economic policy social welfare september 22, 2015september 22, 2015september 22, 20151 introduction...

Economic PolicyEconomic PolicySocial WelfareSocial Welfare

April 19, 2023April 19, 2023 11Introduction to American GovernmentIntroduction to American Government

Patterns of Government SpendingPatterns of Government SpendingWhat proportion of the federal budget do you think is spent on…What proportion of the federal budget do you think is spent on…

Social SecuritySocial Security Medicare and MedicaidMedicare and Medicaid National DefenseNational Defense Nondefense “discretionary”Nondefense “discretionary” InterestInterest The The actual figures

What do you think the government What do you think the government shouldshould spend on? spend on?How is federal spending different from personal spending?How is federal spending different from personal spending?

Outlays greater than receipts means incurring debtOutlays greater than receipts means incurring debt Limitations on debt; bankruptcyLimitations on debt; bankruptcy Government debt financed through bonds, etc.Government debt financed through bonds, etc.

How is federal spending different from business spending?How is federal spending different from business spending? Businesses typically distinguish between capital and operating expensesBusinesses typically distinguish between capital and operating expenses Are expected to make profits (and likely pay dividends) Are expected to make profits (and likely pay dividends) Spending as “investment”Spending as “investment”


Federal Government OutlaysFederal Government Outlays

Source: Office of Management and Budget (OMB), Receipts and Outlays, Tables 2.1, 8.5, and 8.7, OMB Review, 2010.


Financing the GovernmentFinancing the GovernmentWhat proportion of federal receipts comes from…What proportion of federal receipts comes from…

Individual income taxesIndividual income taxes Corporate income taxesCorporate income taxes Payroll taxes (Social Security, Medicare, etc.)Payroll taxes (Social Security, Medicare, etc.) OtherOther The The actual figures Historical trendsHistorical trends

Who pays income tax?Who pays income tax? Progressive: higher rates at higher incomesProgressive: higher rates at higher incomes Marginal rates, i.e. Marginal rates, i.e. “brackets” The “47%”

Who pays payroll taxes?Who pays payroll taxes? Social Security (OASDI): Employers and employees each pay 6.2% Social Security (OASDI): Employers and employees each pay 6.2%

on income up to $108,000 on income up to $108,000 Medicare (FICA): Employers and employees each pay 1.45% (no Medicare (FICA): Employers and employees each pay 1.45% (no

income cap)income cap) Payroll taxes exceeded income taxes for 44% of payers (2006)Payroll taxes exceeded income taxes for 44% of payers (2006)


Federal Government ReceiptsFederal Government Receipts

Source: Office of Management and Budget (OMB), Budget of the US Government 2012, Historical Tables, Table 2.2.


Historical TrendsHistorical Trends

66April 19, 2023April 19, 2023 Introduction to American GovernmentIntroduction to American Government

Federal Tax BracketsFederal Tax Brackets

Source: Nickel, “2012 Federal Income Tax Brackets,” Forbes, September 30, 2011


Bracket Married, Filing Jointly Single

10% $0 - $17,400 $0 - $8,700

15% $17,400 - $70,700 $8,700 - $35,350

25% $70,700 - $142,700 $35,350 - $85,650

28% $142,700 - $217,450 $85,650 - $178,650

33% $217,450 - $388,350 $178,650 - $388,350

35% Over $388,350 Over $388,350

Taxation in ContextTaxation in ContextConsider Consider overalloverall tax burden (federal, state, local) tax burden (federal, state, local)Most is paid by top income earnersMost is paid by top income earners Top 20% pay 66% of federal taxes Top 1% pay 20% of overall taxes (1.37 times their total Top 1% pay 20% of overall taxes (1.37 times their total

share of income)share of income)

Federal tax cuts since 1980s, especially since 2001Federal tax cuts since 1980s, especially since 2001 Less than 30 years ago Graphs (show trends for different taxes) (show trends for different taxes) Cost in lost revenue to federal government between 2001 Cost in lost revenue to federal government between 2001

and 2010: $2.2 trillionand 2010: $2.2 trillion

How does tax burden compare to other countries?How does tax burden compare to other countries? Lower than average “tax as share of GDP” (Lower than average “tax as share of GDP” (

among OECD countries)) Lower overall taxation on the Lower overall taxation on the wealthy (> $100,000) (> $100,000)


Shares of Federal TaxesShares of Federal Taxes


Source: Tax Policy Center

Taxing the Wealthy: ComparisonTaxing the Wealthy: Comparison

Source: The Economist online, October 16, 2012


Federal Debt and DeficitFederal Debt and DeficitUnderstanding the debt and deficitUnderstanding the debt and deficit

