# Macro Chapter 4 Presentation 3. Government Purchases The products directly use up resources and are part of domestic output Ex- missile production uses.

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Macro Chapter 4 Presentation 3

Government Purchases The products directly use up resources and are part of domestic output Ex- missile production uses scientists, machines, engineers etc.

Transfer Payments Do not directly use resources or create output Recipients make no current contribution for them Ex- Welfare, Social Security

The Circular Flow Revisited Resource Market Product Market BusinessesHouseholdsGovernment Goods & Services Goods & Services Net Taxes Expenditures Goods & Services Resources

Average Tax Rate Total tax paid divided by total taxable income

Personal Income Tax Tax collected on taxable income (after deductions such as mortgage interest, charitable donations, education expenses) from households and businesses Fed. govt’s main revenue

Personal Income Tax Contd. The Federal income tax is considered progressive- the average tax rate increases as your income goes up

Marginal Tax Rate The rate at which a tax is paid on each additional unit of taxable income Rate on your next dollar earned

Key Question Suppose in Fiscalville there is no tax on the first \$10,000 of income, but a 20 percent tax on earnings between \$10,000-20,000 and a 30 percent tax on income between \$20,000 and \$30,000. Any income above \$30,000 is taxed at 40 percent. If your income is \$50,000, how much in taxes will you pay? Determine your marginal and average tax rates.

Key Question Solutions \$0-10,000 = no taxes paid 10,000-20,000 = (10,000 x.20= \$2,000) 20,000-30,000 = (10,000 x.30 = \$3,000) 30,000-50,000 = (20,000 x.4 = \$8,000) Total Tax = \$13,000

Key Question Solutions Contd Average Tax Rate = total tax / taxable income = \$13,000/\$50,000 =26%

Key Question Solutions Contd. Marginal tax rate = tax rate on next unit of income = 40% (all income above \$30,000 @.40)

Payroll Taxes Federal taxes based on wages and salaries Fund Social Security and Medicaid Both workers and employers pay equally

Sales and Excise Taxes Sales tax cover a wide range of products that are taxed Excise taxes target specific goods such as alcohol, tobacco, and gasoline

State and Local Taxes States’ main revenue comes through excise and sales taxes----education is the highest expense Local governments’ highest revenue comes from property taxes---education is also the highest expense

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