Economic Policy Social Welfare September 22, 2015September 22, 2015September 22, Introduction to American Government

Patterns of Government Spending What proportion of the federal budget do you think is spent on… Social Security Social Security Medicare and Medicaid Medicare and Medicaid National Defense National Defense Nondefense “discretionary” Nondefense “discretionary” Interest Interest The actual figures The actual figuresactual figuresactual figures What do you think the government should spend on? How is federal spending different from personal spending? Outlays greater than receipts means incurring debt Outlays greater than receipts means incurring debt Limitations on debt; bankruptcy Limitations on debt; bankruptcy Government debt financed through bonds, etc. Government debt financed through bonds, etc. How is federal spending different from business spending? Businesses typically distinguish between capital and operating expenses Businesses typically distinguish between capital and operating expenses Are expected to make profits (and likely pay dividends) Are expected to make profits (and likely pay dividends) Spending as “investment” Spending as “investment” September 22, 2015September 22, 2015September 22, 20152Introduction to American Government

Federal Government Outlays Source: Office of Management and Budget (OMB), Receipts and Outlays, Tables 2.1, 8.5, and 8.7, OMB Review, September 22, 2015September 22, 2015September 22, 20153Introduction to American Government

Financing the Government What proportion of federal receipts comes from… Individual income taxes Individual income taxes Corporate income taxes Corporate income taxes Payroll taxes (Social Security, Medicare, etc.) Payroll taxes (Social Security, Medicare, etc.) Other Other The actual figures The actual figuresactual figuresactual figures Historical trends Historical trends Who pays income tax? Progressive: higher rates at higher incomes Progressive: higher rates at higher incomes Marginal rates, i.e. “brackets” Marginal rates, i.e. “brackets”“brackets” The “47%” The “47%” The “47%” The “47%” Who pays payroll taxes? Social Security (OASDI): Employers and employees each pay 6.2% on income up to $108,000 Social Security (OASDI): Employers and employees each pay 6.2% on income up to $108,000 Medicare (FICA): Employers and employees each pay 1.45% (no income cap) Medicare (FICA): Employers and employees each pay 1.45% (no income cap) Payroll taxes exceeded income taxes for 44% of payers (2006) Payroll taxes exceeded income taxes for 44% of payers (2006) September 22, 2015September 22, 2015September 22, 20154Introduction to American Government

Federal Government Receipts Source: Office of Management and Budget (OMB), Budget of the US Government 2012, Historical Tables, Table 2.2. September 22, 2015September 22, 2015September 22, 20155Introduction to American Government

Historical Trends 6September 22, 2015September 22, 2015September 22, 2015Introduction to American Government

Federal Tax Brackets Source: Nickel, “2012 Federal Income Tax Brackets,” Forbes, September 30, 2011 September 22, 2015September 22, 2015September 22, 20157Introduction to American Government BracketMarried, Filing JointlySingle 10%$0 - $17,400$0 - $8,700 15%$17,400 - $70,700$8,700 - $35,350 25%$70,700 - $142,700$35,350 - $85,650 28%$142,700 - $217,450$85,650 - $178,650 33%$217,450 - $388,350$178,650 - $388,350 35%Over $388,350

Taxation in Context Consider overall tax burden (federal, state, local) Most is paid by top income earners Top 20% pay 66% of federal taxes Top 20% pay 66% of federal taxes Top 20% pay 66% of federal taxes Top 20% pay 66% of federal taxes Top 1% pay 20% of overall taxes (1.37 times their total share of income) Top 1% pay 20% of overall taxes (1.37 times their total share of income) Federal tax cuts since 1980s, especially since 2001 Less than 30 years ago Less than 30 years ago Less than 30 years ago Less than 30 years ago Graphs (show trends for different taxes) Graphs (show trends for different taxes) Graphs Cost in lost revenue to federal government between 2001 and 2010: $2.2 trillion Cost in lost revenue to federal government between 2001 and 2010: $2.2 trillion How does tax burden compare to other countries? Lower than average “tax as share of GDP” (among OECD countries) Lower than average “tax as share of GDP” (among OECD countries)among OECD countriesamong OECD countries Lower overall taxation on the wealthy (> $100,000) Lower overall taxation on the wealthy (> $100,000)wealthy September 22, 2015September 22, 2015September 22, 20158Introduction to American Government

Shares of Federal Taxes 9September 22, 2015September 22, 2015September 22, 2015Introduction to American Government Source: Tax Policy Center

Taxing the Wealthy: Comparison Source: The Economist online, October 16, 2012 September 22, 2015September 22, 2015September 22, Introduction to American Government

