The U.S. Economy

1. The U.S. Economy Income EarnersSpending and Saving Business Formations Taxes Federal Finance

2. Expenditures for Government What do you think?????????? The U.S. Government spends most money on: • Foreign aid • Defense • Welfare • Interest on debt

3. 2011 Income and Outlays – Federal Government

4. FY2012

5. Not recent, but not changed too much

6. 2012Education Income

7. Distribution of total money - 2011

8. World Comparisons - 2000

10. GDP- What is it? Total value of goods and services produced in a given year in the United States. What are the component parts? C + I + G + X-M = GDP ConsumptionInvestmentGovernment SpendingExports- Imports

11. 2008 FY- Tax Policy Center

12. Produce Market / Factor Market Remember the Circular Flow….Now we discuss businesses and types

13. Business formations3 major types - • Sole Proprietor: • A business owned by just one person individual initiative, self-reliance ,hard-work • Most common form and simplest to form • Over 78% of all business in U.S. • Financial investment need not be large. • Limited amount of red tape. • Owner has satisfaction of working for himself. • Flexibility of organization (hours, pay, etc) • Pays taxes only on personal income from business. • Can put money into private pensions. Partner • Easy to form. • Usually has legal standing – 2 or more • Combines skills of several people which enhances ability to create wealth. • Easier to get funding and backing. • Taxed only on personal income. • Limited amount of red tape. • Common formation for professionals.

14. Corporation A BODY THAT IS AUTHORIZED BY LAW TO ACT AS A PRIVATE PERSON Legally endowed with various rights and duties • To receive, own, and transfer property. • To make contracts • To sue and be sued.

15. Corporations Characteristics: • Shareholders share in the wealth. • Limited Liability (responsibility of shareholders of a corporation is held only to their investment in same) • May own tremendous wealth. • Increased management skills • Ownership divided into equal parts called shares • Can raise large amounts of money • Can borrow money through sale of bonds.

16. The following slides are theory Bottom line…. July 18, 2011---- Congress needs to raise the Debt Ceiling Congress needs to cut spending…. Congress needs to close the loop holes for those who do not pay taxes and those who have received subsidies like Oil Companies Congress needs to grow up. That’s my rant!!!----------------------------------- • Note: It is February, 2014….. The above still applies.

17. The primary function of taxes is to transfer command over resources (purchasing power) from the private sector to the public sector. Government has 3 methods for revenuea. user fees (minimal)b. taxes (progressive)c. Borrowing. (growing yearly)

18. Income Taxes • The Sixteenth Amendment to the U.S. Constitution (1915) granted the federal government authority to collect income taxes. • It is now the largest single source of government revenue.

19. Revenue sources – U.S. Govt. 2012

20. Two ways to determine fair tax Benefit Received Ability to Pay

21. Benefits Received: Tax the user- gas tax for drivers- fishing license-ramp fees for boats- toll roads-bus and train tickets- Pay the government for benefits received- can’t pay for welfare received!

22. Ability to Pay • Should those who have the greatest wealth pay the most in taxes regardless of the benefits they receive?? • Should income and family size be assessed? • Determining fairest principle for a just tax is matter of values rather than economics and is determined by our political process.

23. Other Factors in Evaluating Taxes • Total Revenue yielded • Effect on Production (destroy incentive?) • Bracket Creep (AMT ) • Moral consequences (sin taxes) • Reflection of values shown in taxes imposed • Convenience (withholding, quarterly, penalties) • Shifting the burden (seller to consumer) • Ability to pay (relation of tax base to tax rate) Tax rate= percentage that is taxed Tax base = subject on which the tax is levied.

24. Types of Taxes • Progressive = tax rate increases as the tax base increases • Proportional = tax rate remains the same regardless of the base • Regressive= tax rate decreases as the base increases. (often cited as unfair because it places heaviest burden on the least able to pay ---sales tax--- social security tax.) • What is your preference?

25. Federal Government Tax System • Federal government gets most of its revenue from individual and corporate income taxes. • Very small portion of revenue from estate and gift taxes. • Larger share from excise taxes (gasoline, jewelry, alcohol, cigarettes, motor vehicles, admission to entertainment events, tires) • Small portion from tariffs. • Transfer of estates collected since 1916. The Estate Tax is a tax on your right to transfer property at your death.

