1 Chapter 30 Financing Government: Taxes and Debt 5/20/2015 © ©1999 South-Western College Publishing

1

Chapter 30Chapter 30Chapter 30Chapter 30Financing Government: Financing Government:

Taxes and DebtTaxes and Debt

04/18/23

©©1999 South-Western College Publishing

2

In what possible three ways do we pay for government

spending?

In what possible three ways do we pay for government

spending?• Taxes• Debt• Inflation (via

printing of money)


3

What does government spending have to do with

Opportunity Costs?

What does government spending have to do with

Opportunity Costs?A dollar spent by the

military on an airplane is a dollar that cannot be spent on a new house


4

Taxes, taxes, taxesTaxes, taxes, taxes

Or how we pay for government

5

Why Pay Taxes?Why Pay Taxes?

• Quote from Oliver Wendell Holmes: “Taxes are the price we pay for civilization”

6

Classifying taxes in relation to income


• Proportional• Progressive• Regressive

7

What is a Proportional Income Tax?

What is a Proportional Income Tax?

A tax that is a fixed percentage of income, regardless of the level of income, a flat rate tax


8

What is a Progressive Income Tax?

What is a Progressive Income Tax?

A tax whose rate varies directly with the income of the person taxed; rich people pay a higher rate


9

What is a Regressive Income Tax?

What is a Regressive Income Tax?

A tax whose impact varies inversely with the income of the person taxed; as a percentage, poor people pay the most


10



• Proportional: as income rises, the same % of income is paid in tax (flat tax)

• Progressive: as income rises, a higher % of income is paid in tax (graduated rate)

• Regressive: as income rises, a lower % of income is paid in tax

11

10% Proportional tax10% Proportional taxIncome Tax Tax/income$30,000 $3,000 .10 (10%)

$40,000 $4,000 .10 (10%)

$50,000 $5,000 .10 (10%)

12

Progressive tax: Hypothetical marginal tax

brackets

Progressive tax: Hypothetical marginal tax

brackets

Income from 0-$20,000 taxed at 10%Income from 20-$40,000 taxed at 20%Income over $40,000 taxed at 30%

13

Progressive taxProgressive taxIncome Tax Tax/income$30,000 $4,000 .13 (13%)

$40,000 $6,000 .15 (15%)

$50,000 $9,000 .18 (18%)

14

Examples of regressive taxes

Examples of regressive taxes

• Poll taxes• Sales taxes• Social security tax

15

What is a Poll Tax?What is a Poll Tax?A tax of a specific absolute

sum levied on every person or every household


16

Why are sales and Excise Taxes regressive?

Why are sales and Excise Taxes regressive?

Because low income people spend a larger percentage of their income on purchases than high income people


17

Major Federal TaxesMajor Federal Taxes

• Personal income tax• Social security taxes

(payroll tax)• Corporate income tax

18

State and local taxesState and local taxes

States: sales and income taxes

Local: property and real estate taxes

19

What is a Corporate Income Tax?

What is a Corporate Income Tax?

A tax levied on a corporation’s income before dividends are distributed to stockholders


20

For information and statistics concerning taxes:

For information and statistics concerning taxes:

http://www.us.govhttp://www.irs.ustreas.gov/

prod/tax_stats


21

How are Income Taxes Progressive in the U.S.?How are Income Taxes Progressive in the U.S.?

Most people are in either the 15% or 28% tax bracket, but some are in the 31%, 36%, or 39.6% bracket


22

What are Exemptions and Deductions?

What are Exemptions and Deductions?

They are both subtracted from gross income to determine taxable income


23

Visit a few organizations that

advocate tax reform:

Visit a few organizations that

advocate tax reform:http://www.atr.orghttp://www.ctj.org

http://www.cats.org


24

Theories of taxationTheories of taxation• Ability to pay: tax in accordance

with ableness to pay--suggests using income and wealth taxes

• Benefits theory: tax those who benefit from the programs that the taxes are used to finance--gas taxes, license fees

25

Tax IncidenceTax Incidence

• Who really pays a tax and thus bears its burden?

