1. Unit 4 Targets C and D Economic Challenges Faced by the US Government

2. Chapter 20, Opener  What are some of the economic challenges faced by the government ?  Why should the government pay to provide goods/services to assist those facing economic hardships?  What is the goal of the government in providing goods and services for the public good? Economic Challenges Faced by the Government

3. Chapter 20, Opener 1.Define who is poor, according to government standards. 2.Describe the causes of poverty. 3.Analyze the distribution of income in the United States. 4.Summarize government policies intended to combat poverty. Objectives

4. Chapter 20, Opener  poverty threshold: the income level below which income is insufficient to support a family or household  poverty rate: the percentage of people who live in households with income below the official poverty threshold  income distribution: the way in which a nation’s total income is distributed among its population  food stamp program: government program that helps low-income recipients buy food Key Terms

5. Chapter 20, Opener  Lorenz curve: the curve that illustrates income distribution  enterprise zone: area where businesses can locate free of certain state, local, and federal taxes and restrictions  block grants: federal funds given to the states in lump sums  workfare: a program requiring work in exchange for temporary government assistance Key Terms, cont.

6. Chapter 20, Opener  What factors affect the poverty rate?  Race and ethnic origin  Type of family  Age  Residence  Education  Growth of low-skill service jobs Introduction

7. Chapter 20, Opener The Poverty Problem  In a free market, the wealth is spread unevenly throughout society, which leaves some people below the poverty threshold.  The U.S. Bureau of the Census sets the poverty threshold based on the cost of the goods a family needs to buy.

8. Chapter 20, Opener The Poverty Threshold  According to the government, a poor family is one whose total income is less than the amount required to satisfy the family’s minimum needs.  The Census Bureau determines the poverty threshold required to meet those minimum needs. The poverty threshold often varies with the size of the family.  If a family’s total income is below the poverty threshold, everyone in the family is counted as poor.

9. Chapter 20, Opener The Poverty Rate  The poverty rate is the percentage of people who live in households with incomes below the official poverty threshold.  In 2006, 12% of the population equaled 36.5 million.  What happened to the poverty rate from 1994 to 2000?

10. Chapter 20, Opener  Poverty rates differ sharply by group, according to several indicators:  Race and ethnic origin—the poverty rate among minorities is higher than among whites  Type of family—single mother families have a greater poverty rate  Age—children are the largest age group living in poverty  Residence—inner cities have double the poverty rate of those who live outside the inner city The Poverty Rate, cont.

11. Chapter 20, Opener Poverty Rates by Group  Households headed by women, African Americans, Hispanics, and Native Americans are more likely than other groups to have incomes below the poverty threshold.  Which population group has the highest poverty rate?

12. Chapter 20, Opener  The failure to earn adequate income is often the result of unemployment. However, more than half of poor households have someone who works at least part-time, and one in five have a full-time, year-round worker.  For these “working poor,” the problem is usually low wages or a limited work schedule.  Shifts in the family structure, from a two-parent family to a single-parent family, tend to lead to an increase in the amount of families living in poverty. Causes of Poverty

13. Chapter 20, Opener  People who live in the inner city earn less than people living outside the inner city.  White workers generally earn higher salaries than minority workers, and men generally earn more than women.  Inequality results from differences in hours worked, education, work experience, and discrimination. Causes of Poverty, cont.

14. Chapter 20, Opener  The growth of globalization has led to a decrease in high-paying manufacturing jobs forcing many less- educated people to work in low-skill service jobs where wages are low.  Lack of education also leads to poverty. Causes of Poverty, cont.

15. Chapter 20, Opener Income Distribution  To fully understand poverty in this country, you also need to understand income distribution.  The table (below left) shows family income ranked by category. When plotted on a Lorenz curve (below right), these data show the distribution of income in the United States.

16. Chapter 20, Opener

17. Income Distribution, cont.  As you can see from the chart and graph on the previous slide, the wealthiest fifth of American households earned more income than the bottom four fifths combined.  Factors that lead to this income gap include:  Differences in skills and education  Inheritances  Field of work  In the last two decades, the distribution of income has become less equal.

18. Unit 4 Target C : I can identify goods and services provided by the government for society and ways the government pays for these goods and services

19. Chapter 20, Opener  Why does a society provide public goods?  The government provides society with certain public goods because it would be inefficient or impractical for a free market economy to provide these goods on its own. Introduction

20. Chapter 20, Opener  public good: a shared good or service for which it would be inefficient or impractical to make consumers pay individually and to exclude those who did not pay  public sector: the part of the economy that involves the transactions of the government  private sector: the part of the economy that involves the transactions of individuals and businesses  infrastructure: the basic facilities that are necessary for a society to function or grow Key Terms

21. Chapter 20, Opener  free rider: someone who would not be willing to pay for a certain good or service but who would get the benefits of it anyway if it were provided as a public good  market failure: a situation in which the free market, operating on its own, does not distribute resources efficiently  externality: an economic side effect of a good or service that generates benefits or costs to someone other than the person deciding how much to produce or consume Key Terms, cont.

