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Taxation and Debt Management in Government Economics

Explore taxation principles, income taxes, government debt financing, and production possibilities in economic systems. Learn about regressive, proportional, and progressive tax structures.

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Taxation and Debt Management in Government Economics

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  1. Chapter 30 Financing Government: Taxes and Debt

  2. Economic Principles • Commandeering resources • Commandeering money (taxes) • Regressive, proportional, and progressive tax structures Gottheil - Principles of Economics, 4e

  3. Economic Principles • Social Security taxes • Government securities and public debt • Internally and externally financing the debt Gottheil - Principles of Economics, 4e

  4. EXHIBIT 1 PRODUCTION POSSIBILITIES CURVE Gottheil - Principles of Economics, 4e

  5. 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, 4e

  6. 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, 4e

  7. 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, 4e

  8. 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, 4e

  9. 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, 4e

  10. 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, 4e

  11. 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, 4e

  12. 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, 4e

  13. 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, 4e

  14. 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, 4e

  15. There’s More Than One Way to Levy Taxes 2. What is an example of a proportionate income tax? • A flat-rate tax on personal income Gottheil - Principles of Economics, 4e

  16. 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, 4e

  17. 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, 4e

  18. 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, 4e

  19. 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, 4e

  20. 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, 4e

  21. 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.

  22. 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, 4e

  23. 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, 4e

  24. 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, 4e

  25. 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, 4e

  26. 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, 4e

  27. There’s More Than One Way to Levy Taxes 4. Complete the following sentence: All excise taxes are ______. Gottheil - Principles of Economics, 4e

  28. There’s More Than One Way to Levy Taxes 4. Complete the following sentence: All excise taxes are regressive. Gottheil - Principles of Economics, 4e

  29. 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, 4e

  30. 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, 4e

  31. 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. During the late-1990s the government gathered more Social Security taxes than were paid to beneficiaries. Gottheil - Principles of Economics, 4e

  32. EXHIBIT 2 2003 TAX RATE SCHEDULE FOR MARRIED PERSONS FILING JOINTLY Source: Internal Revenue Service, Instructions for Form 1040 (Washington, D.C.: Department of the Treasury, 2003), p. 13. Gottheil - Principles of Economics, 4e

  33. Exhibit 2: 2003 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, 4e

  34. 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 next $21,400 they pay 15%, which equals $3,200. Gottheil - Principles of Economics, 4e

  35. 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 next $40,400 they pay 25%, which equals $10,100. Gottheil - Principles of Economics, 4e

  36. 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, 4e

  37. 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? • Thus the married couple pays a total of $(700 + $3210 + $10,100 + 8,736) = $22,746. Gottheil - Principles of Economics, 4e

  38. EXHIBIT 3 FEDERAL, STATE, AND LOCAL GOVERNMENT REVENUES: 2002 ($ BILLIONS) Source:Survey of Current Business (Washington, D.C.: U.S. Department of Commerce, October 2003). Gottheil - Principles of Economics, 4e

  39. Exhibit 3: Federal, State, and Local Government Revenues: 2002 ($ billions) Complete the sentence: ______ taxes are the largest single source of combined government tax revenues. Gottheil - Principles of Economics, 4e

  40. Exhibit 3: Federal, State, and Local Government Revenues: 2002 ($ billions) Complete the sentence: Income taxes are the largest single source of combined government tax revenues. Gottheil - Principles of Economics, 4e

  41. EXHIBIT 4 THE FEDERAL GOVERNMENT’S SURPLUSES AND DEFICITS: 1970–2002 ($ BILLIONS) Source:Economic Report of the President, 1997 (Washington, D.C.: U.S. Government Printing Office, 1997), p. 394, and Bureau of Economic Analysis, “Overview of the Economy.” 2000; and Survey of Current Business (Washington, DC: U.S. Department of Commerce, 2003), Gottheil - Principles of Economics, 4e

  42. Exhibit 4: The Federal Government’s Surpluses and Deficits: 1970–2002 ($ billions) True or false: The federal government ran a budget surplus during the years between 1970 and 1995. • False. The federal government ran a budget deficit during that time period. Gottheil - Principles of Economics, 4e

  43. Financing Government Spending Through Debt 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, 4e

  44. EXHIBIT 5 OWNERSHIP OF THE U.S. PUBLIC DEBT: 2002 (PERCENTAGE OF TOTAL) *Savings and loan associations, nonprofit institutions, credit unions, mutual savings banks, corporate pension trust funds, certain U.S. Treasury deposit accounts, and federally sponsored agencies. Source:Federal Reserve Bulletin (Washington, D.C., October 2003). Gottheil - Principles of Economics, 4e

  45. Exhibit 5: Ownership of the U.S. Public Debt: 2002 (percentage of total) Which of the following correctly identifies the top two owners of the U.S. public debt: a. The Federal Reserve and insurance companies. b. Federal agencies and trust funds, and foreigners. c. Commercial banks and individual U.S. citizens. Gottheil - Principles of Economics, 4e

  46. Exhibit 5: Ownership of the U.S. Public Debt: 2000 (percentage of total) Which of the following correctly identifies the top two owners of the U.S. public debt: a. The Federal Reserve and insurance companies. b. Federal agencies and trust funds, and foreigners. c. Commercial banks and individual U.S. citizens. Gottheil - Principles of Economics, 4e

  47. Financing Government Sending Through Debt Which form of federal government debt is sold in denominations as low as $1000 and carry maturities of 2 to 10 years? • U.S. Treasury notes Gottheil - Principles of Economics, 4e

  48. Tracking Government Debt 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, 4e

  49. EXHIBIT 6A THE FEDERAL DEBT Source:Statistical Abstract of the United States, 2000 (Washington, D.C.: U.S. Department of Commerce, 2000). Gottheil - Principles of Economics, 4e

  50. EXHIBIT 6B THE FEDERAL DEBT Source:Statistical Abstract of the United States, 2000 (Washington, D.C.: U.S. Department of Commerce, 2000). Gottheil - Principles of Economics, 4e

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