26. The Most Important Federal Taxes (cont'd) Capital Gain The positive difference between the purchase price and the sale price of an asset You buy a share of stock for $5 and sell for $15: you have a capital gain of $10. Capital Loss The negative difference between the purchase price and the sale price of an asset

27. Kiplinger report 2009Income earners (family 4) 1% $410,096 10% $113,018 25% $66,532 50% $32,879

28. Breakdown- 2011 2009Top 1% = $410, 096 Top 10% = $113,018 Top 25% = $66, 532 Top 50% = $32,879

29. Poverty Guidelines- 2013 1 Person = $11,490 Family of four = $23,550 For every additional person (child) the government gives $4,000 more.

30. Payroll Taxes MEDICARE Medicare Tax…. 2.9% on all wage income Medicare is paid (no cap) Government does not collect payroll taxes on nonwage income (such as interest, dividends, or rents

31. HISTORY OF SOCIAL SECURITY Began in 1935 as OASDHI Program of compulsory savings financed from compulsory payroll taxes levied on employees and employers. Social Security is a regressive tax

32. Social Security The wage base is increased every January as long as the fund is deficient… which is probably forever now because: • People live longer, retire earlier, more drawing on fund (disabled, single parents, etc.) • Ratio of retirees/workers will be significantly reduced by year 2010. • Eighteen year olds today (2002) will pay over a million and a half dollars into SS. Benefits received???? • SS payroll tax today is (FICA= 6.2% SS) of your wages are withheld. Your employer matches that amount for the required contribution to the SS Fund up to the wage base amount for that year. • Wage base 2013 is $113,000. Increases automatically every calendar year approximately $3,000.

33. Economics of Transfer Payments Redistribution through public sector will reduce the size of the economic pie: • Weakens the link between productiveactivity and reward (taxes increased reduce individual reward for hard work-less productive. • As public policy redistributes large share of income,more resources flow into increasing it

34. Economics of Transfer • Higher taxes to finance redistribution will induce taxpayers to focus less on income producing activities and more on incomeshelters *higher incomes have greater opportunity here • When leakages flow in taxes rather than in savings (money is unproductive) • Money that is productive generates more capital • More capital generates more jobs. • More jobs generates more income.

35. Merit Goods The government is called upon to distribute merit goods when the market does not provide enough. • A merit good is a good or service society deems everyone is entitled to some minimal quantity .Public goods have two particular characteristics. They are: • Non-excludable - once the goods are provided, it is not possible to exclude people from using them even if they haven't paid. This allows 'free-riders' to consume the good without paying. • Non-rival - this means that consumption of the goods by one person does not diminish the amount available for the next

36. Taxes paid today go to pay benefits for people drawing today. • Do you think there is a “special fund” where the SS dollars go???

37. More Grim Statistics Concerning SS 70% of SS goes to retirees - avg monthly benefit of $898.20 15% to disabled workers and families May, 2003- avg benefit for disabled workers was $837.70 15% goes to widows, widowers, and families – avg check of $850.80 By 2030-twice as many older Americans 35 million to 70 million. Now there are 3.4 workers for every beneficiary… by 2030 there will be just 2.1 workers for each beneficiary.

38. So, it all gets back to Joe Q Citizen… Taxes paid to government. Question is: What kind of an economy do we Joe Q’s want? The primary function of taxes is to transfer command over resources (purchasing power) from the private sector to the public sector. Why from private to public? Why not the other way around?

40. Gross Public Debt.state,local,fed

41. Why is the U.S. Economy owing billions of dollars?“If you subsidize something you get more of it.”Dr. Milton Friedman, Free to Choose • Virtually all of the recent growth in federal expenditure has come from increased income transfers, not purchases of goods and services.

42. Government failure occurs when government intervention fails to improve economic outcomes.

43. Perceptions of Waste • Government waste implies that the public sector isn’t producing as many services as it could with the sources at its disposal. • With such inefficiency, we are producing inside our production-possibilities curve. Opportunity cost The issue of government waste encompasses questions of efficiency and opportunity cost.

44. “POWER CORRUPTS AND ABSOLUTE POWER CORRUPTS ABSOLUTELY!” Lord Acton “POWER TO TAX IS POWER TO DESTROY” Chief Justice John Marshall…. McCullough vs Maryland