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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

Chapter 30

Financing Government Taxes and Debt

Gottheil — Principles of Economics, 7e


Economic principles
Economic Principles

  • Commandeering resources

  • Commandeering money (taxes)

  • Regressive, proportional, and progressive tax structures

Gottheil — Principles of Economics, 7e


Economic principles1
Economic Principles

  • Social Security taxes

  • Government securities and public debt

  • Internally and externally financing the debt

Gottheil — Principles of Economics, 7e


Chapter 30

EXHIBIT 1 PRODUCTION POSSIBILITIES CURVE

Gottheil — Principles of Economics, 7e


Exhibit 1 production possibilities curve
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


Commandeering resources
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


Commandeering resources1
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


Commandeering resources2
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


The tax system
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


There s more than one way to levy taxes
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


There s more than one way to levy taxes1
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


There s more than one way to levy taxes2
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


There s more than one way to levy taxes3
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


There s more than one way to levy taxes4
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


There s more than one way to levy taxes5
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


There s more than one way to levy taxes6
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


There s more than one way to levy taxes7
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


There s more than one way to levy taxes8
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


Are we really paying high taxes
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


Are we really paying high taxes1
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


Are we really paying high taxes2
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


There s more than one way to levy taxes9
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


There s more than one way to levy taxes10
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


There s more than one way to levy taxes11
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


There s more than one way to levy taxes12
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


There s more than one way to levy taxes13
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


There s more than one way to levy taxes14
There’s More Than One Way to Levy Taxes

4. Complete the following sentence:

All excise taxes are ______.

Gottheil — Principles of Economics, 7e


There s more than one way to levy taxes15
There’s More Than One Way to Levy Taxes

4. Complete the following sentence:

All excise taxes are regressive.

Gottheil — Principles of Economics, 7e


There s more than one way to levy taxes16
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


There s more than one way to levy taxes17
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


There s more than one way to levy taxes18
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


Chapter 30

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


Exhibit 2 2006 tax rate schedule for married persons filing jointly
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


Exhibit 2 2006 tax rate schedule for married persons filing jointly1
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


Exhibit 2 2006 tax rate schedule for married persons filing jointly2
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


Exhibit 2 2000 tax rate schedule for married persons filing jointly
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


Exhibit 2 2006 tax rate schedule for married persons filing jointly3
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


Chapter 30

EXHIBIT 3 JointlyFEDERAL, 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


Exhibit 3 federal state and local government revenues 2007
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


Exhibit 3 federal state and local government revenues 20071
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


Chapter 30

EXHIBIT 4 2007FEDERAL 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


Exhibit 4 federal government s surpluses and deficits and as percent of gdp 1990 2007
Exhibit 4: 2007Federal 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


Financing government spending through debt
Financing Government Spending Through Debt 2007

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


Chapter 30

EXHIBIT 5 2007OWNERSHIP OF THE U.S. PUBLIC DEBT: 2010 (percentage of total)

Source:Federal Reserve Bulletin (Washington, D.C., September 2011).

Gottheil — Principles of Economics, 7e


Exhibit 5 ownership of the u s public debt 2010
Exhibit 5: Ownership of the U.S. Public Debt: 2010 2007

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


Exhibit 5 ownership of the u s public debt 20101
Exhibit 5: Ownership of the U.S. Public Debt: 2010 2007

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


Financing government sending through debt
Financing Government Sending through Debt 2007

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


Tracking government debt
Tracking Government Debt 2007

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


Chapter 30

EXHIBIT 6A 2007THE FEDERAL DEBT

Source:Statistical Abstract of the United States, 2006 (Washington, D.C.: U.S. Department of Commerce, 2006).

Gottheil — Principles of Economics, 7e


Chapter 30

EXHIBIT 6B 2007THE FEDERAL DEBT

Source:Statistical Abstract of the United States, 2006 (Washington, D.C.: U.S. Department of Commerce, 2006).

Gottheil — Principles of Economics, 7e


Exhibit 6 the federal debt
Exhibit 6: The Federal Debt 2007

1. During what time period did the gross federal debt grow most rapidly?

  • During the period between approximately 1980 and 2005

Gottheil — Principles of Economics, 7e


Exhibit 6 the federal debt1
Exhibit 6: The Federal Debt 2007

2. Based on the data in panel b of Exhibit 6, in what year was federal debt as a percentage of GDP the largest?

  • 1945. Spending on the war effort caused federal debt to be 125 percent of GDP.

Gottheil — Principles of Economics, 7e


Exhibit 6 the federal debt2
Exhibit 6: The Federal Debt 2007

3. True or false: Gross federal debt as a percentage of GDP has increased sharply during the 1990s.

  • False. Gross federal debt as a percentage of GDP flattened out and then declined in the 1990s.

Gottheil — Principles of Economics, 7e


Exhibit 6 the federal debt3
Exhibit 6: The Federal Debt 2007

4. Compare panels a and b in Exhibit 6. What caused debt as a percentage of GDP to flatten out and then decline in the 1990s?

  • Panel a shows that the gross federal debt increased through 1996.

