1. Financing Government: Taxes and Debt
Chapter 30
Financing Government: Taxes and Debt
4/16/2017
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2. In what possible three ways do we pay for government spending?
Taxes
Debt
Inflation (via printing of money)
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3. 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
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4. Or how we pay for government
Taxes, taxes, taxes
Or how we pay for government

5. Why Pay Taxes?
Quote from Oliver Wendell Holmes: “Taxes are the price we pay for civilization”

6. Classifying taxes in relation to income
Proportional
Progressive
Regressive

7. 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
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8. 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
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9. 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
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10. Classifying taxes in relation to income
Proportional: as income rises, the same % of income is paid in tax (flat tax)
Progressive: as income rises, a higher % of income is paid in tax (graduated rate)
Regressive: as income rises, a lower % of income is paid in tax

11. 10% Proportional tax Income Tax Tax/income $30,000 $3,000 .10 (10%)
$30, $3, (10%)
$40, $4, (10%)
$50, $5, (10%)

12. Progressive tax: Hypothetical marginal tax brackets
Income from 0-$20,000 taxed at 10%
Income from 20-$40,000 taxed at 20%
Income over $40,000 taxed at 30%

13. Progressive tax Income Tax Tax/income $30,000 $4,000 .13 (13%)
$30, $4, (13%)
$40, $6, (15%)
$50, $9, (18%)

14. Examples of regressive taxes
Poll taxes
Sales taxes
Social security tax

15. What is a Poll Tax?
A tax of a specific absolute sum levied on every person or every household
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16. Why are sales and Excise Taxes regressive?
Because low income people spend a larger percentage of their income on purchases than high income people
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17. Major Federal Taxes Personal income tax
Social security taxes (payroll tax)
Corporate income tax

18. State and local taxes States: sales and income taxes
Local: property and real estate taxes

19. What is a Corporate Income Tax?
A tax levied on a corporation’s income before dividends are distributed to stockholders
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20. For information and statistics concerning taxes:
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21. 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
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22. What are Exemptions and Deductions?
They are both subtracted from gross income to determine taxable income
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23. Visit a few organizations that advocate tax reform:
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24. Theories of taxation
Ability to pay: tax in accordance with ableness to pay--suggests using income and wealth taxes
Benefits theory: tax those who benefit from the programs that the taxes are used to finance--gas taxes, license fees

25. Tax Incidence Who really pays a tax and thus bears its burden?
Incidence is complicated by tax shifting

26. Shifting of taxes Forward: to the consumer
Backward: to the worker or resource supplier

27. Government budgets If G=T, balanced budget If G>T, deficit
If G<T, surplus

28. What is a Federal Deficit?
A Deficit occurs when the government spends more than it receives in tax revenues
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29. Where does government get the money when there is a deficit?
Borrow the money by selling treasury bonds, notes, etc. known as government securities

30. What are the different kinds of securities? Treasury ...
Bills
Bonds
Notes
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31. 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
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32. What is a U.S. Savings Bond?
A nonmarketable Treasury bond that is the most commonly held form of public debt
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33. What is a Treasury Bond?
A Treasury Bond takes 30 years to mature and is sold in denominations as low as $1,000
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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
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35. What is the Public (national) Debt?
The total value of government securities held by individuals, businesses, other government agencies, foreigners, and the Federal Reserve
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36. Budget Philosophies 1. Annually balanced 2. Cyclically balanced
3. Functional finance

37. Annually balanced budget
Try to set G=T each year
Problem: could be destabilizing to the economy

38. G rises, T falls, deficit (cyclical) arises
Start with G=T
Recession hits
G rises, T falls, deficit (cyclical) arises
In order to balance budget, either raise T or lower G, but this is contractionary policy
Could worsen recession

39. Cyclically balanced budget
Balance the budget over the course of the business cycle, not necessarily each year

40. Cyclically balanced budget
GDP
Expansions, run surpluses
Recessions, run deficits
Time

41. Functional finance
Balance the economy, not the budget: shoot for full employment, stable prices, regardless of the budget

42. Cyclical vs structural budget
Structural: what the budget would be with existing tax laws and spending programs, assuming full employment
Cyclical: difference between the actual budget and the structural

43. Example
Say present deficit is 200 billion, unemployment rate is 7%: assume full employment is 5%: at full employment suppose the deficit would only be 50 billion: then 50 billion is the structural deficit, the other 150 billion is the cyclical deficit

44. 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
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45. Why is an externally held debt a burden to future generations?
Because people pay taxes to finance the debt without receiving the interest payments
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46. 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
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47. For the latest statistics on the Public Debt:
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48. Visit the national debt clock

49. When the government spends a dollar, do we always 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 are alternative ways to levy taxes?
What is a Social Security Tax?

50. How are Income Taxes Progressive in the U.S.?
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 some problems with the National Debt?

51. END
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