Presentation on theme: "Public Spending, Public Choice, Need for Government, and Taxation Systems Lecture."— Presentation transcript:
1Public Spending, Public Choice, Need for Government, and Taxation Systems Lecture
2Test terms for Thursday, May 1 Market failureExternalityMedicaidMedicarePrivate goodPublic goodRival consumptionGovernment sponsored goodGovernment inhibited goodCollective decision makingTheory of public choiceTax baseTax rate proportional taxProgressive taxRegressive taxCapital gainCapital lossTax incidenceDynamic tax analysisStatic tax analysis
3What a Price System Can and Cannot Do Price system lets resources move from low-valued uses to high value usesConsumers decide thisSometimes too many or too few resources move to specific economic activitiesThis is called a market failure
4Market failure: negative externality Externality; consequence of economic activity that spills over to third partyExample: steel mill moves into townCharges market price for steelMill doesn’t have to pay cost of dirtier air, dirtier clothes, or more respiratory diseases
5How does government correct for negative externalities? Special taxes:In steel mill example government could tax steel mill (pollution or effluent tax)Ultimate aim to place real cost of steel on mill itself: prices would rise—supply fallRegulation:Government could set maximum allowable rate of pollutionMill would have to install abatement equipment or reduce rate of output
6How does government correct positive externalities? Idea of positive externality can be seen with inoculations against communicable diseasesIf it wants more inoculations than the market is producing: it could finance themIt could subsidize themIt can regulate them: require that you must have them to work, attend school, etc.
7Other Functions of Government Provide a Legal SystemA market system relies on contracts (good legal system is necessary)Must have a good system of protecting property rightsHaving a good police system is necessary
8Other Functions of Government Promote CompetitionWe want to preserve our competitive economic system (anti-trust legislation)Reduce and eliminate monopoliesAnswer this questions with your partner:Can small businesses continue to exist in America? Which ones?
9Other Functions of Government Provide Public GoodsPrivate Good:Goods that can be consumed by only one individual at time. Private goods are subject to principle of rival consumptionRival consumption: individuals are rivals in consuming private goods because each persons consumption reduces amount available for others to consume
10Public Goods Public Goods: Principle of rival consumption does not applyCan be consumed by many individuals simultaneously at no additional cost & no reduction in quality or quantityOne who does not pay for the good cannot be denied benefit of goodExample of public good: national defense
11Other Functions of Government Ensure Economy-wide StabilityStabilize rising pricesEliminate unemploymentExamples: FDR’s program; bank bailouts; stimulus packages; control of interest rates
12Political Functions of Government Promote and restrict goodsGovernment-sponsored good: something deemed socially desirable: museums & parksGovernment-inhibited good: something deemed undesirable through political process: heroin
13Political Functions of Government Provide Income RedistributionThis is a more recent function of governmentTwo systems used for this:Progressive income taxTransfer payments
16Public Spending & Transfer Programs Publicly Subsidized Health: MedicareIn fewer than 40 years Medicare became our second-biggest domestic government spending programIn first 20 years of Medicare:Huge upswing in physician's incomes & med-school applications +Huge increase of prices of medical servicesEach year government expenditures on Medicare exceed budget projections
17Public Spending & Transfer Programs Why do projections of expenditures fall short?Bureaucratic planners don’t often see the effects of incentives of government programsDemand side: Huge incentive to use program when government is paying for itSupply side: Huge incentive to use expensive procedures when government is paying
18Public Spending & Transfer Programs Health Care Subsides Continue to GrowMedicare cost has risen from 0.7 % of national income in 1970 to 2.8% todayMedicare spending is growing faster than employer & employee contributionsCurrently Medicare tax is 2.9% on wages with % paid by employer & 1.45% paid by employeeCurrently unfunded guarantees for Medicare estimated at $25 trillion
19Public Spending & Transfer Programs Increased guaranteed costs do not include MedicaidMedicaid provided for low income peopleCombination of state and federal paymentsCurrently, 50 million people have Medicaid or one in six AmericansFederal government currently pays for 57%Medicaid expenditures have grown more rapidly than Medicare (75% since 2000 alone)From 2010 forward increases have expanded at rate at more than $100 billion per year
20Obamacare?????The major questions in Obamacare are 1) whether it will be less expensive for consumers and 2) how will the funding work in insuring 40 million new people?
21Economic Issues of Public Education State and local governments assume primary responsibility for public educationAnnual expenditures are $900 billionIn excess of 6% of national incomeEducation funded byState & local sales, excise, property, and income taxesFederal government, also, provides billions of dollars in grants & transfersQuestion: Should education be funded by local communities or federal government?
22Economic Issues of Public Education Currently state & local education is subsidized by federal governmentEducation is provided for below market priceThink of cost of private schoolsTrade-offs occur with federal government subsidesSt. Gregory tuition: $16,675AZ State payment per student: $7,468AZ Charter school per student: $6,777National payment per student: $10,615
23Economic Issues of Public Education What is the problem with subsidized public education?Schools don’t have to compete with each otherSchools provide inefficient programs for student learning & achievementHow are charter schools able to operate at income levels 25% under public schools?