Gottheil — Principles of Economics, 7e


Exhibit 6 the federal debt4
Exhibit 6: The Federal Debt 2007

4. Compare panels a and b in Exhibit 6. What caused debt as a percentage of GDP to flatten out and then decline in the 1990s?

  • In order for debt as a percentage of GDP to flatten out when debt is still growing, GDP must grow as fast as debt.

Gottheil — Principles of Economics, 7e


Exhibit 6 the federal debt5
Exhibit 6: The Federal Debt 2007

4. Compare panels a and b in Exhibit 6. What caused debt as a percentage of GDP to flatten out and then decline in the 1990s?

  • In the late-1990s gross federal debt actually began to decline.

Gottheil — Principles of Economics, 7e


Chapter 30

EXHIBIT 7 2007GROSS PUBLIC DEBT AS A PERCENT OF GDP FOR SELECTED ECONOMIES: 2007

Source:The 2008 World Factbook, 2008.

Gottheil — Principles of Economics, 7e


Exhibit 7 gross public debt as a percent of gdp for selected economies 2007
Exhibit 7: 2007Gross Public Debt as a Percent of GDP for Selected Economies: 2007

What does Exhibit 7 suggest about the U.S. debt ratio of 65.7 percent GDP compared to other countries?

  • It is not out of line and even and is a near match of France’s and Germany’s.

Gottheil — Principles of Economics, 7e


Hatred of tax collection is the way of the world
Hatred of Tax Collection is the Way of the World 2007

In which of the following countries do tax collectors wear commando uniforms and carry weapons:

a. Sweden

b. France

c. Russia

Gottheil — Principles of Economics, 7e


Hatred of tax collection is the way of the world1
Hatred of Tax Collection is the Way of the World 2007

In which of the following countries do tax collectors wear commando uniforms and carry weapons:

a. Sweden

b. France

c. Russia

Gottheil — Principles of Economics, 7e


Does debt endanger future generations
Does Debt Endanger Future Generations? 2007

In one sense the answer is no. While the interest on future government debt must be paid by taxing the future economy, people in the future who own government bonds receive that interest as income.

Gottheil — Principles of Economics, 7e


Does debt endanger future generations1
Does Debt Endanger Future Generations? 2007

In another sense the answer is yes. For example, if future bondholders are rich, then the rich receive the interest income while the poor only bear the burden of higher taxes.

Gottheil — Principles of Economics, 7e


Does debt endanger future generations2
Does Debt Endanger Future Generations? 2007

In addition, increased government debt purchased by the Fed will increase the money supply, which can be inflationary.

Gottheil — Principles of Economics, 7e


Does debt endanger future generations3
Does Debt Endanger Future Generations? 2007

Another problem with increased government debt is that it tends to crowd out private investment, which slows the rate of economic growth.

Gottheil — Principles of Economics, 7e


Does debt endanger future generations4
Does Debt Endanger Future Generations? 2007

External debt

  • Public debt held by foreigners.

Gottheil — Principles of Economics, 7e


Does debt endanger future generations5
Does Debt Endanger Future Generations? 2007

Recall from Exhibit 5 that foreigners are a major owner of U.S. public debt. In this case, future generations of U.S. citizens bear the burden of higher taxes to pay the interest that flows to foreigners.

Gottheil — Principles of Economics, 7e


Are deficits and debt inevitable
Are Deficits and Debt Inevitable? 2007

What was the impact of the Reagan tax agenda in the 1980s on the federal budget deficit?

  • Supply-side advocates convinced Reagan that cutting tax rates would cause GDP to grow so much that tax revenues would actually increase.

Gottheil — Principles of Economics, 7e


Are deficits and debt inevitable1
Are Deficits and Debt Inevitable? 2007

What was the impact of the Reagan tax agenda in the 1980s on the federal budget deficit?

  • Supply-side expectations notwithstanding, the tax reforms did not do much to increase tax revenues during the 1980s. At the same time, government spending continued to grow.

Gottheil — Principles of Economics, 7e


Are deficits and debt inevitable2
Are Deficits and Debt Inevitable? 2007

What was the impact of the Reagan tax agenda in the 1980s on the federal budget deficit?

  • The combination of tax cuts and government spending growth produced in the 1980s the largest annual budget deficits in the history of the United States.

Gottheil — Principles of Economics, 7e


Are deficits and debt inevitable3
Are Deficits and Debt Inevitable? 2007

The combination of the Clinton presidency, the Republican Congress, and sustained economic growth eliminated budget deficits by the late-1990s.

Gottheil — Principles of Economics, 7e


Are deficits and debt inevitable4
Are Deficits and Debt Inevitable? 2007

Bush’s Jobs and Growth Tax Relief Reconciliation Act may have helped alleviate the post-1990s recession and the 9/11 downturn. However, budget deficits returned.

Gottheil — Principles of Economics, 7e


The aftermath of the 2008 financial meltdown
The Aftermath of the 2008 Financial 2007Meltdown

The president, aided by an obliging Congress, sought to pull the economy out of its doldrums by incurring record-setting deficits which raised the public debt level above $13 trillion by 2010.

Gottheil — Principles of Economics, 7e