Federal Debt and Deficit Understanding the debt and deficit John Green (video) John Green (video)video Paul Krugman Paul Krugman Paul Krugman Paul Krugman Congressional Budget Office Congressional Budget Office Congressional Budget Office Congressional Budget Office To review Deficit is gap between revenues and outlays (taxing and spending) Deficit is gap between revenues and outlays (taxing and spending)gap Recent deficits comparatively high Recent deficits comparatively highcomparatively highcomparatively high Deficit is financed by debt (selling bonds and T-bills) Deficit is financed by debt (selling bonds and T-bills) Most debt “owned” by government, U.S. residents Most debt “owned” by government, U.S. residentsIssues When is deficit spending appropriate? When/how is it avoidable? When is deficit spending appropriate? When/how is it avoidable? Debt as proportion of GDP Debt as proportion of GDP 2011: 98.7% (56.4% in 2001, 32.5% in 1981, 79.7% in 1951, 121.7% in 1946) 2011: 98.7% (56.4% in 2001, 32.5% in 1981, 79.7% in 1951, 121.7% in 1946) government debt displacing private investment? Cost of financing debt (who buys? At what rates?) Cost of financing debt (who buys? At what rates?) September 22, 2015September 22, 2015September 22, Introduction to American Government

12September 22, 2015September 22, 2015September 22, 2015Introduction to American Government

Copyright © 2013 Cengage Source: Adapted from Office of Management and Budget (OMB), Historical Tables, February 1, 2010, Table 1.3. Federal Government Deficits

Goals of Federal Budgets Economic Goals (macroeconomic) Reduce unemployment Reduce unemployment Keep inflation in check Keep inflation in check Keep interest rates low Keep interest rates low Manage trade deficit Manage trade deficit Political goals Promote economic prosperity (majoritarian politics) Promote economic prosperity (majoritarian politics) Maintain government services and benefits (client politics) Maintain government services and benefits (client politics) Lower taxes and less debt/deficit Lower taxes and less debt/deficit Tension between goals Tension between goals Tension between taxing and spending Tension between taxing and spending September 22, 2015September 22, 2015September 22, Introduction to American Government

Broad Economic Theories Monetarism Focus on inflation and effects on growth, employment Focus on inflation and effects on growth, employment Need stable monetary policy (Fed should grow money supply roughly at growth rate) Need stable monetary policy (Fed should grow money supply roughly at growth rate)Keynesianism Economic growth driven primarily by demand Economic growth driven primarily by demand Government spending to stimulate private-sector demand and thus growth (e.g. stimulus plan) Government spending to stimulate private-sector demand and thus growth (e.g. stimulus plan)stimulus planstimulus plan Deficit spending deliberate and appropriate in a recession Deficit spending deliberate and appropriate in a recession Economic Planning Government should explicitly guide economy (sectors) Government should explicitly guide economy (sectors) “bailout” of banks and auto industry (“industrial policy”) “bailout” of banks and auto industry (“industrial policy”) Wage and price controls (macroeconomic) Wage and price controls (macroeconomic) Supply-Side Tax Cuts Less government economic involvement Less government economic involvement Tax cuts to stimulate investment and growth Tax cuts to stimulate investment and growth Obama v. Romney/Ryan Tax proposal comparison Tax proposal comparison Tax proposal comparison Tax proposal comparison Ryan plan on Medicare vouchers Ryan plan on Medicare vouchers September 22, 2015September 22, 2015September 22, Introduction to American Government

Copyright © 2013 Cengage

Machinery of Economic Policy President v. Congress Budget process Budget process Presidential budget proposal Congressional authorizations and appropriations The “Troika” Council of Economic Advisors Council of Economic Advisors Director of the OMB Director of the OMB Secretary of the Treasury Secretary of the Treasury The Federal Reserve Focused on monetary policy Focused on monetary policy Manipulates “discount rate”, reserve requirements, etc. Manipulates “discount rate”, reserve requirements, etc. September 22, 2015September 22, 2015September 22, Introduction to American Government

Two Kinds of Social Welfare Programs Majoritarian Politics/Programs Examples – Social Security, Medicare Examples – Social Security, Medicare No means test No means test Biggest issue – cost Biggest issue – costcost Client Politics/Programs Examples – Medicaid, Food Stamps (SNAP) Examples – Medicaid, Food Stamps (SNAP) Means tested Means tested Biggest issue – legitimacy Biggest issue – legitimacy Copyright © 2013 Cengage

Social Security and Medicare Cost as a % of GDP Copyright © 2013 Cengage Trustees’ Report, 2009.