Economic Decision Makers

ECO 2013

Chapter 3

Households

Play a starring role in a market economy

Determines what gets produced

Supplies labor, capital, natural resources and entrepreneurial ability

Maximize utility

Functional Distribution of Income

Indicates how the nation’s earned income is apportioned among Wages labor Rents land Interest owners of property resources Profit owners of businesses

Functional Distribution of Income

Distribution of Personal Income

Self Employment

income

Profits

InterestRents

Wages

1 2 3 4 5

Personal Distribution of Income

How the nation’s money income is divided among individual households.

Top 20% earn over 50% of the income

Households

Income spent Personal taxes – 12% Personal savings – 0% Personal consumption – 88%

Households

Three categories of spending: Durable goods

Goods expected to last three or more years

Households

Nondurable goods Goods such as food and gasoline

Household

Services

Businesses

Constitute the second major part of the private sector

Is a business organization that owns and operates plants.

Types of Firms

Sole proprietorships A firm with a single owner who has the right to all profits

and who bears unlimited liability for the firm’s debts. Partnerships

A firm with multiple owners who share the firm’s profits and who bears unlimited liability for the firm’s debts.

Corporations A legal entity owned by stockholders whose liability is

limited to the value of their stock. Distinct and separate from the individual stockholders

who own it.

Government

Extensive role of the public sector

Levels of Government Federal State Local

Role of Government

Providing legal structurePromoting competitionRegulating monopoliesRedistributing income

Transfer payments Market invention Taxation

Reallocating resources Market failure

Role of Government

Externalities A cost or benefit that falls on a third party and is

therefore ignored by the two parties to the market transaction

Externalities

An externality occurs when some of the costs or the benefits of a good are passed to or spill over to someone other than the immediate buyer or seller. Negative externality

Production or consumption costs inflicted on a third party without compensation

Environmental pollution Positive externalities

Benefits education

Role of government

Public good A good that once produced is available for all to

consume regardless of who pays National defense

Government structure

Federal National security Economic stability Market competition

State Public higher education Prisons Transportation

Local Education protection

Size of Government

Government spending has increased over the years

Government is the green in the chart

1930 – 10% of economy

2004 – 36% of economy

Government Purchase and Transfers

Government purchases Exhaustive

Directly absorb resources and are part of the domestic output

Transfer payments Non-exhaustive

Federal Expenditures

Pension and income security 35%

National defense 20%

Health 21%

Interest on debt 7%

Sources of Government Revenue

Taxes Bulk of government revenues at all

levels Tax principles

Ability to pay principle Benefits received tax principle

Tax incidence Distribution of tax burden among

taxpayers Proportional tax Progressive Regressive Marginal tax rate

Types of taxes

Personal income tax Tax on earnings of individuals Progressive tax All but six states have it Single taxpayer

If taxable income is  over--But not over-- The tax is:

$0 $7,150 10% of the amount over $0

$7,150 $29,050 $715.00 plus 15% of the amount over 7,150

$29,050 $70,350 $4,000.00 plus 25% of the amount over 29,050

$70,350 $146,750 $14,325.00 plus 28% of the amount over 70,350

$146,750 $319,100 $35,717.00 plus 33% of the amount over 146,750

$319,100 no limit $92,592.50 plus 35% of the amount over 319,100

Types of Taxes

Corporate income tax Tax on earnings of

corporations Progressive tax Federal and state

If taxable income (line 30, Form 1120, or line 26, Form 1120-A) on page 1 is:

Over— But not over— Tax is:

Of the amount over—

$0 $50,000 15% $0

50,000 75,000 $ 7,500 + 25% 50,000

75,000 100,000 13,750 + 34% 75,000

100,000 335,000 22,250 + 39% 100,000

335,000 10,000,000 113,900 + 34% 335,000

10,000,000 15,000,000 3,400,000 +

35%10,000,000

15,000,000 18,333,333 5,150,000 +

38%15,000,000

18,333,333 - - - - - 35% 0

Types of taxes

Sales tax Tax on purchases of goods and services Some services excluded Some goods excluded Flat rate State and local government

Types of taxes

Property taxes Tax on the value of real property Tax on the value of tangible property Flat rate Local governments

Excise taxes Tax on consumption of specific goods Alcohol, tobacco, and gasoline Sin taxes All levels of government

Level of Government Services Provided Taxes Imposed

Federal National defenseTransfer paymentsTransfers to states

Personal income taxCorporate income taxExcise taxes

State Public transportationWelfareHigher education

Personal income taxCorporate income taxExcise taxesSales taxes

Local Police and fire protectionPrimary and Secondary education

Excise taxesProperty taxes