22. Chapter 20, Opener  A public good is a shared good or service for which it would be inefficient or impractical to make consumers pay individually and to exclude those who do not pay. Public Goods

23. Chapter 20, Opener Public Goods, cont.  In the case of most public goods it is simply not practical for a private business to provide the service, charge those who benefit, and exclude non payers from using the source. Maintaining street signs and traffic lights is one economic role of government.

24. Chapter 20, Opener Public Goods, cont.  Public goods can be used by any number of consumers without reducing the benefits to any single consumer.  Public goods are financed by the public sector.  Firefighters are an example of a public good.

25. Chapter 20, Opener Costs and Benefits  Checkpoint: What two criteria must be present for a public good?  The benefit to each individual is less than the cost that each individual would have to pay if it were provided privately.  The total benefits to society are greater than the total cost.

26. Chapter 20, Opener  The government pays for public goods through taxes.  Thus, the financial burden on each individual is significantly less than if a few people decided to fund a project privately. Costs and Benefits, cont.

27. Chapter 20, Opener  One issue associated with public goods is known as the “free-rider problem.”  Free riders are people who are not willing to pay for a particular good or service but would benefit from it if it were offered as a public good.  The free-rider problem suggests what would happen if the government stopped providing public goods: People would refuse to pay and many services would be eliminated. Free Riders

28. Chapter 20, Opener  Checkpoint: Why are public goods an example of a market failure?  Public goods are examples of a market failure, where the free market does not distribute resources efficiently.  For example, the free market would not be able to build roads efficiently because building roads does not meet the criteria for a properly functioning market system. Thus, road construction is a market failure. Market Failures

29. Chapter 20, Opener  Public goods involve externalities, which may be either positive or negative.  Positive Externalities  Represent the beneficial side effects of public goods.  Can also be generated by the private sector.  Allow someone who did not purchase a good to enjoy part of the benefits of that good. Positive Externalities

30. Chapter 20, Opener Negative Externalities  Negative externalities cause part of the cost of producing a good or service to be paid for by someone other than the producer. Why would increased car traffic be considered a positive externality by some people and a negative externality by others?

31. Chapter 20, Opener  Understanding externalities helps us see more roles that the government plays in the U.S. economy.  The government may take action to create positive externalities, such as improving education.  The government aims to limit negative externalities like pollution. Government’s Goals

32. Chapter 20, Opener Government’s Goals, cont.  Many economists feel that the private sector produces more positive externalities that the government does.  This belief shows itself in the debate over how to stop pollution to the environment.

33. Chapter 20, Opener  The government spends billions of dollars on programs designed to reduce poverty.  Critics of such programs argue that the programs themselves harm the very people they are intended to help. Such criticisms have led to new policies.  Earned Income Tax Credit (EITC) —a refundable tax credit that low-income families with children receive when they fill out their federal income tax return. EITC offsets the impact of the Social Security payroll tax on low-income families.  In 2005, the EITC lifted more than four million people above the poverty line. Antipoverty Policies

34. Chapter 20, Opener  Enterprise zones—benefit businesses by lowering their costs and help local people by making it easier for them to find work.  In recent decades, federal and state governments have designed job training programs to help workers who lack the skills to earn an adequate income.  The government has established a minimum wage as well.  The government also has programs to help poor people obtain affordable housing. Antipoverty Policies, cont.

35. Chapter 20, Opener  Federal spending is divided up into mandatory and discretionary spending.  Mandatory spending pays for Social Security, Medicare, Medicaid, and other entitlements.  Discretionary spending pays for everything else, including defense, education, law enforcement, environmental cleanup, and disaster aid. How does the federal government spend its income?

36. Chapter 20, Opener  There are two types of government spending.  Mandatory spending is money that Congress is required by existing law to spend on certain programs or to use for interest payments on the national debt.  Discretionary spending is spending about which lawmakers are free to make choices. Federal Spending

37. Chapter 20, Opener Federal Spending, cont.  The federal government spends the funds it collects from taxes and other sources on a variety of programs.  Which are the three largest categories of expenditures in the federal budget?

38. Chapter 20, Opener Discretionary Spending  Approximately how much of the federal government’s discretionary spending goes toward defense?  Defense spending accounts for about half of the government’s discretionary spending.  The Department of Defense uses this money to pay salaries of enlisted men and women as well as its civilian employees.  This money also buys weapons, missiles, ships, tanks, airplanes, and equipment.

