Lifeconomics and Financial Fitness For Life A Continuing Education Workshop for Teachers

Outline Your Government Your Life Your Money Financial Fitness for Life Curriculum

What is economics? Observing the world full of mysteries –Why does the government tax us? –Should you take that second job? –Should you fix the leak or call the roofer? –Why does a stock price fluctuate?

What is economics? Trying to solve these mysteries in a manner consistent with human behavior. Sometimes, hard to solve these… … so we make assumptions, say there are only 2 goods in the world: Milk and Gasoline

What is economics? Use simple models as representations of the ‘real world’. Apply this to explain our mysteries.

Your Government How the government affects your everyday life

Calculating your tax burden (Ch 20) Taxes: Do we pay - too much? - just enough? - not enough? Tax Burden: the portion of income paid in form of taxes (federal, state, local etc)  39% (CA average) 2005

Tax Burden… As income rises, taxes rise (both actual and proportion)  Progressive taxation (pay more taxes and at a higher rate)

Calculating Tax Burden Only count direct taxes 1.Federal Tax Withheld  Box 2 W-2 a.Add/ subtract extra taxes from return 2.Other federal taxes  SS, Medicare (Boxes 4,6) 3.State Tax (Box 17) Adjust (add/ subtract) any taxes from return 4.Gas Tax (Both fed/ state taxes included in pump price) (p 113/ website)

Calculating Tax Burden 5.Sales Tax (on all purchases) (p113/website ) Actual (add all taxes from all receipts) Estimate: Total Amount Spent x Tax Rate (0.95) x Take home pay x Tax Rate 6.Property Tax (Home, Vehicle)  check bill 7.Total Tax 8.Total Income 9.Tax Burden = 7/ 8

Tax Burden Example Bob wants to estimate his tax bill. In 2003 he made $14 000, received a tax refund of $100 and paid the following: Medicare $214; State tax $509; federal tax $1461; property tax $200; social security $742. He also purchased 400 gallons of gas and took home $ What is his tax burden?

Estimating Tax Burden 1.Federal Tax Withheld a. Refund $ Other Federal Taxes: a. SS b. Medicare State Tax Gas Tax 400 gallons x Sales tax (estimated) 0.95 x x

Estimating Tax Burden 6. Property Tax Total Taxes Total Income Tax Burden (7/8)0.267 Or 26.7% Tax Burden = Proportion of income paid in taxes

Now you try it… Jack grossed $ in He paid the following proportion of his gross income: 10% for federal tax, 2% state tax, 0% property tax, 12% other federal tax. Gas tax is 0.50/ gallon in his state. His old car consumed 3000 gallons of gasoline, and he managed to save 4% of his take home pay, $ Sales tax in his state is 6%. What is Jack’s tax burden?

Answer Federal = 2700 State = 540 Other = 3240 Gas = 1500 Sales = 680 Total = 8660  32%

Using your tax bracket (Ch 21) Tax burden also known as average tax rate i.e., on average, the taxes you pay out of each dollar of income. Sometimes want to know how much more taxes you will pay if your income rises. Or, how much you will save if invest in a tax-free investment Here, average tax rate not all that helpful. Why?

Tax Bracket Two reasons: 1.Some taxes stop at certain income –eg. SS max $94,200 (2006) 2.Federal tax is progressive, i.e. pay higher RATE at higher income –So need to know ‘marginal tax rate’ –Marginal Rate = additional tax pay for additional income aka tax bracket

What to count? Only those taxes that one must automatically pay with higher income such as federal taxes ( FICA = Federal Insurance Contributions Tax= SS + Medicare {7.65%} ), state income taxes. Not count: property taxes, sales tax and gasoline tax (unless change spending)

Government and Money Then and Now…

Government spending elsewhere

Deficit as a % of GDP

Why the difference? Governments in different countries vary expenditures (G) because priorities are different  choice made by society. US: spends more on military Others: spend more on social services Even within a given country where the money goes can change over time.

