Carbaugh, Chap. 9 2 The Mixed Economy of the United States. The Mixed Economy of the United States includes private sector and the public sector. The private sector include: Millions of households businesses The public sector include: Federal government States Local governments
Carbaugh, Chap. 9 3 Households as income recievers Distribution of income is the way income is devided among members of society. Functional distribution of income shows the shares of a nation’s income accruing to the factors of production. Personal distribution of income addresses the issue of how indiidual households share the nation’s income; as seen in slides 4 & 5.
Carbaugh, Chap. 9 4 Functional distribution of income, 2002 The Mixed Economy: Households Source: From U.S. Department of Commerce, 2004-2005 Statistical Abstract of the United States (Washington, D.C.: U.S. Government Printing Office), Table 672. Wages and salaries 72% Rents 2% Interest 8% Corporate profit 9% Proprietor income 9%
Carbaugh, Chap. 9 5 Personal distribution of income, 2002 The Mixed Economy: Households Lowest 20 percent 4.2% Second 20 percent 9.7% Middle 20 percent 15.5% Fourth 20 percent 23.0% Top 20 percent 47.6% Source: From U.S. Department of Commerce, 2004-2005 Statistical Abstract of the United States (Washington, D.C.: U.S. Government Printing Office), Table 672.
Carbaugh, Chap. 9 6 Sources of income inequalty Determinants of income differences: Age: with age come more education, training and experience. Differences in productive resources: quantity and quality of resources. Investment in human capital: sharpening productive talents, acquiring new skills. Inheritance: cash, stocks, bonds, homes, land.. Discrimination: between male or female, religion, races…..
Carbaugh, Chap. 9 7 Households as spenders Parts of household income flows into consumption, the rest is to pay taxes or is saved( slide 7).
Carbaugh, Chap. 9 8 Households income, 2004 The Mixed Economy: Households AmountPercent (billions) of total Disposition of household income Personal consumption expenditures$8,282 88% Durable goods1,00711 Non-durable goods2,38725 Services4,88852 Personal taxes1,04411 Personal savings 43 1 TOTAL$9,369 100% Source: From National Economic Accounts, Bureau of Economic Analysis, U.S. Department of Commerce, available at http://www.bea.doc.gov/bea/dnl.htm.
Carbaugh, Chap. 9 9 Business sector Business is an org. established for producing and selling goods and services. 3 types of businesses: Sole proprietorship (độc chủ) Partnership ( hợp danh) Corporation (cổ phần)
Carbaugh, Chap. 9 10 U.S. business firms in 2001 The Mixed Economy: Business Source: From U.S. Commerce Department, Bureau of the Census, 2004–2005 Statistical Abstract of the United States (Washington, D.C.: U.S. Government Printing Office), Table 716. Number ofBusiness firms (mill.)receipts (bill.) Form of businessNumberPercentDollarsPercent Proprietorships18.371%$1,0174% Partnerships2.18%2,56911% Corporations5.221%19,30885% TOTAL25.6100%22,894100%
Carbaugh, Chap. 9 11 Business sector- proprietorship Owned & operated by 1 individual. Easy to set up and close down. Owner is not responsible or answerable to anyone But small size of capital Unlimited liability
Carbaugh, Chap. 9 12 Business sector- partnership Owned by 2 or more persons. Contribution of labor, expertise, capital… Decision making is more cumbersome. Limited life: ends when 1 withdraws. Limited funds: personal sources of capital. Unlimited liability.
Carbaugh, Chap. 9 13 Business sector- corporation A “legal person”.Owners are stock-holders. Stock-holders vote for directors of BOD (Board of Directors). Advantages: Large size of capital(may mobilize from sales of stocks);Unlimited life; Limited liability; easy transfer of ownership. Disadvantages: double taxation; costly to set up and close down; problem of separation of ownership and control.
Carbaugh, Chap. 9 14 Government in the mixed economy Gov. provides: Legal & social framework, Promote competition Alters distributions of incomes by taxation Provides public goods: national defense, education, fire fighting…. Gov. expenditures = Gov. purchases + transfer payments Gov. purchases: street lighting, sewage system, city playground, national park, jet planes… Transfer payments:
Carbaugh, Chap. 9 15 Government in the mixed economy Transfer payments Transfer payments: Unemployment compensation. Food stamps Supplemental security income Aid to families with Dependant children Medicaid Housing and energy subsidies Agricultural assistance
Carbaugh, Chap. 9 16 Government in the mixed economy US has devised a system of taxes and transfer payments to alter the distribution of iincome in favor of the poor: ‘Peter’ is taxed to hepl ‘Paul’.
Carbaugh, Chap. 9 17 Government finance The charts shows the federal gov. budget for 2004 and state & local ones for 2002: includes receipts and expenditures. Expenditures: largest portion was on income transfer programs: social security, medicare, income security(48%) Then comes national defense( 20%) Interest on public debts:
Carbaugh, Chap. 9 18 Government finance Where does the Gov. obtain funds: Personal income taxes Social security, medicare, retirement taxes Corporate income taxes
Carbaugh, Chap. 9 19 Federal government receipts and expenditures, 2004 Government Finance Personal income taxes 43% Corporate income taxes 10% Excise, Customs, Estate, Gift and misc. taxes 8% Social Security, Medicare & other retirement taxes 39% Federal Receipts Source: From Office of Management and Budget, The Budget for Fiscal Year 2006, Historical Tables and Economic Report of the President, 2005. Net interest on the debt 7% Federal Expenditures Social security, Medicare, & other retirement 48% National defense 20% Other 15% Health 10%
Carbaugh, Chap. 9 20 Education 34% Highways 7% Other 43% Expenditures State and local receipts and expenditures, 2002 Government Finance Sales and Excise taxes 20% Other 29% Property tax 17% Revenue from the Federal Government 19% Corporate income tax 2% Receipts Personal income tax 13% Public welfare 16% Source: From Office of Management and Budget, The Budget for Fiscal Year 2006, Historical Tables and Economic Report of the President, 2005.
