Government Debt, Taxes and Social Security

1. Government Debt, Taxes and Social Security All the taxes paid over a lifetime by the average American are spent by the government in less than a second.Jim Fiebig

2. Government Debt Sum of all budget surpluses and deficits incurred in the US government since there WAS a US government. • Tax revenues > govt expenditures = budget surplus • Tax revenues < govt. expenditures = budget deficit • In years that the government incurs budget deficits, the government debt increases. In surplus years, debt decreases. http://www.publicdebt.treas.gov/opd/opdpenny.htm • Budgets are annual, beginning over again every year. Govt. debt is a running total of the budget balances. • How does the government spend more than they collect in taxes?? How do YOU do it?

3. Government Debt Sum of all budget surpluses and deficits incurred in the US government since there WAS a US government. • They borrow! Government borrows additional funds by issuing bonds (treasuries, securities) to the public in exchange for interest paid. (That’s why they call it debt) • To avoid having to borrow, the government may increase taxes for more spending money.

4. Tax Principles and Analysis Economists favor tax systems that meet criteria for equity and efficiency. Tax Equity Equal Tax Treatment Doctrine Taxpayers in the same economic circumstances should be treated equally. Relative Tax Treatment Doctrine Taxpayers in different economic circumstances should be treated unequally.

5. Tax Principles and Analysis Ability to Pay Principle • Taxpayers with more of an ability to pay should pay more taxes. • Taxpayers with higher incomes should pay more taxes. Benefits Received Principle • Taxes should be distributed among individuals based on individual benefits received from government goods and services. • Taxes tend to be charged with consumption. • Example: gasoline tax is used to pay for highway maintenance. People that use the highway more use more gasoline, pay more gasoline tax.

6. Tax Principles and Analysis Tax Efficiency • Taxes should be economical to collect and enforce. • Taxes should be convenient to pay and certain to the taxpayer (not complicated to calculate). • Tax structure should minimize excess burden of taxes. • Excess burden – Distortionary effect of taxes. Efficient taxes do not distort behaviors and choices. • Who Bears the Burden of the Tax? • Tax Incidence – burden, or final resting place, of the tax. • Forward shifting • When amount of tax is shifted forward so that burden falls on the consumer in the form of higher prices. • Tends to occur when goods are relatively inelastic (price change results in relatively small change in quantity demanded) • Backward Shifting • When amount of tax is shifted backward to resource owners in the form of lower resource prices. • Tends to occur when goods are relatively elastic (price change results in relatively large change in quantity demanded) • General rule of thumb – if a tax can be shifted, it will be.

7. American Tax System Progressive Tax • As income increases, the percentage of income paid toward the tax increases. • Heavier burden carried by rich than poor. • Example: Federal Income Tax Proportional tax • All incomes pay equal percentages of the income toward this tax. • Also called “flat tax”. • Example: If all taxpayers paid a flat 25% of their income, no matter what their income level is. Regressive Tax • As income increases, the percentage of income paid toward the tax decreases. • Heavier burden carried by poor than rich. • Examples: Sales tax, Property tax, Lottery

8. Social Security • Pay-as-you-go system • Social Insurance, benefits guaranteed by government for elderly, disabled, survivors. • Monthly benefits determined by calculations of lifetime earnings. • Funded through payroll taxes (FICA): • Half paid by employee, half paid by employer • 6.2% for social security, 1.45% for Medicare • Salary cap on social security = $90,000 in 2005 • Self employed pay entire amount themselves • Because of the maximum salary on which social security taxes can be imposed, social security is a regressive tax. • Surpluses (amount collected less amount paid out) are accounted for in a trust fund, invested in interest bearing government bonds.

9. Social Security • 1930’s Great Depression, 25% unemployment rate, American families lost most of their savings. • FDR signs Social Security Act guaranteeing monthly benefits to workers retiring at age 65. • Government began collecting first social security taxes to hold in trust for Americans until they retired. • Congress amended Social Security Act to include benefits for families of workers. Represented shift of focus from individual to family. • Ida Mae Fuller became the first Social Security beneficiary when she received check number 00-000-01 for $22.54. Fuller had paid taxes totaling $24.75. With her second benefit check she had already received more than she had paid in. She lived to be 100. • Disability benefits added to Social Security Act. • LBJ signed bill to establish Medicare Health Insurance program for retirees. • Enactment of new early retirement option, allowing workers to retire at age 62 and receive reduced benefits.

10. Amount paid out Amount paid in Growing balance As long as amount paid in exceeds amount paid out, trust fund will grow. When amount paid out becomes larger than taxes paid in, trust fund balance will begin to decline.

11. Projected OASDI tax income will begin to fall short of outlays in 2018 and will be sufficient to finance only 73 percent of scheduled annual benefits by 2042, when the combined OASDI trust fund is projected to be exhausted. The 2004 OASDI Trustees Report Updated March 23, 2004 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds

12. Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase in payroll taxes of 15 percent or an immediate reduction in benefits of 13 percent (or some combination of the two). To the extent that changes are delayed or phased in gradually, greater adjustments in scheduled benefits and revenues would be required. Ensuring the sustainability of the system beyond 2078 would require even larger changes. The 2004 OASDI Trustees Report Updated March 23, 2004 2004 Annual Report of the Board of Trustees of the Federal Old-Age and Survivors Insurance and Disability Insurance Trust Funds

14. Trust Fund Balance