Role of Government Economics 2016

Role of Government Maintain Legal and Social Framework –What does this mean to you? –Create laws & provide courts; provide critical information, establish monetary system, enforce property rights Maintain Competition –How does the government do this? –Create & enforce anti-trust legislation, regulation of business sector, establish free trade Provide Public Goods and Services –What is a “public good”? –Provide goods & services that markets are unable or unwilling to provide –Influence allocation of resources!

Role of Government Redistribute Income –How does the government do this? –Higher income taxes for rich, provide social security, entitlements, welfare, Medicaid, etc. Stabilize the Economy –Use government budgets and/or the money supply to promote economic growth, control inflation, reduce unemployment

Government Expenditures

Government Spending 1/3 of all money in U.S. economy is channeled through government Totals $3.6 trillion in 2014 –Only 34% of spending is in direct payments –66% is in transfer payments Soc. Sec. debt, welfare, veterans, etc. Nearly 75 million people (25% of pop.)

“Big” Government 17 million state/local gov’t workers 3 million federal workers 20 million workers = 14.5% of total –1 in 7 workers –Federal workers same since 1985 –State/local workers increased 25%

Establishing the Federal Budget Governmental Fiscal Year 10/01 – 9/30 Starts with a request by the President Appropriations (spending) drawn up by the House and approved by the Senate Final approval by the President

Mandatory vs. Discretionary Mandatory Spending – 65% –Spending authorized by law that continues without the annual approval by Congress –Entitlements (SS, Medicare, welfare, etc.) Discretionary Spending – 29% –Spending that must be approved by Congress on an annual basis –Direct $ (Defense, transportation & education)

Federal Spending Largest direct expense is Defense –16% of federal spending –All other direct spending = 18% Justice, trans., education, energy, etc. Largest transfer expense is Social Security –23% of federal spending –16% on employment benefits Interest on national debt is 6% of $1 –$624,000,000 a day

State/Local Spending Most payments are direct, not transfer Education is 28% (avg. by state is largest) Interest on debt only 4% –Legally prevented from deficit spending –Except items funded by bond issues Burdened with federal mandates & taxpayer revolts –NCLB, prisons, roads, health care –Stadium issue, by-state tax, school bonds

Kansas $ Expenditures Agriculture $488,137, Education$ 6,402,457, General Gov’t $5,108,210, Highways & Trans. $ 1,539,457, Human Resources $6,320,704, Public Safety $803,404, TOTAL $20,662,372,420.88

JoCo Expenditures Health Services$15,800,000 Roads $8,300,000 Public Safety$11,400,000 Inter-county programs $6,500,000 Capital Improvement $2,600,000 Debt $3,600,000 TOTAL SPENDING$48,300,000

Social Decision Making 1.What do you think is the biggest issue currently facing Leawood? Why? 2.List the choices you made in order. Give the rationale for each decision. 3.What are the opportunity costs of your team’s decisions?

Government Revenue Sources

Quick Review What is the largest direct expenditure for the federal government? What is the largest transfer payment? What is a state’s largest source of revenue?

Federal Revenue Tax burden = 4 months wages (April 17 th ) Totaled $3.02 trillion in 2014 Largest % comes from Personal Income Tax – 46% Social Security payroll taxes (FICA) is 35% –½ of workers pay more in FICA than income tax Corporate tax is only 11% of total Excise taxes –Gas, cigarettes, alcohol, customs,etc

Conditions for Revenue Equity – those who earn the same should pay the same amount Horizontal – same income should pay same amount. Vertical – higher incomes should pay higher amount. –Benefits Principle those who use the service should pay for it –Progressive taxation (Income tax) But…5% earn > $100,000 paid 60% of burden.06% earn > $1,000,000 paid 10% of burden

Conditions for Revenue Efficiency – taxation should not interfere with way resources are allocated or discourage production i.e., healthcare for poor –Sin Taxes are exceptions Those items/service deemed objectionable should be taxed higher These taxes are inelastic Is this right?

Conditions for Revenue Incidence – every household should share the same burden of taxation –Income taxes – incidence falls to person who pays it. –Excise taxes – incidence often falls to the consumer, not the owner Sales tax, rental property tax, gas tax, etc. –Most taxes are progressive…this is okay –But excise taxes are regressive and “punish” low income earners

State/Local Revenue Largest % is from sales tax (state) & property taxes (local) Federal transfers – “fiscal federalism” –Covers federal mandates Education, immigrant costs, medicaid User fees –Garbage, licenses, registration, airports Growth of lotteries & gambling

JoCo Revenue Property Tax$25,002,747 Transfer Payments$15,252,000 Service Tax $2,200,000 Licenses $353,198 Miscellaneous $1,400,000 Interest $655,000 TOTAL REVENUE$42,000,000

Types of Taxation Progressive Taxation - Pro Argument Against Argument

Flat Taxation - Pro Argument Against Argument Types of Taxation

Taxation The first income tax in the US was to finance the Civil War in It was a flat tax of 3% on all incomes over $600. Congress ratified the 16 th Amendment in 1913 and levied a 1% tax on net personal incomes above $3,000, with a 6% surtax on incomes above $500,000. By 1918, the top rate of the income tax was increased to 77% (on income over $1,000,000, equivalent of 15,300,000 in 2012 dollars) to finance World War I. Congress has gradually raised the income brackets as inflation raised the income of most Americans into the brackets of the “wealthy”.

U.S. Income Tax Individuals are subject to federal graduated tax rates from 10% to 39.6% State and local tax rates vary widely by jurisdiction, from 0% to 13.30% of income, and many are graduated Taxable income is gross income less adjustments and allowable tax deductions In the United States, the first progressive income tax was established by the Revenue Act of This was signed into law by President Abraham Lincoln and repealed the flat tax

U.S. Taxation…compared to others….

Possible Effects/Impacts? Progressive on Consumption Regressive on Income Tax incidence equality? Increased GDP? Increased spending/consumption? Savings & money supply? Increased employment? Increased wages?

Government Debt & Deficit

Deficits, Surpluses and Debt Deficit Spending – the amount of money spent yearly in excess of the revenues collected Federal Debt – the total amount of money borrowed from investors to finance the government’s total accumulated spending Public vs. Private Debt – –Public Debt (internal) is owed to trust funds within the federal government –Private Debt (external) is owed to individuals, companies and foreign governments.

U.S. National Debt Clock National Debt Clock – LINK Each citizen’s share of the debt is growing at an alarming rate. Currently each person’s share is about $51,000 The national debt has continued to increase on average $3.7 billion per day since January 1, During this class period the debt will increase by $1,575,666.00

Debt as a % of GDP Japan192% United States102% France80% Germany77% Canada72% Britain69% Mexico38%