39. Chapter 20, Opener  The remaining discretionary funds goes to pay for the following:  Education and training  Scientific research  Student loans  Law enforcement  Environmental cleanup  Disaster relief Discretionary Spending, cont.

40. Chapter 20, Opener Federal Aid  Federal taxes are sometimes used to help state and local governments.  State and federal governments share the cost of Medicaid, unemployment insurance, education, lower-income housing, highway construction, and dozens of other programs.  States also rely on federal aid for disaster relief.

41. Chapter 20, Opener  To help the poor, government programs take money from some people and redistribute it to others.  Such programs include:  The welfare system  Cash transfers  In-kind benefits  Medical and educational benefits  Grant money How does government help the poor?

42. Chapter 20, Opener  welfare: government aid to the poor  cash transfers: direct payment of money by the government to the poor, disabled, or retired people  in-kind benefits: goods and services provided for free or greatly reduced prices  grant: a financial award given by a government agency to a private individual or group in order to carry out a specific task Key Terms

43. Chapter 20, Opener  Most of the mandatory spending items are for entitlement programs, which fund social welfare programs.  The federal government guarantees assistance for all people who quality for such programs.  Entitlements are a largely unchanging part of government spending.  Congress can only change the eligibility requirements or reduce benefits if there is a change in the law. Entitlement Programs

44. Chapter 20, Opener  Other means-tested entitlements benefit people and families whose incomes fall below a certain level. These entitlements include:  Food stamps and child nutrition programs  Retirement benefits and insurance for federal workers  Veterans’ pensions  Unemployment insurance  Current debate over governmentally funded Obama healthcare continues. Watch the news for current events about the congressional debate, website issues and discussion over funding fears. Other Mandatory Programs

45. Chapter 20, Opener  Government redistribution programs include the following:  Cash transfer programs  Temporary Assistance for Needy Families (TANF) - sends welfare payments directly to the states, which design and run their own welfare programs Redistribution Programs

46. Chapter 20, Opener Redistribution Programs, cont.  Social Security - collects money from current workers and redistributes funds to retired and disabled persons

47. Chapter 20, Opener Medical and Educational Benefits  The government provides health care to the elderly (Medicare), the disabled, the poor (Medicaid), and children who are uninsured (SCHIP).  The government also funds educational programs from preschool to college.

48. Chapter 20, Opener  Employees also withhold money to help fund Social Security, and Medicare under the Federal Insurance Coalition Act (FICA).  Most of the FICA taxes you pay go to Social Security benefits for retired people, surviving members of wage earners, and disabled people.  The Medicare tax helps pay for health insurance for people over 65. Social Security and Medicare

49. Chapter 20, Opener Social Security  Social Security is a huge portion of federal spending.  About 50 million Americans receive monthly benefits from the Social Security Administration.  The future of Social Security is uncertain.  As the millions of baby boomers — people born after World War II — start to retire, the ratio of existing workers, who pay for Social Security, to retirees will fall.

50. Chapter 20, Opener Medicare and Medicaid  About 42 million people receive Medicare benefits.  It pays for hospital care and for the costs of physicians and medical services.  Medicare costs have been rising as a result of expensive technology and people living longer. It faces the same problem as Social Security.  Medicaid benefits help low- income families pay for their medical expenses  The federal government shares the cost of Medicaid with state governments.

51. Chapter 20, Opener  Checkpoint: What is the goal of the government welfare program?  The government provides a safety net to groups like the very young, the very old, the sick, the poor, and the disabled through various federal, state, and local government programs. The Government’s Role

52. Chapter 20, Opener  The welfare-reform plan of 1996 established Temporary Assistance for Needy Families (TANF), which provides block grants to the states to help move poor adults from welfare dependence to employment.  It was hoped that this reform would reduce poverty by providing poor Americans with labor skills and access to steady, adequate income. Welfare Reform

53. Chapter 20, Opener The Government’s Role, cont.  One government program, the welfare program, collects funds from taxpayers and redistributes this money to those in need.  This system began during the Great Depression and continues today.

54. Chapter 20, Opener  Critics of welfare claim that it discourages productivity and further aggravates poverty.  In 1996, new welfare reforms limited the amount of time people could receive welfare payments and gave states more freedom to experiment with antipoverty programs. Welfare Reform

55. Chapter 20, Opener In-Kind Benefits  The government also provides poor people with in-kind benefits, such as:  Food stamps  Qualified people receive assistance with their monthly food purchases

56. Chapter 20, Opener  Subsidized housing  Qualified people are allowed to rent housing for less than the regular rent  Legal aid  Qualified people receive legal advice at no charge In-Kind Benefits, cont.

