The U.S. EconomyMixed Economy

Private and PublicHouseholds Income ReceiversHouseholds Income Spenders

Business FormationPublic Sector

TaxesFederal Finance

Expenditures for Government

What do you think?????????? The U.S. Government spends most money on:a) Foreign aidb) Defensec) Welfared) Interest on debt

2011 Income and Outlays – Federal Government

Not recent, but not changed too much

• 24-Oct-12• Household Income Distribution, 2011• Quintile Upper Limit Mean• Lowest $20,262 ……..$11,239• Second $38,520…… $29,204• Third $62,434 ……$49,842• Fourth $101,582…. $80,080• Highest Fifth -- $178,020• Top 1% $186,000 ……$311,444

20,26238,520

62,434 101,582 178,-010186,000

2012Education Income

GDP- What is it?

Total value of goods and services produced in a given year in the United States.

What are the component parts?C + I + G + X-M = GDPConsumption

InvestmentGovernment SpendingExports- Imports

GDP – Q2, 2014

2008 FY- Tax Policy Center

Business formations3 major types -

• Sole Proprietor:

• A business owned by just one personindividual initiative, self-reliance ,hard-work

Most common form and simplest to form

Over 78% of all business in U.S. Financial investment need not be large.

Limited amount of red tape.

Owner has satisfaction of working for himself.

Flexibility of organization (hours, pay, etc)

Pays taxes only on personal income from business.

Can put money into private pensions.

Partner

• Easy to form.

• Usually has legal standing – 2 or more

• Combines skills of several people which enhances ability to create wealth.

• Easier to get funding and backing.

• Taxed only on personal income.

• Limited amount of red tape.

• Common formation for professionals.

CorporationA BODY THAT IS AUTHORIZED BY LAW TO ACT AS

A PRIVATE PERSONLegally endowed with various rights and duties

To receive, own, and transfer property.To make contractsTo sue and be sued.

Corporations

Characteristics:Shareholders share in the wealth.Limited Liability (responsibility of shareholders of a

corporation is held only to their investment in same)

May own tremendous wealth. Increased management skillsOwnership divided into equal parts called sharesCan raise large amounts of moneyCan borrow money through sale of bonds.

The following statements are theory

Bottom line…. July 18, 2011---- Congress needs to raise the Debt Ceiling

Congress needs to cut spending….Congress needs to close the loop holes for those

who do not pay taxes and those who have received subsidies like Oil Companies

Congress needs to grow up.That’s my rant!!!

-----------------------------------• Note: In October, 2014….. The above still applies.

Taxes

• The primary function of taxes is to transfer command over resources (purchasing power) from the private sector to the public sector.

Government has 3 methods for revenuea. user fees (minimal)b. taxes (progressive)c. Borrowing. (growing yearly)

What do you consider to be a FAIR tax?

Which do you prefer?

Benefit Received?’Tax the user- gas tax for drivers- fishing license-ramp fees for boats- toll roads-bus and train tickets- Ability to Pay?Should those who have the greatest wealth pay the most in taxes regardless of the benefits they receive??

Income Taxes

• The Sixteenth Amendment to the U.S. Constitution (1915) granted the federal government authority to collect income taxes.

• It is now the largest single source of government revenue.

Revenue sources – U.S. Govt. 2012

Other Factors in Evaluating Taxes

Total Revenue yieldedEffect on Production (destroy incentive?)Bracket Creep (AMT )Moral consequences (sin taxes)Reflection of values shown in taxes imposedConvenience (withholding, quarterly, penalties)Shifting the burden (seller to consumer)Ability to pay (relation of tax base to tax rate)Tax rate= percentage that is taxedTax base = subject on which the tax is levied.

• Types of Taxes• Progressive = tax rate increases as the tax

base increases• Proportional = tax rate remains the same

regardless of the base• Regressive= tax rate decreases as the base

increases. (often cited as unfair because it places heaviest burden on the least able to pay ---sales tax--- social security tax.)

• What is your preference?

Federal Government Tax SystemFederal government gets most of its revenue from

individual and corporate income taxes.Very small portion of revenue from estate and gift

taxes.Larger share from excise taxes (gasoline, jewelry,

alcohol, cigarettes, motor vehicles, admission to entertainment events,)

Small portion from tariffs.Transfer of estates collected since 1916. The

Estate Tax is a tax on your right to transfer property at your death.

The Most Important Federal Taxes (cont'd)

• Capital Gain– The positive difference between the purchase

price and the sale price of an asset • You buy a share of stock for $5 and sell for $15: you

have a capital gain of $10.

• Capital Loss– The negative difference between the purchase

price and the sale price of an asset

Poverty Guidelines- 2014

1 Person = $11,670Family of four = $23,850For every additional person (child) the

government gives $4,000 more.