Carbaugh, Chap. 9 21 Taxation principles Benefit-receive principle: Taxes are paid in propotion to the benefits that taxpayers get from public expenditure. E.g.:gazoline tax, taxes on airline tickets, sales taxes, tolls… Ability-to- pay principle: people with greater inomes & wealth should pay a higher rate. E.g.: income taxes.
Carbaugh, Chap. 9 22 3 types of taxation systems 3 types: Proportional taxation Progressive taxation Regressive taaxation Table 9.6 (slide 24): column 1: different levels of total income Column 2: total taxes due at levels co;lumn 3: avarage tax rate
Carbaugh, Chap. 9 23 Taxes and tax rates Taxation NationAverage tax rate Sweden 59.3% France50.4 Austria50.4 Italy45.8 Germany45.3 Canada41.2 Australia37.0 United Kingdom33.9 United States31.0 Japan30.9 Total tax receipts as a percent of gross domestic output, 2003 Source: From U.S. Department of Commerce, Bureau of the Census, 2004–2005 Statistical Abstract of the United States (Washington, D.C.: U.S. Government Printing Office), Table 1344.
Carbaugh, Chap. 9 24 Progressive, proportional & regressive taxes Taxation TotalTaxesAverageMarginal incomeduetax ratetax rate Progressive tax $0$0-- 10055%5% 2002010%15% 3004515%25% Regressive tax $0$0-- 1003030%30% 2005025%20% 3006020%10% Proportional tax $0$0-- 1001010%10% 2002010%10% 3003010%10% * In a progressive tax system, the average tax rate and marginal tax rate rise as income increases. * In a regressive tax system, the average tax rate and marginal tax rate fall as income increases. * In a proportional tax system, the average tax rate and marginal tax rate remain the same as income increases.
Carbaugh, Chap. 9 25 3 types of taxes Propotional taxation: also called flat-tax: as income rises, taxes due rise by the same fraction. Regressive taaxation: a smaller fraction of income is taken in taxes as income rises. Progressive taxation: a larger fraction of income is taken in taxes as income rises.
Carbaugh, Chap. 9 26 US tax structure Federal personal income tax: Federal corporate income tax Social security tax Sales, excise, and property taxes Overall U.S tax system
Carbaugh, Chap. 9 27 1.Federal personal income tax Taxable income = Gross income – exemptions, deductions and credits Gross income: wages, salaries, tips, bonuses, ….. Exemption: allowance for each household member Deduction: home mortgage interest payments, business expenses, charitable contribution, medical expenses, state&local taxes Credits: child care, elderly and disabled, low- income allowance
Carbaugh, Chap. 9 28 Federal income tax rates for a single taxpayer, 2005 Taxation Tax bracketTaxesAverageMarginal OverUp todue*tax ratetax rate $07,300$ 73010%10% 7,30029,700 4,09014%15% 29,70071,95014,65320%25% 71,950150,15036,54924%28% 150,150326,45094,72829%33% 326,450 and over35% * Computed at the top of the six taxable income brackets. Source: From Internal Revenue Service, 2005 Tax Rate Schedules.
Carbaugh, Chap. 9 29 Share of federal personal income tax paid by various income groups, 2001 Taxation Percentiles rankedAdjusted gross incomePercentage of federal adjusted gross incomethreshold on percentilespersonal income tax paid Top 1%$292,913 34% Top 5% 127,90453 Top 10% 92,75465 Top 25% 56,08583 Top 50% 28,52896 Bottom 50% less than 28,5284 Source: From New IRS Data on Income and Tax Shares, Joint Economic Committee, September 2003, available at http://www.house.gov/jec.
Carbaugh, Chap. 9 30 2. Federal corporate income tax Federal corporate income tax is essentially propotional tax with a flat rate of 35% for almost all companies
Carbaugh, Chap. 9 31 3. Social security tax Social security tax: imposed on individual’s wage income up to $90,000. Social security tax is large ly a propotional tax, but having some regressive features. E.g.: in 2005: 6.2% applied to the first $90,000, but 3.1% on an income of $180,000
Carbaugh, Chap. 9 32 4. Sales, excise, and property taxes Sales, excise, and property taxes are regressive. Why?
Carbaugh, Chap. 9 33 Should US tax system be reformed?
Carbaugh, Chap. 9 34 Progressive vs. flat-rate income tax Taxation Progressive tax Flat-rate tax Tax rate 0 20% Taxable income
Carbaugh, Chap. 9 35 Taxes on goods & services as a share of total tax revenue Taxation Source: From U.S. Department of Commerce, Bureau of the Census, 2004–2005 Statistical Abstract of the United States (Washington, D.C.: U.S. Government Printing Office), Table 1345. 31.3% 28.8% 25.6% 25.2% 24.7% 19.0% 16.1% 0%5%10%15%20%25%30%35%40% United Kingdom Germany Italy France Canada Japan United States Taxes on goods and services as a percent of total revenue, 2001