1. © 2007 Thomson South-Western 11. THE TAX SYSTEM

2. © 2007 Thomson South-Western U.S. NATIONAL DEBT CLOCK The Outstanding Public Debt as of Oct. 12, 2011 is: 14,800,000,000,000 It is about 95% of the U.S. GDP The estimated population of the United States is 311,000,000 so each citizen's share of this debt is $47,731.

3. © 2007 Thomson South-Western Public Debt to GDP ratio, 2010 Debt to GDP ratio (CIA) Debt to GDP ratio (IMF) Japan197.5225.9 Italy119.5118.4 Belgium100.9100.2 Singapore105.898.9 U.S.63.392.7 France82.484.2 Canada8481.7 Spain60.164.5 Nigeria11.916.3 http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt

4. © 2007 Thomson South-Western Difference between public debt and external debt Public debt: government’s liability including domestic and foreign ones External debt: foreign currency liability U.S. external debt = U.S. debt owned by foreign countries - dollar liability = ?

5. 4 Debt change during …

6. © 2007 Thomson South-Western Does the U.S. have too much spending or too much tax? 2010 Tax burden % of GDP (all levels) Government expenditure % of GDP France59.852.8 Sweden47.952.5 U.K.38.947.3 Germany40.643.7 Norway42.140.2 Canada32.239.7 U.S.26.938.9 Japan28.337.1 Australia30.834.3 http://en.wikipedia.org/wiki/Government_spending

7. © 2007 Thomson South-Western “In this world nothing is certain but death and taxes.”... Benjamin Franklin 0 20 40 60 80 100 Taxes paid in Ben Franklin’s time accounted for 5 percent of the average American’s income. 1789

8. © 2007 Thomson South-Western “In this world nothing is certain but death and taxes.”... Benjamin Franklin 0 20 40 60 80 100 1789 Today Today, taxes account for up to a third of the average American’s income.

9. © 2007 Thomson South-Western Figure 1 Government Revenue as a Percentage of GDP State and local Federal 0 Revenue as Percent of GDP Total government 1902 1922 1927 1913 1932 1940197019801990200019501960 35 30 25 20 15 10 5

10. © 2007 Thomson South-Western Table 1: Central Government Tax Revenue as a Percentage of GDP Source: World Development Report 1998/99

11. © 2007 Thomson South-Western The Federal Government The U.S. federal government collects about two-thirds of the taxes in our economy. The largest source of revenue for the federal government is the individual income tax. Individual Income Taxes The marginal tax rate is the tax rate applied to each additional dollar of income. Higher-income families pay a larger percentage of their income in taxes. (Progressive tax)

12. © 2007 Thomson South-Western The Federal Government The Federal Government and Taxes Payroll Taxes: tax on the wages that a firm pays its workers. Social Insurance Taxes: taxes on wages that is earmarked to pay for Social Security and Medicare. Excise Taxes: taxes on specific goods like gasoline, cigarettes, and alcoholic beverages.

13. © 2007 Thomson South-Western Source: Economic Report of the President, 2005, Table B-81. Table 2 Receipts of the Federal Government: 2004

14. © 2007 Thomson South-Western Receipts of the Federal Government 2004 Individual Income Tax, 43% Social Insurance Tax, 39% Corporate Tax, 10% Other, 8%

15. © 2007 Thomson South-Western Table 3 Federal Income Tax Rates: 2004

16. © 2007 Thomson South-Western The Federal Government Federal Government Spending Government spending includes transfer payments and the purchase of public goods and services. Transfer payments are government payments not made in exchange for a good or a service. Transfer payments are the largest of the government’s expenditures.

17. © 2007 Thomson South-Western The Federal Government Federal Government Spending Expense Category: Social Security National Defense Income Security Net Interest Medicare Health Other

18. © 2007 Thomson South-Western Table 4 Spending of the Federal Government: 2004 Source: Economic Report of the President, 2005, Table B-81.

19. © 2007 Thomson South-Western Federal Government Spending: 2004 Social Security, 22% Defense, 20% Income Security, 15% Medicare, 12% Health, 10% Net Interest, 7% Other, 15%

20. © 2007 Thomson South-Western The Federal Government Budget balance : T - G Budget Surplus: T – G > 0 A budget surplus is an excess of government receipts over government spending. Budget Deficit: G – T > 0 A budget deficit is an excess of government spending over government receipts.

21. © 2007 Thomson South-Western The Federal Government Financial Conditions of the Federal Budget A budget deficit occurs when there is an excess of government spending over government receipts. Government finances the deficit by borrowing from the public. A budget surplus occurs when government receipts are greater than government spending. A budget surplus may be used to reduce the government’s outstanding debts.

22. © 2007 Thomson South-Western

23. Figure 1. Outlays, Receipts, and the Surplus, 1970 — 2004

24. © 2007 Thomson South-Western The Demographic and Fiscal Challenge

25. © 2007 Thomson South-Western The Demographic and Fiscal Challenge

26. © 2007 Thomson South-Western State and Local Government State and local governments collect about 40 percent of taxes paid.

27. © 2007 Thomson South-Western State and Local Government Receipts Sales Taxes Property Taxes Individual Income Taxes Corporate Income Taxes Federal government transfer Other Taxes $

28. © 2007 Thomson South-Western Source: Economic Report of the President, 2005, Table B-86. Table 5 Receipts of State and Local Governments: 2002

29. © 2007 Thomson South-Western State and Local Government Spending Education Public welfare Highways Other

30. © 2007 Thomson South-Western Source: Economic Report of the President, 2005, Table B-86. Table 6 Spending of State and Local Governments: 2002

31. © 2007 Thomson South-Western TAXES AND EFFICIENCY Policymakers have two objectives in designing a tax system... –Efficiency –Equity

32. © 2007 Thomson South-Western TAXES AND EFFICIENCY One tax system is more efficient than another if it raises the same amount of revenue at a smaller cost to taxpayers. An efficient tax system is one that imposes small deadweight losses and small administrative burdens.

33. © 2007 Thomson South-Western TAXES AND EFFICIENCY The Cost of Taxes to Taxpayers –The tax payment itself –Deadweight losses –Administrative burdens

34. © 2007 Thomson South-Western Marginal Tax Rates versus Average Tax Rates The average tax rate is total taxes paid divided by total income. The marginal tax rate is the extra taxes paid on an additional dollar of income.

35. © 2007 Thomson South-Western Lump-Sum Taxes A lump-sum tax is a tax that is the same amount for every person, regardless of earnings or any actions that the person might take.

36. © 2007 Thomson South-Western Table 7 Three Tax Systems

37. © 2007 Thomson South-Western Source: Congressional Budget Office. Figures are estimates for 2005. Dollar figures are expressed in 2001 dollars. Table 8 The Burden of Federal Taxes