Payroll TaxesMEDICARE

Medicare Tax…. 2.9% (total employer/employee) on all wage income

Medicare is paid (no cap) Government does not collect payroll taxes on

nonwage income (such as interest, dividends, or rents

• HISTORY OF SOCIAL SECURITYBegan in 1935 as OASDHIProgram of compulsory savings financed from

compulsory payroll taxes levied on employees and employers.

Social Security is a regressive tax

Social Security

The wage base is increased every January as long as the fund is deficient… which is probably forever now because:

People live longer, retire earlier, more drawing on fund (disabled, single parents, etc.)

Ratio of retirees/workers was significantly reduced by year 2010.

Eighteen year olds today (2002) will pay over a million and a half dollars into SS. Benefits received???? What in 2014?

SS payroll tax today is (FICA= 6.2% SS) of your wages are withheld. Your employer matches that amount for the required contribution to the SS Fund up to the wage base amount for that year.

Wage base 2014 is $117,000. Increases automatically every calendar year approximately $3,000.

Economics of Transfer PaymentsRedistribution through public sector will

reduce the size of the economic pie:Weakens the link between productive

activity and reward (taxes increased reduce individual reward for hard work-less productive.

As public policy redistributes large share of income,more resources flow into increasing it

Economics of Transfer

Higher taxes to finance redistribution will induce taxpayers to focus less on income producing activities and more on income shelters *higher incomes have greater opportunity here

When leakages flow in taxes rather than in savings (money is unproductive if redistributed)

Money that is productive generates more capital

More capital generates more jobs.More jobs generates more income.

Merit GoodsThe government is called upon to distribute merit

goods when the market does not provide enough.A merit good is a good or service society deems

everyone is entitled to some minimal quantity . Public goods have two particular characteristics. They are:

1.Non-excludable - once the goods are provided, it is not possible to exclude people from using them even if they haven't paid. This allows 'free-riders' to consume the good without paying.

2.Non-rival - this means that consumption of the goods by one person does not diminish the amount available for the next

• Taxes paid today go to pay benefits for people drawing today.

• Do you think there is a “special fund” where the SS dollars go???

More Grim Statistics Concerning SS

70% of SS goes to retirees - avg monthly benefit of $898.20

15% to disabled workers and familiesMay, 2003- avg benefit for disabled workers was

$837.7015% goes to widows, widowers, and families – avg

check of $850.80By 2030-twice as many older Americans 35 million

to 70 million. Now there are 3.4 workers for every beneficiary… by 2030 there will be just 2.1 workers for each beneficiary.

Who pays?

• The top 1% of tax payers pay 38% of all income taxes.

• The top 50% of tax payers pay practically all of the nation’s federal taxes (97.3%)

• WHO ARE THE 47% WHO PAY NO FEDERAL INCOME TAXES?

a. Working poorb. Elderlyc. Low income

BracketsTax Rate Single

Married Filing Jointly or Qualifying

Widow

Married Filing

Separately

Head of Household

10% < $9,075 < $18,150 < $9,075 < $12,950

15% $9,076 to $36,900

$18,151 to $73,800

$9,076 to $36,900

$12,951 to $49,400

25% $36,901 to $89,350

$73,801 to $148,850

$36,901 to $74,425

$49,401 to $127,550

28% $89,351 to $186,350

$148,851 to $226,850

$74,426 to $113,425

$127,551 to $206,600

33% $186,351 to $405,100

$226,851 to $405,100

$113,426 to $202,550

$206,601 to $405,100

35% $405,101 to $406,750

$405,101 to $457,600

$202,551 to $228,800

$405,101 to $432,200

39.6% > $406,751

> $457,601 > $228,801 > $432,201

So, it all gets back to Joe Q Citizen… Taxes paid to government.

Question is:What kind of an economy do we Joe Q’s want?

The primary function of taxes is to transfer command over resources (purchasing power) from the private sector to the public sector.

Why from private to public? Why not the other way around?

Gross Public Debt.state,local,fed

Why is the U.S. Economy owing billions of dollars?“If you subsidize something you get more of it.”

Dr. Milton Friedman, Free to Choose

• Virtually all of the recent growth in federal expenditure has come from increased income transfers, not purchases of goods and services.

• Government failure occurs when government intervention fails to improve economic outcomes.

Perceptions of Waste

• Government waste implies that the public sector isn’t producing as many services as it could with the sources at its disposal.

• With such inefficiency, we are producing inside our production-possibilities curve.

Opportunity costThe issue of government waste encompasses

questions of efficiency and opportunity cost.

“POWER CORRUPTS AND ABSOLUTE POWER CORRUPTS ABSOLUTELY!”

Lord Acton

“POWER TO TAX IS POWER TO DESTROY”Chief Justice John Marshall…. McCullough vs Maryland