the u.s. economy income earners spending and saving business formations taxes federal finance
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The U.S. EconomyIncome Earners
Spending and SavingBusiness Formations
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
FY2012
Not recent, but not changed too much
2012Education Income
Distribution of total money - 2011
World Comparisons - 2000
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
2008 FY- Tax Policy Center
Produce Market / Factor Market
Remember the Circular Flow….Now we discuss businesses and types
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.
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: It is February, 2014….. The above still applies.
The following slides are theory
• 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)
• 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.
Income Taxes
Revenue sources – U.S. Govt. 2012
Benefit Received
Ability to Pay
Two ways to determine fair tax
Benefits Received:Tax the user- gas tax for drivers- fishing license-ramp fees for
boats- toll roads-bus and train tickets- Pay the government for benefits received- can’t pay for welfare
received!
Ability to Pay Should those who have
the greatest wealth pay the most in taxes regardless of the benefits they receive??
Should income and family size be assessed?
Determining fairest principle for a just tax is matter of values rather than economics and is determined by our political process.
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.
Other Factors in Evaluating Taxes
• 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 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, tires)
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.
Federal Government Tax System
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
1% $410,096
10% $113,018
25% $66,532
50% $32,879
Kiplinger report 2009Income earners (family 4)
Breakdown- 2011
2009Top 1% = $410, 096Top 10% = $113,018Top 25% = $66, 532Top 50% = $32,879
Poverty Guidelines- 2013
1 Person = $11,490Family of four = $23,550For every additional person (child) the
government gives $4,000 more.
MEDICARE
Medicare Tax…. 2.9% on all wage income Medicare is paid (no cap) Government does not collect payroll taxes on
nonwage income (such as interest, dividends, or rents
Payroll Taxes
• 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
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 will be significantly reduced by year 2010.
Eighteen year olds today (2002) will pay over a million and a half dollars into SS. Benefits received????
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 2013 is $113,000. Increases automatically every calendar year approximately $3,000.
Social Security
Redistribution 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 Payments
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)
Money that is productive generates more capital
More capital generates more jobs.More jobs generates more income.
Economics of Transfer
The 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
Merit Goods
• Taxes paid today go to pay benefits for people drawing today.
• Do you think there is a “special fund” where the SS dollars go???
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.
More Grim Statistics Concerning SS
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?
So, it all gets back to Joe Q Citizen… Taxes paid to government.
Gross Public Debt.state,local,fed
• Virtually all of the recent growth in federal expenditure has come from increased income transfers, not purchases of goods and services.
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
• Government failure occurs when government intervention fails to improve economic outcomes.
• 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.
Perceptions of Waste
“POWER CORRUPTS AND ABSOLUTE POWER CORRUPTS ABSOLUTELY!”
Lord Acton
“POWER TO TAX IS POWER TO DESTROY”Chief Justice John Marshall…. McCullough vs Maryland
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