1 © ©1999 South-Western College Publishing PowerPoint Slides prepared by Ken Long Principles of Economics 2nd edition by Fred M. Gottheil

2 Chapter 30 Financing Government: Taxes and Debt 1/31/2016 © ©1999 South-Western College Publishing

3 This chapter discusses principles associated with © ©1999 South-Western College Publishing Internally & Externally Financing the Public Debt Government Securities & Public Debt Social Security Taxes Regressive, Proportional, & Progressive Tax Structures Commandeering Money (Taxes) Commandeering Resources

4 When the government spends a dollar, do we always pay for that dollar? Yes! We always pay for that dollar at the time it is spent © ©1999 South-Western College Publishing

5 In what possible three ways do we pay for that dollar? Taxes Debt Inflation © ©1999 South-Western College Publishing

6 How do we pay for that extra dollar if the government borrows it? When the demand for money in the loanable funds market increases more than the supply of money, interest rates increase © ©1999 South-Western College Publishing

7 When will an extra dollar spent cause inflation? When the federal government sells securities to the Fed and the Fed creates money to pay for the bond, thereby increasing the money supply more than GDP © ©1999 South-Western College Publishing

8 What does government spending have to do with Opportunity Costs? A dollar spent by the military on an airplane is a dollar that cannot be spent on a new house © ©1999 South-Western College Publishing

9 What is the Commandeering of Resources? This occurs when the government forcefully takes the resources it needs © ©1999 South-Western College Publishing

10 What is a Tax System? A tax system is an alternative to commandeering resources as a way of shifting resources from the private sector to the government © ©1999 South-Western College Publishing

11 What are alternative ways to levy taxes? Poll Regressive Progressive Proportional © ©1999 South-Western College Publishing Corporate Property Excise

12 What is a Poll Tax? A tax of a specific absolute sum levied on every person or every household © ©1999 South-Western College Publishing

13 What is a Regressive Income Tax? A tax whose impact varies inversely with the income of the person taxed; as a percentage, poor people pay the most © ©1999 South-Western College Publishing

14 What is a Progressive Income Tax? A tax whose rate varies directly with the income of the person taxed; rich people pay a higher rate © ©1999 South-Western College Publishing

15 What is a Proportional Income Tax? A tax that is a fixed percentage of income, regardless of the level of income, a flat rate tax © ©1999 South-Western College Publishing

16 What is a Corporate Income Tax? A tax levied on a corporation’s income before dividends are distributed to stockholders © ©1999 South-Western College Publishing

17 What is a Property Tax? A tax levied on the value of physical assets such as land, stock and bonds © ©1999 South-Western College Publishing

18 What are the different types of Property Tax? Unit Sales Customs Excise © ©1999 South-Western College Publishing

19 What is a Unit Tax? A fixed tax in the form of cents or dollars per unit, levied on a good or service © ©1999 South-Western College Publishing

20 What is a Sales Tax? A tax levied in the form of a specific percentage of the value of a good or service © ©1999 South-Western College Publishing

21 What is a Customs Duty? A sales tax applied to a foreign good or service © ©1999 South-Western College Publishing

22 What is an Excise Tax? Any tax levied on a good or service, such as a unit tax, a sales tax, or a customs duty © ©1999 South-Western College Publishing

23 Why are Excise Taxes regressive? Because low income people spend a larger percentage of their income on purchases than high income people © ©1999 South-Western College Publishing

24 What is a Social Security Tax? A tax that is specifically used to fund the nation’s social security system © ©1999 South-Western College Publishing

25 For information and statistics concerning taxes: prod/tax_stats © ©1999 South-Western College Publishing

26 How are Income Taxes Progressive in the U.S.? Most people are in either the 15% or 28% tax bracket, but some are in the 31%, 36%, or 39.6% bracket © ©1999 South-Western College Publishing

27 What does it mean that each dollar of income is taxed on the Margin? With our progressive income tax system, dollars of income can be in different tax brackets © ©1999 South-Western College Publishing

28 How are my Income Taxes determined? Income below a certain level is not taxed; income above that level is taxed according to the bracket each dollar falls within © ©1999 South-Western College Publishing

29 What are Exemptions and Deductions? They are both subtracted from gross income to determine taxable income © ©1999 South-Western College Publishing

30 Visit a few organizations that advocate tax reform: © ©1999 South-Western College Publishing

31 What is a Federal Deficit? A Deficit occurs when the government spends more than it receives in tax revenues © ©1999 South-Western College Publishing

32 What is the Public Debt? The total value of government securities held by individuals, businesses, other government agencies, foreigners, and the Federal Reserve © ©1999 South-Western College Publishing

33 What are the different kinds of securities? Treasury... Bills Bonds Notes © ©1999 South-Western College Publishing

34 What is a Treasury Bill? A bond that matures in 3, 6, or 12 months with minimum denominations of $10,000 and multiples of $5,000 above this © ©1999 South-Western College Publishing

35 What is a Treasury Note? A Treasury bond that matures in 2 to 10 years and is sold in denominations as low as $1,000 © ©1999 South-Western College Publishing

36 What is a Treasury Bond? A Treasury Bond takes 30 years to mature and is sold in denominations as low as $1,000 © ©1999 South-Western College Publishing

37 What is the Secondary Market? It is a market in which bonds can be sold before they mature for whatever the market determines © ©1999 South-Western College Publishing

38 What is a U.S. Savings Bond? A nonmarketable Treasury bond that is the most commonly held form of public debt © ©1999 South-Western College Publishing

39 Why is an internally financed public debt not a burden to future generations? Because even though people pay taxes to finance the debt, they also receive interest payments © ©1999 South-Western College Publishing

40 Why is an externally held debt a burden to future generations? Because people pay taxes to finance the debt without receiving the interest payments © ©1999 South-Western College Publishing

41 What are some problems with the National Debt? Not everyone holds the debt It promotes overconsumption It can create inflation It can crowd out private investment © ©1999 South-Western College Publishing

42 For the latest statistics on the Public Debt: © ©1999 South-Western College Publishing

43 When the government spends a dollar, do we always pay for that dollar?When the government spends a dollar, do we always pay for that dollar? In what possible three ways do we pay for that dollar?In what possible three ways do we pay for that dollar? What does government spending have to do with Opportunity Costs?What does government spending have to do with Opportunity Costs? What are alternative ways to levy taxes?What are alternative ways to levy taxes? What is a Social Security Tax?

44 How are Income Taxes Progressive in the U.S.?How are Income Taxes Progressive in the U.S.? What does it mean that each dollar of income is taxed on the Margin?What does it mean that each dollar of income is taxed on the Margin? What is a Federal Deficit? What is the Public Debt? What are the different kinds of securities? Treasury …What are the different kinds of securities? Treasury … What are some problems with the National Debt?What are some problems with the National Debt?

45 ENDEND © ©1999 South-Western College Publishing