Presentation Transcript

1. All About Income Dr. Katie Sauer Metropolitan State College of Denver (ksauer5@msudenver.edu) Presented at Junior Achievement’s Elementary School Personal Financial Literacy Workshop in collaboration with the Colorado Council for Economic Education
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
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 lowest household income highest household income
5. Mean Income: - add up all household’ income - divide by number of households 3
6. 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 2009 data: US Census Bureau http://www.census.gov
7. Median Income vs Mean Income Exercise Handout
8. Median Earnings by Worker Characteristics http://bls.gov/cps/cpsaat37.pdf
9. How to find recent data on income and occupations: From the Bureau of Labor Statistics website: http://bls.gov/
10. From the “Subject Area” tab: - click on “Pay and Benefits” - the “Wages by Area and Occupation” link will lead you to information to update the wage game data - click on “Employment” - the “Employment Projections” link will lead you to information on employment trends
11. Income comes from other sources than working. Employment Projections Program, U.S. Department of Labor, U.S. Bureau of Labor Statistics
12. How is that income spent? Employment Projections Program, U.S. Department of Labor, U.S. Bureau of Labor Statistics
13. 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. - accountants typically make more money than bank tellers
14. 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
15. Investing in human capital has a high opportunity cost: When students are in class they aren’t being productive in the economy. Increasing human capital can have large benefits: - higher paycheck - better society - productive workers
16. Individuals, firms and governments are willing to pay the cost of investing in building human capital because they expect to see benefits in the future. Governments fund 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.
17. A degree or certification can signal that someone has likely built their human capital. 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)
18. 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
19. 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.
20. The US Business Cycle for the Past 50 Years Data source: Bureau of Economic Analysis
21. 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.
22. 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
23. 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
24. 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.
25. 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.
26. 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.
27. 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.
28. Wage Rate As the wage rate falls, a firm can hire more workers. Labor Demand Number of Workers
29. 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
30. 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
31. 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
32. Ex: Professional Engineer vs Bartender Labor Supply Wage Rate Wage Rate Labor Supply Labor Demand Labor Demand Number of Workers Number of Workers
33. 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.
34. IV. Tax System Policymakers have two considerations when it comes to taxes: efficiency and equity 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
35. 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.
36. 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
37. D. Taxes That Individuals Pay 1. Federal Taxes Income Tax Payroll Tax The Social Security tax is also called the FICA (Federal Insurance Contributions Act) tax. (6.2%) The Medicare tax is used to provide medical benefits for certain individuals when they reach age 65. (1.45%) Estate Tax Gift Tax Gasoline Tax (18.4cents per gallon)
38. Federal Income Tax: Here are the tax brackets for a single person for 2010: Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,375 15% $8,375 $34,000 25% $34,000 $82,400 33% $82,400 $171,850 35% $171,850 $373,650 38% $373,650
39. Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,375 15% $8,375 $34,000 25% $34,000 $82,400 33% $82,400 $171,850 35% $171,850 $373,650 38% $373,650 Let’s suppose you are single and make $50,000 in 2010. You pay different tax rates on different portions of your income: - On the first $8,375 of your income you pay 10% in taxes.
40. Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,375 15% $8,375 $34,000 25% $34,000 $82,400 33% $82,400 $171,850 35% $171,850 $373,650 38% $373,650 - The next bracket contains $34,000 - $8,375 = $25,625 of income. You pay 15% tax on $25,625 of your income.
41. Marginal Tax Tax Bracket Rate over but not over 10% $0 $8,375 15% $8,375 $34,000 25% $34,000 $82,400 33% $82,400 $171,850 35% $171,850 $373,650 38% $373,650 $50,000 - The next bracket contains $50,000 - $34,000 = $16,000 of income. You pay 25% tax on $16,000 of your income.
42. The total amount you pay in taxes: (0.10)(8,375) + (0.15)(34,000 – 8,375) + (0.25)(50,000 – 34,000) = 837.5 + 3843.75 + 4000 = $8,681.25
43. The marginal tax rate is the extra taxes paid on an additional dollar of income. If you currently earn $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%.
44. The average tax rate is the total taxes paid, divided by total income. 8,681.25/50,000 = 0.1736 x 100% = 17.4%
45. 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%) 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)
46. 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.
47. E. How your taxes are spenthttp://www.whitehouse.gov/taxreceipt 1. Federal
48. 2. Colorado http://www.colorado.gov/taxtracks/