Government in the Economy

Reasons to Allow Government Intervention: Establish and enforce private property rights and the law Ensure market competition Protect consumers Stabilize the economy Promote economic security: i.e. social security, food stamps, unemployment Provide public goods/services – national defense

How Do We Pay For These Interventions? Taxes: Required payment to a local, state, or national government Primary way governments raise money they need to operate Called revenue: Income received by a government from taxes and non-tax sources “Taxes are the price of civilization.” Oliver Wendell Holmes

Why the Government Collects Taxes Pay for the cost of government Protect selected industries (tariffs) Discourage activities (“sin taxes”) Encourage certain activities (tax breaks) Tax policy as economic stabilizer

Federal Taxes: what taxes provide a majority of revenue? 51% - Income and Corporate Taxes 40% - Payroll Taxes (FICA, Medicare) 6% - Excise Taxes: specific items (perfume, liquor) 3% - Misc: Estate and gift taxes, customs duties Total revenues 2012 – $2.5 Trillion

Idaho State Taxes: Total Revenue 33% Property Taxes (Homes & Vehicles) 28% Sales Tax (Consumption Tax) 28% Individual Income Taxes 6% Fuel Tax 5% Various taxes that you may or may not pay throughout your lifetime! There are also Local Taxes/Municipal taxes that cover property, sales, water, sewer, school, etc.

Two Principles Taxes Are Based On Benefits Received Tax people in proportion to the benefits they receive from a government service Toll bridge Fees for public golf courses Campgrounds “Sin Taxes” (alcohol, gambling, tobacco…) Gas taxes towards road construction (hypothetically) Those that use it should pay for it, those that don’t use, don’t pay San Francisco Golden Gate Bridge - Toll

Principles Taxes Are Based On Ability to Pay Promotes the idea that the rich can afford to pay taxes the poor cannot afford to pay The wealthier you are, the greater your ability to pay the tax Federal and State Income Taxes were supposed to be designed this way.

Tax Structures Proportional – “Flat Tax” A tax for which the percentage of income paid in taxes remains the same for all income levels $350,000 X 10% = $35,000 tax $50,000 X 10% = $5,000 tax Ex: Sales Tax

Tax Structures Progressive tax A tax for which the percentage of income paid increases as income increases People with very small income might not pay any tax at all $100,000 X 35% = $35,000 tax $25,000 X 20% = $5,000 tax $5,000 = 0% tax Ex: Federal Income Tax

Tax Structures Regressive Tax A tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is generally a tax that is applied uniformly (proportional). This means that it hits lower-income individuals harder. Sales tax – a low income earner pays the same amount as a high income earner on a refrigerator, but pays a higher percentage of their income. FICA/Medicare – only pay up to $110,100 (2012) of your income, so millionaires pay the same as a $400,000 wage earner. Up to $113,700 (2013) Income Tax – 25% of income earners pay 85% of the income taxes

Who Pays the Most Tax in the United States? Income group Income split point Group’s share of total U.S. income Group’s share of federal income taxes Top 1% Above $364,657 16.12% 33.71% Top 5% Above $145,283 30.55% 53.80% Top 10% Above $103,912 41.77% 65.73% Top 25% Above $62,068 64.37% 83.90% Top 50% Above $30,851 85.77% 96.50% Bottom 50% Below $30,851 14.23% 3.5%

Payroll Taxes “Pay-as-you-earn” system throughout the year, mostly by employers withholding Withholding taxes FICA/Medicare – 7.65% Federal Income Taxes State Income Taxes

Types of Government Spending Mandatory – money lawmakers are required by law to spend on certain programs or to use for interest payments on the national debt Most mandatory is for entitlement programs: benefits paid to people who meet certain requirements or income Example: Social Security, Medicare, VA benefits Discretionary – government planners can choose to spend (1/4 of budget) Example: education, defense spending, foreign aid