Interventions. Lesson 22: Government Taxation. It ain’t Real.
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Lesson 22: Government Taxation
Mary and Gary are counterfeiters. One day, they make a perfect copy of a $10 bill. They use it to pay their gardener. The gardener uses the $10 to buy pizza. The pizza maker uses the $10 to rent video tapes. The $10 bill keeps circulating in the economy, and no one ever discovers that it is counterfeit. Who was harmed by Mary and Gary counterfeiting a $10 bill?
The government--and its citizens--lose. The Federal Reserve Board usually increases the money supply by buying government securities--the stuff that the U.S. Treasury issues to finance budget deficits. This process is called monetizing the deficit. Most of the new money that's created eventually assumes the form of demand deposits (a.k.a. checking accounts), but some of it is in the form of vault cash and currency in circulation. By issuing their own $10 bill, the counterfeiters prevented the Fed from taking a piece of paper that only cost the Bureau of Engraving and Printing about 2½¢ to produce and exchanging it for $10 worth of government securities.
Two economists meet on the street.
Q. How’s your wife?
A. Relative to what?
Outstanding Public Debt as of 12 Jan 2011 at 04:35:20 AM GMT is:
Debt Clock: Update
If the government reduced the budget deficit, would the national debt rise or fall?
It would rise as long as there's a budget deficit. The federal budget deficit measures how much the government borrows per year. The national debt is the sum of all the deficits less all the surpluses the government has run since the 1789. The budget deficit, then, tells us by how much the national debt increased in any given year. We decrease the national debt only when we run budget surpluses.
For government to operate, it must tax.
For the market to work, it needs freedom.
Tax rates depend on what goods and services government provides and the productive sector.
Source: Economic Indicators, Council of Economic Advisors
• Graphically the deadweight loss is shown on a supply-demand curve as the welfare loss triangle.
• The welfare loss triangle – a geometric representation of the welfare loss in terms of misallocated resources caused by a deviation from a supply-demand equilibrium.
A per unit tax Tpaid by the suppliers shifts the supply curve from S to S+T and increases price to PB and decreases quantity to Q2.
Consumer surplus is A+B+C before the tax and A after the tax.
Producer surplus is D+E+F before the tax and F after the tax.
Government revenue=B+D Deadweight loss=C+E
•The other costs of taxation are the administrative costs of compliance.
•Resources are used by the government to administer the tax code and by citizens and businesses to comply with it.
The benefits of taxation are the goods and services that government provides.
The supply and demand framework gives the answer to this question.
S: without Tax
S+T: after tax, supply shifts
What’s the difference?
The analysis of tax incidence is helpful when discussing current policy debates.
Sales taxes are those paid by retailers on the basis of their sales revenue.
Since sales taxes are broadly defined, consumers find it hard to substitute.
Demand is inelastic so consumers bear the greater burden of the tax.
As consumers increase purchases on the internet where sales are not taxed, retail stores will bear a greater burden of the sales tax.
Mimi: "From 1977 to 1992, Americans in the top 1% income group had their federal tax rates cut by more than 17%." Kimmy: "In 1992, Americans in the top 1% income group paid a larger share of federal taxes than they did in 1977.” Mimi and Kimmyseem to be contradicting each other, but both of their claims are correct. Can you explain why these statements aren't contradictory?
Solution: From 1977 to 1992, the federal effective tax rate for families in the top 1% income group fell from 35.5% to 29.3% -- a decrease of more than 17%. Over this same period, the share of total federal taxes paid by that group rose from 13.6% to 18.3%. This happened because the share of U.S. pretax income received by the top 1% grew substantially over this period (from 8.7% in 1977 to 14.6% in 1992). With this higher income, the richest 1% paid more taxes even though its tax rates had fallen.
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