What are things the government should not do?

1. What are things the government should not do?

3. The Iron Lady “…a true-believing, Friedrich von Hayek-quoting enemy of what she saw as the excesses of the welfare state, of the unions that seemed to run it and of the mass of socialist encrustations that had formed on the Labor Party’s left wing in the years after World War II. She thought that statism was crushing the nation’s economy, destroying the morale of its people and rapidly diminishing its standing in the world.”

5. Government Finance

6. What’s Dr. S. saying in this chapter?

7. Government Finance • Decisions governments make affect the economy as a whole by changing incentives

8. Government Finance • Decisions governments make affect the economy as a whole by changing incentives • Heavily taxed activities, products, localities, industries or people react accordingly… move elsewhere, convert money to alternate uses, not work as hard, illegal behavior (avoiding taxes)

9. Government Finance • Decisions governments make affect the economy as a whole by changing incentives • Heavily taxed activities, products, localities, industries or people react accordingly… move elsewhere, convert money to alternate uses, not work as hard, illegal behavior (avoiding taxes) • In short, people change their behavior in response to governmental financial operations

11. How does government get its money?

12. How does government get its money? • Taxes, bonds, sale of goods and services and the good old printing press

13. How does government get its money? • Taxes, bonds, sale of goods and services and the good old printing press • Each of which has its own consequences, no matter what the intent

14. A bunch of terms • Government bonds: An instrument of indebtedness, where the issuer owes the holder a debt and must repay it along with interest. Essentially a claim on future tax revenues.

15. A bunch of terms • Government bonds: An instrument of indebtedness, where the issuer owes the holder a debt and must repay it along with interest. Essentially a claim on future tax revenues. • Feds issue: Treasury bills – one year or less Treasure notes – two to 10 years Treasury bonds – 30 years TIPS – five, 10, 15 years

16. Bonds • Corporations also issue bonds to expand business, fund innovation and acquire new companies. These bonds create wealth

17. Bonds • Corporations also issue bonds to expand business, fund innovation and acquire new companies. These bonds create wealth • Government bonds create no wealth… in fact, they pull money that could be productive out of the system, thus negatively affecting wealth creation

19. A bunch of terms • Balanced budget:

20. A bunch of terms • Balanced budget: if all current government spending is paid for with money received from taxes. Most states have balanced-budget laws.

21. A bunch of terms • Balanced budget: if all current government spending is paid for with money received from taxes. Most states have balanced-budget laws. • Budget surplus:

22. A bunch of terms • Balanced budget: if all current government spending is paid for with money received from taxes. Most states have balanced-budget laws. • Budget surplus: a hypothetical status whereby current tax receipts exceed current spending

23. A bunch of terms • Balanced budget: if all current government spending is paid for with money received from taxes. Most states have balanced-budget laws. • Budget surplus: a hypothetical status whereby current tax receipts exceed current spending • Last true federal budget surplus was in 1969, although some say President Clinton did it three times

24. Couple more terms • Deficit:

25. Couple more terms • Deficit: the preferred way to govern whereby tax receipts don’t even come close to covering current expenses so gap is closed by bonds and printing press

26. Fiscal 2012 federal deficit • $3.5 trillion spent • -$2.45 trillion in revenues • $1.09 trillion deficit

29. Couple more terms • Deficit: the preferred way to govern whereby tax receipts don’t even come close to covering current expenses so gap is closed by bonds and printing press • National debt:

30. Couple more terms • Deficit: the preferred way to govern whereby tax receipts don’t even come close to covering current expenses so gap is closed by bonds and printing press • National debt: the accumulation of those deficits over time, or the total amount owed by the national government. How big is U.S. debt?

31. $16.78 trillion

32. $16.78 trillion • Debt per person: $53,185 • Debt per taxpayer $148,078 • Debt is increasing $4.1 billion per day

35. Taxation

36. What is a tax?

37. What is a tax? • “A sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc.” • From the Latin “taxo” • It "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority”

38. Taxes • All that governments control is tax rates

39. Taxes • All that governments control is tax rates • Increases in tax rates don’t necessarily translate to increased taxes

40. Taxes • All that governments control is tax rates • Increases in tax rates don’t necessarily translate to increased taxes • Our old friend the Laffer Curve

41. The Laffer Curve • Relationship between tax rates and government revenue • Taxable-income elasticity: income will change in response to tax rates • Raising tax rates beyond a certain point will result in less tax revenues • Cutting taxes can result in more revenue

42. Taxes • All that governments control is tax rates • Increases in tax rates don’t necessarily translate to increased taxes • Our old friend the Laffer Curve • CBO has been very wrong about impacts of tax increases and decreases

43. Taxes • All that governments control is tax rates • Increases in tax rates don’t necessarily translate to increased taxes • Our old friend the Laffer Curve • CBO has been very wrong about impacts of tax increases and decreases • Key point: tax rates change behavior

45. Couple more terms • Regressive tax:

46. Couple more terms • Regressive tax: one that affects lower-income people disproportionally

47. Couple more terms • Regressive tax: one that affects lower-income people disproportionally • Example?

48. Couple more terms • Regressive tax: one that affects lower-income people disproportionally • Example? Sales tax get a higher percentage of income from low-income people. • Social Security tax also is regressive because the 7.65% tax stops after $113,700 earned (self-employed SS tax is 15.3%!)

49. Still more terms • Progressive tax:

50. Still more terms • Progressive tax: a tax that hits the higher-income people disproportionally