Private and Public Sectors 5 C H A P T E R The U. S. Economy: Private and Public Sectors

INCOME AMONG INDIVIDUAL HOUSEHOLDS HOUSEHOLDS AS INCOME RECEIVERS FUNCTIONAL DISTRIBUTION WAGES RENT INTEREST PROFIT/LOSS PERSONAL DISTRIBUTION SHOWS ALLOCATION OF INCOME AMONG INDIVIDUAL HOUSEHOLDS

FUNCTIONAL DISTRIBUTION HOUSEHOLDS AS INCOME RECEIVERS FUNCTIONAL DISTRIBUTION WAGES $5,977 Billion 72% PROPRIETOR’S 757 Billion 9% INCOME CORPORATE 787 Billion 9% PROFITS INTEREST 684 Billion 8% RENTS 142 Billion 2% 2002 DATA

PERSONAL DISTRIBUTION Personal Income (Percent) HOUSEHOLDS AS INCOME RECEIVERS PERSONAL DISTRIBUTION Personal Income (Percent) 3.5% Lowest 20% Income Group 8.7% Second 20% Income Group 14.6% Middle 20% Income Group 23.0% Fourth 20% Income Group 50.2% Highest 20% Income Group 2002 DATA

HOUSEHOLDS AS SPENDERS WHERE DOES OUR INCOME GO? 2002 DATA 3% to personal saving $291 Billion

HOUSEHOLDS AS SPENDERS WHERE DOES OUR INCOME GO? 2002 DATA 3% 13% to personal taxes $291 Billion $1,114 Billion

HOUSEHOLDS AS SPENDERS WHERE DOES OUR INCOME GO? 2002 DATA 3% 13% 84% to personal consumption $291 Billion $1,114 Billion $7,304 Billion

HOUSEHOLDS AS SPENDERS COMPOSITION OF CONSUMER EXPENDITURES, 2002 Services $4,317 billion (59%) Durable Goods $872 billion (12%) Nondurable Goods $2,115 billion (29%)

Plant Firm Multiplant Firms Vertical Integration Conglomerates THE BUSINESS POPULATION Plant Firm Multiplant Firms Vertical Integration Conglomerates Industry

Sole Proprietorships 4% THE BUSINESS POPULATION Business Shares of Domestic Output Percentage of Firms Percentage of Sales Corporations 20% Partnerships 8% Corporations 87% Sole Proprietorships 72% Partnerships 9% Sole Proprietorships 4%

Advantages Disadvantages Easy to Organize Proprietor is Own “Boss” LEGAL FORMS OF BUSINESSES Sole Proprietorship Advantages Easy to Organize Proprietor is Own “Boss” Disadvantages Limited Resources No Help With Decision Making Unlimited Liability

Advantages Disadvantages LEGAL FORMS OF BUSINESSES Partnership Easy to Organize More Management Skills Greater Resources Available Disadvantages Difficulty Making Decisions Possibly Limited Financial Resources Partnership Continuity Problems Unlimited Liability

Advantages Disadvantages LEGAL FORMS OF BUSINESSES Corporation Most Effective Raising Capital - Stocks, Bonds Limited Liability Easy Expansion of Size & Scope Infinite Life Disadvantages Corporate Regulations & Legal Expenses Some Unscrupulous Practices Double Taxation Separation of Ownership & Control

Limited-Liability Company (LLC) S-Corporation Principal-Agent Problem LEGAL FORMS OF BUSINESSES Hybrid Structures Limited-Liability Company (LLC) S-Corporation Principal-Agent Problem

Providing the Legal Structure Maintaining Competition PUBLIC SECTOR: GOVERNMENT’S ROLE Providing the Legal Structure Maintaining Competition Monopoly Regulation Antitrust Regulated Monopolies Redistributing Income Transfer Payments Market Intervention Taxation

Reallocating Resources PUBLIC SECTOR: GOVERNMENT’S ROLE Reallocating Resources Market Failure Spillovers or Externalities Spillover Costs Legislation Specific Taxes Spillover Benefits Subsidize Consumers Subsidize Suppliers Government Provision

Reallocating Resources PUBLIC SECTOR: GOVERNMENT’S ROLE Reallocating Resources Market Failure Spillovers or Externalities Private Goods - Rivalry Excludability Public Goods and Services Nonrivalry Nonexcludability Free-Rider Problem Quasi-Public Goods

