1. Chapter 24 Taxes and Spending Chapter 24 Norton Media Library
Nariman Behravesh
Edwin Mansfield

2. Government Spending as a Share of the Economy, 1930-2006
The following slide shows total government spending (federal, state, and local) as a share of the economy.
Total government spending accounted for only 9.4% of GDP in 1930, and only one third of this spending was at the federal level.
Government spending, particularly at the federal level, soared from 1930 to 1970.
Total government spending rose from 9.4% of GDP in 1930 to 30.2% of GDP in 1970.
Since 1970, government spending has been relatively constant at about one-third of the U.S. economy.

3. The Size of Government Government Expenditures as a Share (%) of GDP
3.0
6.5
9.4
1930
Federal
8.4
15.7
7.3
State & local
1940
21.1
14.7
6.3
1950
24.1
16.5
7.6
1960
30.2
19.4
10.9
1970
32.8
21.0
11.8
1980
34.2
21.6
12.6
1990
31.9
19.0
12.9
2000
33.8
20.3
13.5
2006

4. How the Federal Government Spends (2006)
Defense 19.7%
Social
Security 20.7%
Net Interest 8.5%
Transportation 2.6%
Income
Security 13.3%
Other 13.3%
Medicare and health 21.9%
Sources: Economic Report of the President, 2007, and Statistical Abstract of the United States, 2007.
Back to slide 29

9. How State and Local Governments Spend
Insurance trusts 8.9%
Education 28.8%
Public welfare & Health 19.5%
Administration & other 21.9%
Transportation 5.5%
Police & Fire Protection 4.9%
Utilities & liquor stores 6.9%
Interest on debt 3.6%
Sources: Economic Report of the President, 2007, and Statistical Abstract of the United States, 2007.

10. Financing the Public Sector: Taxation
In order to make available public and correct inequity, government must free up resources from the production of private goods.
Taxes shift resources from private to public use
Taxing households and businesses reduces their incomes and spending, the private demand for products decreases, as does the private demand for resources.
This is known as Deadweight Loss

11. THE U.S. TAX STRUCTURE Federal Government Personal Income Tax
Collection of Taxes
Federal Government
Personal Income Tax
Corporate Income Tax

12. (Social Security)

13. THE U.S. TAX STRUCTURE State Governments County and City Governments
Collection of Taxes
State Governments
Personal Income Tax
Sales Tax
County and City Governments
Property Taxes

16. TAXES
Tax Incidence
The Tax Incidence or Tax Burden is the determination of who actually pays the tax. Government must determine how to appropriate taxes from the citizens.

17. THE U.S. TAX STRUCTURE Personal Income Tax Corporate Income Tax
INCIDENCE OF U.S. TAXES
Personal Income Tax
Individual
Corporate Income Tax
Stockholders – Consumers
Sales Taxes
Consumers
Property Taxes
Owner or Renter

18. TAXES Tax Incidence Benefits-Received Principle
Ability-to-Pay Principle

19. Benefits Received versus Ability to Pay
The benefits-received principle is the idea that people who receive the benefit from government-provided goods and services should pay the taxes required to finance them.
The ability-to-pay principle is the idea that people who have greater income should pay a greater proportion of it as taxes than those who have less income.

20. THE TAX BURDEN Progressive Tax Regressive Tax Proportional Tax
Flat Tax

21. Progressive, Proportional, and Regressive Taxes
A progressive tax is one whose average tax rate increases as the taxpayer’s income increases.
A regressive tax is a tax whose average tax rate decreases as the taxpayer’s income increases.
A proportional tax is a tax whose average tax rate remains constant as the taxpayer’s income increases.
A flat tax is a tax which takes the same monetary amount regardless of income.

22. Progressive, Proportional, and Regressive Taxes
In general, progressive taxes fall relatively more heavily on high-income households while regressive taxes are those that fall relatively more heavily on the poor.

23. Progressive, Proportional, and Regressive Taxes
Taxes are classified as progressive, proportional, or regressive, depending on the relationship between
average tax rate (total tax paid as a percentage of income) and
marginal tax rate (the rate paid on each additional dollar of income).

26. Top marginal tax rate (%)
Tax year
Top marginal tax rate (%)
Taxable income over--
PRESIDENT
GROWTH
RATE
1913 7
500,000
WILSON
1918 77
1,000,000
1922 58
200,000
HARDING
1923 43
COOLIDGE
1925 25
100,000
1932 63
ROOSEVELT
-1.3%
1936 79
5,000,000
1940 81
8.1%
1942 88
18.5%
1951 94
400,000
EISENHOWER
8.7%
1965 70
KENNEDY
1.7%
1981
38.5
215,400
REAGAN
-0.2%
1986 28
29,750
4.3%
1993
39.6
89,150
CLINTON
4.0%
1994
250,000
2003 35
311,950
BUSH
3.9%

28. TAX APPLICATIONS:
Identify whether progressive, regressive, or proportional
Personal Income Tax
Progressive
Sales Tax
Regressive
Corporate Income Tax
Proportional
Payroll Taxes
Property Taxes

29. Tax Progressivity in the U.S.
The majority view of economists is as follows:
The Federal tax system is progressive.
The state and local tax structures are largely regressive. A general sales tax and property taxes are regressive with respect to income.
The overall U.S. tax system is slightly progressive.

31. THE TAX ISSUE
The Liberal Position

38. The Conservative Position
THE TAX ISSUE
The Conservative Position

44. End Chapter 24