57. Chapter 20, Opener  Checkpoint: How does tax law provide an incentive to help the needy?  Federal tax laws allow both individuals and corporations to take tax deductions for charitable donations.  The government may also provide grants and other assistance to organizations that provide social services. Encouraging Private Action

58. Chapter 20, Opener Unemployment  The unemployment tax pays for “unemployment compensation” that people can receive when they are laid off. This is called unemployment insurance and is withheld under the Federal Insurance Coalition Act (FICA).

59. Unit 4 Target D: I can explain the role that the government takes in redistributing wealth (through its taxes).

60. Chapter 20, Opener 1.Identify the taxes and withholding the government uses to provide for public goods and the redistribution of wealth. 2. Identify the main programs through which the government redistributes income. 3. Describe how the government encourages private efforts to help the needy. Objectives

61. Progressive income tax Regressive sales tax Proportional income tax

62. Chapter 20, Opener Taxation “In this world nothing can be said to be certain, except death and taxes.” Benjamin Franklin

63. Chapter 20, Opener In reality…  US Federal Tax Rates: (only 3 % of Americans make over $250,000)  Add 10 -15 % more depending on which state you work in

64. Chapter 20, Opener What are “Good Taxes”?  According to Adam Smith:  Simple to understand  Don’t provide negative incentives  Avoid loopholes  IRS manual – 2,500,000 pages

65. Chapter 20, Opener Income Tax in USA  IRS – tax collection agency in USA  Taxes are deducted throughout year  Every citizen must file every year by:  If you paid more during the year then you need to: you get a refund  If you paid more during the year then you need to: you must pay the difference

66. Chapter 20, Opener Property tax  Tax on something you own  Usually expensive like your house or boat  For example: $100,000 home  5% property tax rate  100,000 X.05 = $5,000 property tax  Incentive? 8.01 % ave Pima Co rate

67. Chapter 20, Opener Proportional Income Tax  Tax on a household income  % of stays the same  “flat tax”  For example: 5% tax, $25,000/year or $100,000/year  Rare in USA  Incentive?

68. Tax on a household income % of changes based on income “tax the rich more!” The more you make, the higher your tax For example: Tax $12/hour labor or accountant $55,000/year Common in USA & EU Incentive? Progressive Income Tax Income Tax Rate $0-$15,0000% $15,001- $20,00010% $20,000- $30,00015% $30,000- $50,00025% $50,000- $100,00033% $100,001 +38%

69. Chapter 20, Opener Regressive Tax  Smaller % taken the higher your income  Sales tax  For example: 5% tax, $25,000/year w/$10,000 consumption pays: 10,000 X.05 = $500, or 2% of total income  $50,000/year w/$15,000 consumption pays: 15,000 X.05 = $750, or 1.5% of total income  Incentive?

70. Chapter 20, Opener Estate tax  Tax on inheritance  Sometimes called “death tax”  In US today, $2,000,000 and up  45% rate  Incentive?

71. Chapter 20, Opener If you are curious…  US estate taxes over the years  GW Bush worked to repeal in 2001  Comes back in 2011 when law expires  Barack Obama supports estate tax

72. Chapter 20, Opener

73. Gift tax  Tax on gifts or rewards  Games shows, gambling, lottery  Rate depends on gift  35-60 %  Incentive?

74. Chapter 20, Opener 5. Does the US have a good tax system? Explain your answer

75. Chapter 20, Opener  Unemployment Insurance  Provides money to workers who have lost their jobs as long as recipients offer proof that they have made efforts to get work.  This help is only temporary, offering benefits for only 26 weeks in most states.  Worker’s Compensation  Provides state funds to workers injured on the job. Unemployment Tax

76. Chapter 20, Opener  Excise taxes—a general revenue tax on the sale or manufacture of a good or service such as gasoline, cigarettes, and other items  Estate taxes—a tax on the total value of the money and property of a person who has died  As of 2008, if the total value of an estate is $2 million or less, there is no federal estate tax. Types of Taxes

77. Chapter 20, Opener  Gift taxes—a tax on the money or property that one living person gives to another  The goal of the gift tax is to stop people from avoiding the estate tax by giving away property before they died.  Import taxes—Tariffs, or import taxes, are taxes place on imported goods. Other Types of Taxes, cont.

78. Chapter 20, Opener Taxes That Affect Behavior  The government sometimes uses taxes to encourage good behavior, which is known as a tax incentive.  Tax credits are often used as an incentive.  For example, people who use solar power receive an income tax credit.