Promoting Stability Unemployment Inflation Circular Flow Revisited PUBLIC SECTOR: GOVERNMENT’S ROLE Promoting Stability Unemployment Inflation Circular Flow Revisited Adding the Government Sector

PUBLIC SECTOR: GOVERNMENT’S ROLE GOODS & SERVICES FLOW TO BUSINESSES NET TAXES FLOW TO GOVERNMENT FROM BUSINESSES $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES GOVERNMENT HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

PUBLIC SECTOR: GOVERNMENT’S ROLE NET TAXES FLOW TO GOVERNMENT FROM HOUSEHOLDS GOODS & SERVICES FLOW TO HOUSEHOLDS FROM GOVERNMENT $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES GOVERNMENT HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

PUBLIC SECTOR: GOVERNMENT’S ROLE $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES GOVERNMENT HOUSEHOLDS RESOURCES FLOW TO GOVERNMENT EXPENDITURES FLOW TO ACQUIRE RESOURCES GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

PUBLIC SECTOR: GOVERNMENT’S ROLE GOODS & SERVICES FLOW TO GOVERNMENT GOVERNMENT EXPENDITURES FLOW TO PRODUCT MARKET $ COSTS $ INCOMES RESOURCE MARKET RESOURCES INPUTS BUSINESSES GOVERNMENT HOUSEHOLDS GOODS & SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION

Purchases & Transfers Government Purchases Transfer Payments GOVERNMENT FINANCE Purchases & Transfers Government Purchases Exhaustive Transfer Payments Nonexhaustive 35 30 25 20 15 10 5 5% ~ 12% ~ Percent of U.S. Output 22% ~ 18% ~ 1960 2002 2002 Data

Federal Expenditures FEDERAL FINANCE Pensions and Income Security National Defense Health Interest on Public Debt Pensions & Income Security 38% Total Expenditures $2,011 Billion National Defense 17% All Other 15% Health 21% Interest 9% 2002 Data

Federal Tax Revenues FEDERAL FINANCE Personal Income Tax Marginal Tax Rate Average Tax Rate Personal Income Tax 46% 2002 Data

Federal Tax Revenues FEDERAL FINANCE Personal Income Tax Payroll Tax Corporate Income Taxes Excise Taxes Personal Income Tax 46% Total Tax Revenues $1,853 Billion Excise Taxes 4% Payroll Taxes 38% All Other 4% Corporate Income Tax 8% 2002 Data

State Revenues Sales & Excise Taxes ~ 47% State Income Taxes ~ 36% STATE AND LOCAL FINANCE State Revenues Sales & Excise Taxes ~ 47% State Income Taxes ~ 36% Corporate Income Taxes License Fees Lotteries Intergovernmental Grants ~22% State Owned Utilities/Stores

State Expenditures Education ~ 36% Public Welfare ~ 25% STATE AND LOCAL FINANCE State Expenditures Education ~ 36% Public Welfare ~ 25% Health and Hospitals ~ 8% Highways ~ 8% Public Safety ~ 5%

Local Revenues Local Expenditures Property Taxes 72% STATE AND LOCAL FINANCE Local Revenues Property Taxes 72% Sales & Excise Taxes 17% Local Expenditures Education 44% Welfare, Health, and Hospitals 12% Public Safety 11% Housing, Parks, and Sewerage 8% Highways 5%

Sources of Proprietary Incomes STATE AND LOCAL FINANCE Local Revenues Sources of Proprietary Incomes Property Taxes 72% Sales & Excise Taxes 17% Local Expenditures Education 44% Welfare, Health, and Hospitals 12% Public Safety 11% Housing, Parks, and Sewerage 8% Highways 5%

FISCAL TRANSFERS Intergovernmental Grants Federal Transfers & Grants State Grants to Local Governments

Key Terms functional distribution of income personal distribution of income durable goods non-durable goods services plant firm industry sole proprietorship partnership corporation stocks bonds limited liability double taxation principal-agent problem monopoly spillover costs spillover benefits public goods free-rider problem quasi-public goods government purchases transfer payments personal income tax marginal tax rate average tax rate payroll taxes corporate income tax sales & excise taxes property taxes Copyright McGraw-Hill/Irwin 2005 BACK END

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