24Collective Decision Making: The Theory of Public Choice Collective decision making: how voters, politicians, and other interested parties influence nonmarket decisionsTheory of Public Choice: study of collective decision makingTheory states individuals will act within political process to maximize their individual, not collective well-being.Do you agree with this theory?
25The Theory of Public Choice Opportunity cost:Everything spent in private sector plus public sector must add up to total income availableGovernment then has an opportunity cost; they face choicesCompetition:Appointed officials are in competition for available government fundsGovernment officials will do what is in the best interest of themselves
26The Theory of Public Choice Differences of individuals & public sectorsGovernmental officials face a different incentive structureCompare USPS & UPS: profitability incentivesPublic sector is not that concerned with cost- benefits (how many units to expand or how many hours to operate)Difference in use of force: don’t pay your taxes wages are seized; don’t pay your bills-- declare bankruptcy
27The Theory of Public Choice Voting vs. spendingPolitical system: one person-one votePolitical system: majority ruleMarket system: each dollar a person spends countsMarket system: proportional rule (if 10% of votes cast vote for blue cars 10% will be made)
28Funding the Public Sector Three sources of funding for government1) Explicit fees or charges for gov.-services2) Taxes3) Borrowing
29Government Budget Constraint Each dollar of public spending on goods, services, transfer payments, and repayment of borrowed fundsmust be provided by tax revenues
30Systems of Taxation Tax Base Tax rate Value of good, services, wealth, or income subject to taxationTax rateProportion of tax base that must be paid to a government
31Three types of taxation systems Proportional TaxationRegardless of income everyone’s tax rate is the same—everyone pays the same %Progressive TaxationAs a person’s taxable income increases the % paid increases (our current system)Regressive TaxationA smaller % of taxable income is taken as taxable income increases
33Treatment of Capital Gains Capital gain: positive difference between the purchase price & sale price of an assetMiscalculation????Are capital gains always real gains?Example: if you sold an asset for $100,000 after 10 years and your original purchase price was $50,000 (pay on $50,000)What if there was 10% inflation, your real gain would be $0.00 (fair????)
34Treatment of Capital Gains Capital Loss: a negative difference between the purchase price and sale priceCan you deduct the full amount of a capital loss on your income tax?Ten Important Facts About Capital Gains and Losses
35Corporate Income Tax Corporate Taxable Income $0-50,000 $50,001-75,000 $100, ,000$335,001-10,000,000$10,000,001-15,000,000$15,000,001-18,333,333$18,333,334-and upCorporateTax Rate15%25%39%34%35%38%
36More on Cooperate Income Tax Corporate income taxes account for12% of federal taxes2% of state & local taxes
37More on Corporate Income Tax Double taxationStockholders pay taxes on dividendsDividends are paid out of after tax profitsPrior to issuing dividends, it paid taxes on all its profit, including any it put back into the companyRetained earnings (any earnings put back into invest-ments) have helped raise the value of the companyWhen you sell your stock for a capital gain, you pay tax on the capital gainsEither way, dividends or retained earnings you are double taxed (Since 2003 dividends are taxed at lower rates)
38Who Really Pays the Corporate Income Tax? Tax Incidence:the distribution of tax burdens among various groups in societySo who really pays the corporate taxes?Discuss with your partner!
39So who really pays the corporate taxes? Do corporations simply pass on their tax burden to customers by charging higher prices?Are stockholders bearing the cost of the tax? (price of stock has to reflect cost)Are employees of the corporation paying the cost by taking lower wages than might be offered without the tax?Point: it is people who pay the tax!
40Social Security & Unemployment Taxes Social Security Tax on earnings up to $106,8006.2% on employees & 6.2% on employersSocial Security taxes were passed in 1935More people paid into it than drew benefitsWithin next few years outflow will exceed inflowSolutions include; later start date, increased taxes, lower COL adjustments
41Tax Rates & Tax Revenues Sales taxes, gross receipts taxes, & excise taxes generate one-fifth of most state and local governmentsSales tax is a proportional taxStatic tax analysisAssumption of no effect on tax base with tax rate increasesDynamic tax analysisRecognizes tax base will eventually decline as tax rate increases
42How to maximize tax revenue Maryland example of “millionaires” taxExtra-high bracket created for incomes exceeding $1,000,000Many millionaires changed residences to other states (made second home – primary)Maryland collected $100 million less with this taxGerry Swanson: most important consideration in taxing is that those taxed feel it is fair. (Tax avoidance can set in)
43Can we wipe out the annual federal deficit with taxes? Yes, annual deficit is about $1.3 trillionTaxes should be raised by $9,000 for every worker (that covers one year)Shouldn’t we tax the rich more?There are fewer than 100,000 who make more than $1,000,000Raise the marginal tax rate from 35% to 45% we would raise $35 billion or less than 3% of federal budget
44Last call on taxing the rich! Let’s tax that top 1% at 100%!So that would cover one year at $1.3 trillionOur national debt is over $17 trillionLet’s take 100% of everyone who makes at least $75,000!So that would cover about $4 trillion or one-third of the net public debt
45Components of Federal Expenditures as Percent of Total Federal Spending
46With your partnerWhat is your solution for eliminating the national public debt?