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Chapter 24
Chapter 24
Taxes and Spending
Norton Media Library
Nariman BehraveshEdwin Mansfield
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• The following slide shows total government spending (federal, state, and local) as a share of the economy.
• Total government spending accounted for only 9.4% of GDP in 1930, and only one third of this spending was at the federal level.
• Government spending, particularly at the federal level, soared from 1930 to 1970. • Total government spending rose from 9.4%
of GDP in 1930 to 30.2% of GDP in 1970.• Since 1970, government spending has been
relatively constant at about one-third of the U.S. economy.
Government Spending as a Shareof the Economy, 1930-2006
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Federal
The Size of Government
State & local
Government Expenditures as a Share (%) of GDP
1930
1940
1950
1970
1980
1990
2000
3.0 6.5 9.4
8.4 15.77.3
1960 24.116.5 7.6
30.219.4 10.9
32.821.0 11.8
34.221.6 12.6
31.919.0 12.9
21.114.7 6.3
2006 33.820.3 13.5
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How the Federal Government Spends (2006)
Sources: Economic Report of the President, 2007, and Statistical Abstract of the United States, 2007.
Defense 19.7%
NetInterest 8.5%
Transportation2.6%
Other13.3%
Social Security 20.7%
Income Security 13.3%
Medicare and health 21.9%
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Education28.8%
How State and Local Governments Spend
Sources: Economic Report of the President, 2007, and Statistical Abstract of the United States, 2007.
Insurance trusts 8.9%
Public welfare & Health 19.5%
Police &Fire Protection 4.9%
Transportation 5.5%
Administration & other 21.9%
Interest on debt 3.6%Utilities &liquor stores 6.9%
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Financing the Public Sector: Taxation
In order to make available public and correct inequity, government must free up resources from the production of private goods.• Taxes shift resources from private to public use• Taxing households and businesses reduces their
incomes and spending, the private demand for products decreases, as does the private demand for resources.
• This is known as Deadweight Loss
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Federal Government•Personal Income Tax•Corporate Income Tax
Collection of TaxesTHE U.S. TAX STRUCTURE
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(Social Security)
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State Governments•Personal Income Tax•Sales Tax
County and City Governments•Property Taxes
Collection of TaxesTHE U.S. TAX STRUCTURE
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TAXES
Tax IncidenceThe Tax Incidence or Tax Burden is the determination of who actually pays the tax. Government must determine how to appropriate taxes from the citizens.
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Personal Income TaxIndividual
Corporate Income TaxStockholders – Consumers
Sales TaxesConsumers
Property TaxesOwner or Renter
INCIDENCE OF U.S. TAXESTHE U.S. TAX STRUCTURE
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TAXES
Tax Incidence
•Benefits-Received Principle
•Ability-to-Pay Principle
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Benefits Received versus Ability to Pay
• The benefits-received principle is the idea that people who receive the benefit from government-provided goods and services should pay the taxes required to finance them.
• The ability-to-pay principle is the idea that people who have greater income should pay a greater proportion of it as taxes than those who have less income.
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THETAX BURDEN
• Progressive Tax
• Regressive Tax
• Proportional Tax
•Flat Tax
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Progressive, Proportional, and Regressive Taxes
• A progressive tax is one whose average tax rate increases as the taxpayer’s income increases.
• A regressive tax is a tax whose average tax rate decreases as the taxpayer’s income increases.
• A proportional tax is a tax whose average tax rate remains constant as the taxpayer’s income increases.
• A flat tax is a tax which takes the same monetary amount regardless of income.
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Progressive, Proportional, and Regressive Taxes
• In general, progressive taxes fall relatively more heavily on high-income households while regressive taxes are those that fall relatively more heavily on the poor.
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Progressive, Proportional, and Regressive Taxes
• Taxes are classified as progressive, proportional, or regressive, depending on the relationship between • average tax rate (total tax paid as a percentage of
income) and
• marginal tax rate (the rate paid on each additional dollar of income).
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Tax yearTop marginaltax rate (%)
Taxableincome over--
PRESIDENT GROWTHRATE
1913 7 500,000 WILSON
1918 77 1,000,000
1922 58 200,000 HARDING
1923 43 200,000 COOLIDGE
1925 25 100,000
1932 63 1,000,000 ROOSEVELT -1.3%
1936 79 5,000,000
1940 81 5,000,000 8.1%
1942 88 200,000 18.5%
1951 94 400,000 EISENHOWER 8.7%
1965 70 200,000 KENNEDY 1.7%
1981 38.5 215,400 REAGAN -0.2%
1986 28 29,750 4.3%
1993 39.6 89,150 CLINTON 4.0%
1994 39.6 250,000
2003 35 311,950 BUSH 3.9%
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TAX APPLICATIONS:
• Personal Income TaxProgressive
• Sales TaxRegressive
• Corporate Income TaxProportional
• Payroll TaxesRegressive
• Property TaxesRegressive
Identify whether progressive, regressive, or proportional
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Tax Progressivity in the U.S.
• The majority view of economists is as follows:• The Federal tax system is progressive.• The state and local tax structures are largely
regressive. A general sales tax and property taxes are regressive with respect to income.
• The overall U.S. tax system is slightly progressive.
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THE TAX ISSUE
The Liberal Position
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THE TAX ISSUE
The Conservative Position
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EndChapter 24