16 public finance: expenditures and taxes mcgraw-hill/irwin copyright © 2012 by the mcgraw-hill...
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16
Public Finance: Expenditures and Taxes
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
LO1
Government and the Circular Flow
(1) Costs
RESOURCEMARKET
PRODUCTMARKET
BUSINESSES HOUSEHOLDS
(4)Goods and services
(7)Expenditures
(8)Resources
(9)Goods and services
(4)Goods and services
(10)Goods and services
Net taxes(12)
Net taxes(11)
(3) Consumption expenditures(3) Revenues
GOVERNMENT
(1) Money income (rents, wages, interest, profits)
(2) Land, labor, capital
Entrepreneurial Ability
(2) Resources
(5) Expenditures (6) Goods and services
16-2
LO1
Government Finance
• Government purchases
• Exhaustive
• Transfer payments
• Nonexhaustive
• Borrowing and deficit spending
• Opportunity cost is low during recession; high during growth
16-3
20%
40
35
30
25
20
15
10
5
0 2009
1960
GovernmentPurchases
Governmenttransfer payments
22%
15%5%
Year
Per
cen
tag
e o
f U
.S. o
utp
ut
LO1
Government Finance
Government purchases, transfers, and total spending as percentages of U.S. output
16-4
LO1
Global Perspective
16-5
LO1
Federal Expenditures
16-6
LO1
• Personal income tax
• Progressive tax
• Marginal tax rate
• Payroll taxes
• Corporate income tax
• Excise taxes
Federal Tax Revenues
16-7
Federal Tax Revenues
LO1
(1)Total Taxable
Income
(2)Marginal Tax
Rate %
(3)Total Tax
on HighestIncome inBracket
(4) Average Tax Rate
on Highest Income in Bracket
% (3) / (1)
$1-$16,750 10 $ 1,675 10
$16,751-$68,000 15 9,363 14
$68,001-$137,300 25 26,688 19
$137,301-$209,250 28 46,834 22
$209,251-373,650 33 101,086 27
Over $373,650 35
Federal Personal Tax Rates, 2010*
* For a married couple filing a joint return
16-8
LO1
State Finances
16-9
LO1
Local Finances
16-10
LO1
Local, State, and Federal Employment
16-11
LO2
Apportioning the Tax Burden
• Size, distribution, and impact of the costs that taxes impose on society
• Benefits-received principle
• Ability-to-pay principle
16-12
LO2
Apportioning the Tax Burden
• Progressive tax – average tax rates increase as income increases
• Regressive tax – average tax rate declines as income increases
• Proportional tax – average rate stays the same as income increases
16-13
LO2
Apportioning the Tax Burden
• Applications
• Personal income tax: progressive
• Sales tax: regressive
• Corporate tax: proportional
• Payroll tax: regressive
16-14
• Tax incidence
• Who really pays the tax?
• Excise tax
• Tax burden depends on elasticity
• Inelastic vs. elastic
• Efficiency loss
• Deadweight loss
• Transfer of surplus to government
Tax Incidence and Efficiency Loss
LO3 16-15
Elasticity and Tax Incidence
14
12
10
8
6
4
2
0
5 10 15 20 25 Q
PP
rice
(P
er B
ott
le)
Quantity(Millions of Bottles Per Month)
S
D
St
Tax $2
LO3 16-16
LO3
Elastic Demand Inelastic Supply
Tax
a
b
c
a
b
0Q2
P1
Q1
P
Pe
Smaller efficiency loss with inelastic demand
St
S
De
Di
c
S
Tax St
P1
PPb
Q2 Q1
Pa
P
Elasticity and Tax Incidence
16-17
Elastic Supply Inelastic Supply
Smaller efficiency loss with inelastic supply
D D
S
SSt
St
P1Pa
PeP1
Pb
Pi
Q1Q2 Q1Q2
Tax Tax
aa
bb
c
c
LO3
Elasticity and Tax Incidence
0
P P
0 QQ
16-18
Efficiency Loss of a Tax
Pri
ce (
Per
Bo
ttle
)
Quantity(Millions of Bottles Per Month)
S
D
St
Tax $2
Tax paidby consumers
5 10 15 20 25 Q
P
14
12
10
8
6
4
2
0
Tax paidby producers
Efficiency loss (ordeadweight loss)
LO3 16-19
LO3
Global Perspective
16-20
LO3
Type of tax Probable Incidence
Personal income tax
Tax falls on the household or individual on which it is levied
Payroll taxes Workers pay the full tax levied on their earnings and partof the tax levied on their employers
Corporate income tax
Short Run: Full tax falls on owners of the businessesLong Run: Some of the tax may be born by workers through lower wages
Sales tax Tax falls on consumers who buy the taxed products
Specific excise taxes
Taxes fall on consumers, producers or both, depending on elasticity of supply and demand
Property Taxes Taxes fall on owners in the case of land and owner occupied residences, tenants in the case of rented property, consumers in the case of business property
Probable Incidence of U.S. Taxes
16-21
LO4
• Distribution of income
• Taxes taken from the rich
• Do they to flow to the poor?
• Shows income is transferred to the poor
• Bottom 40% received more government spending than they paid in taxes
• Top 40% paid more in taxes than they received in government spending
Redistribution vs. Recycling
16-22
LO4
Redistribution vs. Recycling
16-23