Managing Your Money Copyright © 2011 Pearson Education, Inc.

Discussion Paragraph 4E Web and World Web Tax Simplification Plans Fairness Issues Consumption Tax World Alternative Minimum Tax Tax Changes Your Tax Return Copyright © 2011 Pearson Education, Inc.

Understanding the Federal Budget Unit 4F p.279-289 Understanding the Federal Budget Copyright © 2011 Pearson Education, Inc.

Federal Budget Basics Receipts, or income, represent money that has been collected. Outlays, or expenses, represent money that has been spent. Net income = receipts – outlays The budget has a surplus if net income is positive. The budget has a deficit if next income is negative. Copyright © 2011 Pearson Education, Inc.

Debt vs. Deficit A deficit represents money that is borrowed (or taken from savings) during a single year. The debt is the total amount of money owed to lenders, which may result from accumulating deficits over many years. Copyright © 2011 Pearson Education, Inc.

Personal Budget Example: Suppose your gross personal income last year was $45,000. Your expenditures were $20,000 for rent and food; $3000 for interest on your credit cards and student loans; $5000 for car expenses; and $7000 for entertainment and miscellaneous expenses. You also paid $9000 in taxes. Did you have a deficit or a surplus? Solution: Your personal budget had a $1000 surplus. Copyright © 2011 Pearson Education, Inc.

Personal Budget CN (1) Suppose your gross income last year was $40,000. Your expenditures were as follows: $20K for rent and food, $2K for interest on your credit cards and student loans, $6K for car expenses, and $9K for entertainment and misc. expenses. You also paid $8K in taxes. 1. Did you have a deficit or surplus? Copyright © 2011 Pearson Education, Inc.

Federal Surplus / Deficit and Overall Debt Since 1955 The first key idea to emphasize is the difference between our national deficit and the national debt. These graphs make for a rich area for political math discussions! Copyright © 2011 Pearson Education, Inc.

The Federal Debt CN (2) The federal debt at the end of 2009 was nearly $12 trillion. If this debt were divided evenly among the roughly 300 million citizens of the US, 2. How much would you owe? Copyright © 2011 Pearson Education, Inc.

Growing Interest Payments CN (3-5) The Wonderful Widget Company (table on p.281) pays the $47K interest payment in 2010 for the prior debt of $566K. 3. What is the annual interest rate? 4. If the interest rate remains the same, what will the payment be on the debt at the end of 2010? 5. What will the payment be if the interest rate rises by 2 percentage points? Copyright © 2011 Pearson Education, Inc.

Federal Budget Summary Copyright © 2011 Pearson Education, Inc.

Budget Projections CN (6-7) As of 2009, the government projected total receipts for 2011 of $2685 billion (2.685 trillion) and a deficit of $929 billion. 6. How would net income change if the projection of receipts turned out to be too high by 11%? 7. How would it change if the projections of receipts were too low by 11%? Copyright © 2011 Pearson Education, Inc.

Federal Government Receipts and Outlays Emphasize that, just as a typical family has both income and expense, our federal government is not any different when it comes to budgeting. One of the goals of quantitative literacy is to help our students become an informed electorate. Copyright © 2011 Pearson Education, Inc.

Discretionary Squeeze CN (8-9) The portion fo the budget going to Social Security is expected to grow as more people retire in coming decades. Suppose that SS rises to 30% of total outlays while all other programs except non-defense discretionary spending hold steady. 8. As a percentage of total outlays, how much would non defense discretionary spending have to decrease to cover the increase in SS? 9. How would this affect Congress’s power to control the deficit? Copyright © 2011 Pearson Education, Inc.

Two Kinds of National Debt The publicly held debt (or net debt) represents the money the government must repay to individuals and institutions that bought Treasury issues. The gross debt includes both the publicly held debt and money that the government owes to its own trust funds, such as the Social Security trust fund. Copyright © 2011 Pearson Education, Inc.

Unified Budget, On Budget, and Off Budget The U.S. government’s unified budget represents all federal revenues and spending. Off-budget: the portion of the unified budget that is involved in Social Security On-budget: the rest of the unified budget (everything that is not involved in Social Security) The following relationships hold: unified net income = on-budget net income + off-budget net income Or, equivalently, unified net income – on-budget net income = off-budget net income Copyright © 2011 Pearson Education, Inc.

On and Off Budget CN (10-11) The federal government ran a $459 billion deficit (unified deficit) in 2008. However this number does not separate eh effects of excess SS taxes. For 2008, the government collected $190 billion more in SS revenue than it paid out in SS benefits. 10. What do we call this excess $190 billion of SS revenue and what happened to it? 11. What was the government’s on-budget deficit for 2008? Copyright © 2011 Pearson Education, Inc.

Tax Increase CN (12) In 2009, individual income taxes made up about 47% of total government receipts of $2.16 trillion. Suppose that the government needed to raise an additional $900 billion through individual income taxes. 12. How much would taxes have to increase? Copyright © 2011 Pearson Education, Inc.

Homework 4F: p.290 Discussion Questions 1-8 Does it make sense 9-14 1 Web 43. Federal Budget Deficit 44. Deficit/Debt and GDP 45. Debt problem 46. SS Problems 47. SS Solutions 48. Privatizing SS 1 World 49. Federal Budget 50. SS 51. Relying on Projections Copyright © 2011 Pearson Education, Inc.