• Incidence is complicated by tax shifting

26

Shifting of taxesShifting of taxes

• Forward: to the consumer

• Backward: to the worker or resource supplier

27

Government budgetsGovernment budgets

If G=T, balanced budgetIf G>T, deficitIf G<T, surplus

28

What is a Federal Deficit?What is a Federal Deficit?A Deficit occurs when

the government spends more than it receives in tax revenues


29

Where does government get the money when

there is a deficit?

Where does government get the money when

there is a deficit?Borrow the money by

selling treasury bonds, notes, etc. known as government securities

30

What are the different kinds of securities?

Treasury ...

What are the different kinds of securities?

Treasury ...• Bills• Bonds• Notes


31

What is a Treasury Note? What is a Treasury Note? A Treasury bond that

matures in 2 to 10 years and is sold in denominations as low as $1,000


32

What is aU.S. Savings Bond?

What is aU.S. Savings Bond?

A nonmarketable Treasury bond that is the most commonly held form of public debt


33

What is a Treasury Bond?What is a Treasury Bond?A Treasury Bond takes 30

years to mature and is sold in denominations as low as $1,000


34

What is aTreasury Bill?

What is aTreasury Bill?

A bond that matures in 3, 6, or 12 months with minimum denominations of $10,000 and multiples of $5,000 above this


35

What is the Public (national) Debt?

What is the Public (national) Debt?

The total value of government securities held by individuals, businesses, other government agencies, foreigners, and the Federal Reserve


36

Budget PhilosophiesBudget Philosophies

1. Annually balanced2. Cyclically balanced3. Functional finance

37

Annually balanced budget

Annually balanced budget

Try to set G=T each yearProblem: could be

destabilizing to the economy

38

•Start with G=T• Recession hits

•G rises, T falls, deficit (cyclical) arises

•In order to balance budget, either raise T or lower G, but this is contractionary

policy•Could worsen recession

39

Cyclically balanced budget


Balance the budget over the course of the business cycle, not necessarily each year

40Time

GDP

Recessions, run deficits

Expansions, run surpluses


41

Functional financeFunctional finance

Balance the economy, not the budget: shoot for full employment, stable prices, regardless of the budget

42

Cyclical vs structural budget

Cyclical vs structural budget

Structural: what the budget would be with existing tax laws and spending programs, assuming full employment

Cyclical: difference between the actual budget and the structural

43

ExampleExample

Say present deficit is 200 billion, unemployment rate is 7%: assume full employment is 5%: at full employment suppose the deficit would only be 50 billion: then 50 billion is the structural deficit, the other 150 billion is the cyclical deficit

44

Why is an internally financed public debt not a burden to

future generations?

Why is an internally financed public debt not a burden to

future generations?Because even though

people pay taxes to finance the debt, they also receive interest payments


45

Why is an externally held debt a burden to future generations?

Why is an externally held debt a burden to future generations?

Because people pay taxes to finance the debt without receiving the interest payments


46

What are some problems with the National Debt?

What are some problems with the National Debt?

• Not everyone holds the debt• It promotes overconsumption• It can create inflation• It can crowd out private

investment©©1999 South-Western College Publishing

47

For the latest statistics on the Public Debt:

For the latest statistics on the Public Debt:

http://www.publicdebt.treas.gov


48

Visit the national debt clock

Visit the national debt clock

National Debt Clock

49

• When the government spends a dollar, do we always pay for that dollar?

• In what possible three ways do we pay for that dollar?

• What does government spending have to do with Opportunity Costs?

• What are alternative ways to levy taxes?

• What is a Social Security Tax?

50

• How are Income Taxes Progressive in the U.S.?

• What does it mean that each dollar of income is taxed on the Margin?

• What is a Federal Deficit?• What is the Public Debt?• What are the different kinds of

securities? Treasury …• What are some problems with the

National Debt?

51

ENDENDENDEND


Documents

1 Chapter 30 Financing Government: Taxes and Debt 5/20/2015 © ©1999 South-Western College Publishing