is $50,000. You pay different tax rates on different portions of your income. Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,925 15% $8,925 $36,250 25% $36,250 $87,850 28% $87,850 $183,250 33% $183,250 $398,350 35% $398,350 $400,000 39.6% $400,000 On the first $8925, you pay 10% in taxes. 8925 x 0.10 = $892.50

42. Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,925 15% $8,925 $36,250 25% $36,250 $87,850 28% $87,850 $183,250 33% $183,250 $398,350 35% $398,350 $400,000 39.6% $400,000 On the next portion of income, you pay 15% in taxes. 36250 – 8925 = 27,325 27325 x 0.15 = $4098.75

43. Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,925 15% $8,925 $36,250 25% $36,250 $87,850 28% $87,850 $183,250 33% $183,250 $398,350 35% $398,350 $400,000 39.6% $400,000 On the next portion of income, you pay 25% in taxes. 50000 – 36250 = 13,750 13750 x 0.25 = $3437.50

44. The total amount you pay in taxes: = (0.10)(8,925) + (0.15)(36,250 – 8,925) + (0.25)(50,000 – 36,250) = 892.50 + 4098.75 + 3437.50 = $8,428.75

45. 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%.

46. The average tax rate is the total taxes paid, divided by total income. = 8428.75 / gross income x 100 Suppose your gross income is $60,000. = 8428.75 / 60000 x 100 = 14.05% is your average tax rate

47. 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%)

48. 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)

49. 3. Local Taxes and Fees Motor Vehicle Registration Property Tax City Sales Tax 4. Special District Taxes RTD 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.

50. E. How your taxes are spenthttp://www.whitehouse.gov/taxreceipt 1. Federal