John Green (video)John Green (video) Paul KrugmanPaul Krugman Congressional Budget OfficeCongressional Budget Office

To reviewTo review Deficit is gap between revenues and outlays (taxing and spending)Deficit is gap between revenues and outlays (taxing and spending) Recent deficits comparatively highRecent deficits comparatively high Deficit is financed by debt (selling bonds and T-bills)Deficit is financed by debt (selling bonds and T-bills) Most debt “owned” by government, U.S. residentsMost debt “owned” by government, U.S. residents

IssuesIssues When is deficit spending appropriate? When/how is it avoidable?When is deficit spending appropriate? When/how is it avoidable? Debt as proportion of GDPDebt as proportion of GDP

2011: 98.7% (56.4% in 2001, 32.5% in 1981, 79.7% in 1951, 121.7% in 2011: 98.7% (56.4% in 2001, 32.5% in 1981, 79.7% in 1951, 121.7% in 1946) 1946) government debt displacing private investment?government debt displacing private investment?

Cost of financing debt (who buys? At what rates?)Cost of financing debt (who buys? At what rates?)


Goals of Federal BudgetsGoals of Federal BudgetsEconomic Goals (macroeconomic)Economic Goals (macroeconomic) Reduce unemploymentReduce unemployment Keep inflation in checkKeep inflation in check Keep interest rates lowKeep interest rates low Manage trade deficitManage trade deficit

Political goalsPolitical goals Promote economic prosperity (majoritarian politics)Promote economic prosperity (majoritarian politics) Maintain government services and benefits (client Maintain government services and benefits (client

politics)politics) Lower taxes and less debt/deficitLower taxes and less debt/deficit Tension between goalsTension between goals Tension between taxing and spendingTension between taxing and spending


Broad Economic TheoriesBroad Economic TheoriesMonetarismMonetarism

Focus on inflation and effects on growth, employmentFocus on inflation and effects on growth, employment Need stable monetary policy (Fed should grow money supply roughly at Need stable monetary policy (Fed should grow money supply roughly at

growth rate)growth rate)

KeynesianismKeynesianism Economic growth driven primarily by demandEconomic growth driven primarily by demand Government spending to stimulate private-sector demand and thus growth Government spending to stimulate private-sector demand and thus growth

(e.g. stimulus plan)(e.g. stimulus plan) Deficit spending deliberate and appropriate in a recessionDeficit spending deliberate and appropriate in a recession

Economic PlanningEconomic Planning Government should explicitly guide economy (sectors)Government should explicitly guide economy (sectors) ““bailout” of banks and auto industry (“industrial policy”)bailout” of banks and auto industry (“industrial policy”) Wage and price controls (macroeconomic)Wage and price controls (macroeconomic)

Supply-Side Tax CutsSupply-Side Tax Cuts Less government economic involvementLess government economic involvement Tax cuts to stimulate investment and growthTax cuts to stimulate investment and growth

Obama v. Romney/RyanObama v. Romney/Ryan Tax proposal comparisonTax proposal comparison Ryan plan on Medicare vouchersRyan plan on Medicare vouchers


Machinery of Economic PolicyMachinery of Economic PolicyPresident v. CongressPresident v. Congress Budget processBudget process

Presidential budget proposalPresidential budget proposalCongressional authorizations and appropriationsCongressional authorizations and appropriations

The “Troika”The “Troika” Council of Economic AdvisorsCouncil of Economic Advisors Director of the OMBDirector of the OMB Secretary of the TreasurySecretary of the Treasury

The Federal ReserveThe Federal Reserve Focused on monetary policyFocused on monetary policy Manipulates “discount rate”, reserve requirements, Manipulates “discount rate”, reserve requirements,

etc.etc.


Two Kinds of Social Welfare Two Kinds of Social Welfare ProgramsPrograms

Majoritarian Politics/ProgramsMajoritarian Politics/Programs Examples – Social Security, MedicareExamples – Social Security, Medicare No means testNo means test Biggest issue – costBiggest issue – cost

Client Politics/ProgramsClient Politics/Programs Examples – Medicaid, Food Stamps (SNAP)Examples – Medicaid, Food Stamps (SNAP) Means testedMeans tested Biggest issue – legitimacyBiggest issue – legitimacy


Social Security and Medicare Cost as a Social Security and Medicare Cost as a % of GDP% of GDP


Trustees’ Report, 2009.

economic policy social welfare september 22, 2015september 22, 2015september 22, 20151 introduction...

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