Components of the federal budget

Where do Federal Dollars go? During Vietnam war, almost half of govt spending on military. Today, again increase in defense spending. After end of cold war, big decrease in military spending. Where did the savings end up? SS and Medicare As population ages, this will increase. Much borrowing (deficit spending) during ’80s. Interest payments will continue to make larger portion of govt spending

Where the government dollars go…

Who suffers? As deficit keeps rising, either need to tax more or cut spending. Generally taxes fallen over the last few years. So spending cuts. Which programs get cut? –Natural Resources and Environment (NRE); Education and other training (Edu); Housing, food and unemployment assistance (Hou) Where has spending increased? Health  rising costs

Social programs as % of G

Who pays the taxes? Source Individual Income Tax 44%50%43% Corporate Income Tax 23%10%9% Social Security16%32%41% Excise Taxes13%3%4% Other4% 3%

Sources of Government Revenue

Who pays the taxes? Individual Income Taxes: Unchanged over 4 decades Corporate taxes: Fell by large amount (especially during the ’80s) SS: Increased as more people entered workforce (women, baby boomers) Excise Taxes: Tax on gasoline, alcohol and cigarettes, also fell

Declining Democracy How does society change its priorities? –In a democracy, through elections. –People vote for those who best represent their interests. Voter apathy increased over last 40 years. Who votes most often? How to influence?

Declining Democracy

How do others compare? 1996: Italy – 87%; Japan – 60%; India – 60%; Guatemala – 31%; Cameroon – 41%; Canada – 55% Other ways to influence govt: lobby groups 1998: $1.42 B industry  $2.7 M/ member of Congress

Will the real deficit and debt stand up (Ch 23) Today, national debt approx $8.4 trillion; 1995: $5 T; 1929: $17 Bdebt Does this mean that it increased 49312% since 1929 and 68% since 1995? Two problems: –Not adjusted for purchasing power (that dollars are worth different in various periods). –Does not count for the changing size of the economy

Realistically Speaking… If your debt is $10 000, would not worry much if income was $ But would if income was $ Similarly debt as a percent of GDP (national income) is what matters rather than the actual debt.

The surReal Deficit… Similar true of federal deficit As indicated by graph, high deficit during war years Looking at these figures, both annual deficit and total debt have increased as a percent of GDP.

Dollar values over different time periods (Ch 1) Earned $ in 1985; earned $ in Did you really earn more in 2005 than in 1985? Depends, things tend to cost more over time (purchasing power declines or cost-of-living rises) so later years $ buy less than prior years How do you calculate how much money is worth over time, i.e., how do you compare prices from different time periods? Purchasing power converter (PPC) p 4 Multiply $ from any year by the PPC (based on say 2005 $)  value in terms of 2005$

Example using PPC 1985: $30 000; 2005: $ PPC 1985 = 1.80 $(1985) x PPC(1985) = $ (2005) $30000 x 1.80 = $ in 2005$ So it would take $ in 2005 to buy what $ bought in Actual salary in 2005 is $50 000, in terms of purchasing power, you are worse off in 2005 than in 1985.

PPC for selected years

Another example Govt spent $3M for a program in 1965, in 1995 same program spent $10 M. In which year was the govt program spending more in terms of purchasing power? PPC 1965 = 6.15; PPC 1990 = 1.48 $ (1965) x PPC (1965) = $ (2005) $3 M x 6.15 = $18.5 M $(1990) x PPC (1990) = $ (2005) $10 M x 1.48 = $14.8 M So $14.8M was spent in 1995 (2005 $) vs $18.5 M spent in 1965 (2005 $). So more was spent in 1965 in terms of purchasing power.

Now you try it! In 1983 gasoline cost $1.20 per gallon. Today (2005) it costs $2.70. Are the prices ‘really’ higher today? PPC 1983 = 1.95 (2005 $) $(1983) x PPC (1983) = $ (2005) 1.20 x 1.95 = $2.34 So gas prices are actually cheaper compared to 1983 in terms of 2005 purchasing power.

Caveats about PPC When comparing prices over years, must make sure product is essentially the same in both years. If different features or better technology, then can not use PPC. When comparing salaries need to make sure that no major changes in working conditions. Use take- home salary. PPC only accounts for higher prices, not higher taxes (or lower).

FilmYear Total Gross ($ ) 1. Titanic ,779, Star Wars ,935, Shrek ,471, ET ,949, Star Wars – Episode I ,065, Spider Man ,706, Lord of the Rings: Return of the King ,019, Spider Man ,377, The Passion of the Christ ,270, Jurassic Park ,784,000 All – Time US Box Office Receipts

The Most Popular Movies of All Time, Inflation Adjusted