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Public Finance: Expenditures and Taxes

12. Public Finance: Expenditures and Taxes. Government and the Circular Flow. (1) Costs. ( 1) Money income (rents, wages, interest, profits). RESOURCE MARKET. (2) Resources. (2) Land, labor, capital. Entrepreneurial Ability. (7) Expenditures. (8) Resources. (10) Goods and services.

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Public Finance: Expenditures and Taxes

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  1. 12 Public Finance: Expenditures and Taxes

  2. Government and the Circular Flow (1) Costs (1) Money income (rents, wages, interest, profits) RESOURCE MARKET (2) Resources (2) Land, labor, capital Entrepreneurial Ability (7) Expenditures (8) Resources (10) Goods and services (9) Goods and services BUSINESSES GOVERNMENT HOUSEHOLDS Net taxes (11) Net taxes (12) (5) Expenditures (6) Goods and services (4) Goods and services (4) Goods and services PRODUCT MARKET (3) Consumption expenditures (3) Revenues LO1

  3. Government Finance • Government purchases • Exhaustive • Transfer payments • Nonexhaustive • Borrowing and deficit spending • Opportunity cost is low during recession, high during growth LO1

  4. Government Finance Government purchases, transfers, and total spending as percentages of U.S. output 40 35 30 25 20 15 10 5 0 15% Government transfer payments 5% Percentage of U.S. output 22% 20% Government Purchases 1960 2010 Year LO1

  5. Global Snapshot LO1

  6. Federal Expenditures Federal expenditures: $3456 billion Federal tax revenues: $2162 billion National defense 20% Pensions & income security 38% Payroll taxes 40% Health 24% All other 12% Corporate income tax 9% Interest on public debt 6% Excise taxes 3% All other 6% LO1

  7. Federal Tax Revenues • Personal income tax • Progressive tax • Marginal tax rate • Payroll taxes • Corporate income tax • Excise taxes LO1

  8. Federal Tax Revenues Federal Personal Tax Rates, 2011* * For a married couple filing a joint return LO1

  9. State and Local Finance • State revenues • 48 percent from sales and excise taxes • 40 percent from personal and corporate taxes • License fees and other taxes make up the rest LO1

  10. State and Local Finance • State expenditures • 37 percent on education • 28 percent on public welfare • 8 percent on health and hospitals • 7 percent on highway maintenance and construction • 4 percent on public safety • 20 percent on other purposes LO1

  11. State and Local Finances • Local finances • 71 percent of revenues from property taxes • 17 percent of revenues from sales and excises taxes • 44 percent of expenditures on education • 12 percent on welfare, health, and hospitals • 11 percent on public safety • 11 percent on housing, parks, and sewerage • 6 percent on streets and highways LO1

  12. Local, State, and Federal Employment • State and local jobs • 50 percent in education • 9 percent in hospitals or health care • 10 percent in police and corrections • Federal jobs • 50 percent in national defense or postal service • 12 percent in hospitals or health care • 4–7 percent in natural resources, police, and financial administration LO1

  13. Apportioning the Tax Burden • Size, distribution, and impact of the costs that taxes impose on society • Benefits-received principle • Ability-to-pay principle LO2

  14. Apportioning the Tax Burden • Progressive tax—average tax rates increase as income increases • Regressive tax—average tax rate declines as income increases • Proportional tax—average rate stays the same as income increases LO2

  15. Apportioning the Tax Burden • Applications • Personal income tax: progressive • Sales tax: regressive • Corporate tax: proportional • Payroll tax: regressive LO2

  16. Tax Incidence and Efficiency Loss • Tax incidence • Who really pays the tax? • Excise tax • Tax burden depends on elasticity • Inelastic versus elastic • Efficiency loss • Deadweight loss • Transfer of surplus to government LO3

  17. Elasticity and Tax Incidence 14 12 10 8 6 4 2 0 P Price (per bottle) 5 10 15 20 25 Q Quantity (millions of bottles per month) St S Tax $2 D LO3

  18. Elasticity and Tax Incidence P P St Tax Tax St S a P1 S b P a Pe Pb c P1 b De Pa c Di 0 Q2 Q1 Q2 Q1 Inelastic Demand Elastic Demand Smaller efficiency loss with inelastic demand LO3

  19. Elasticity and Tax Incidence P P St S Tax Tax St a Pe S a Pi b b P1 P1 Pa c Pb c D D 0 0 Q2 Q Q2 Q1 Q Q1 Elastic Supply Inelastic Supply Smaller efficiency loss with inelastic supply LO3

  20. Efficiency Loss of a Tax P 14 12 10 8 6 4 2 0 Price (per bottle) 5 10 15 20 25 Q Quantity (millions of bottles per month) Tax paid by consumers St Tax $2 S Efficiency loss (or deadweight loss) Tax paid by producers D LO3

  21. Global Snapshot LO3

  22. Probable Incidence of U.S. Taxes LO3

  23. U.S. Tax Structure • Federal tax system is progressive • State and local tax structures are largely regressive • Overall U.S. tax system is progressive LO3

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