Outline: How large is the public sector? Federal expenditures and revenues by category. State & local government expenditures and revenues by category. Principles of taxation. Personal tax rates under the 1993 Tax Reform Act. Why a sales tax is regressive

Federal, State & Local Government Spending as a Percent of GDP

Source: Economic Report of the President

“Other” includes spending for libraries, hospitals, health, employment security, water transport and terminals, police and fire, solid waste management, parking, corrections, parks and recreation, housing, and other items. Source: Economic Report of the President

Major Categories of Federal Spending,

Horizontal equity: Tax code should be written so that those in the same economic circumstances pay the same amount in taxes. Vertical equity: Tax code should be written so that those in different economic circumstances should pay an unequal amount in taxes. Benefits received principle: Those who derive more benefits from government programs should pay more taxes. If Madonna or Bill Gates paid the same amount in taxes as an accountant or government employee, that would be vertically inequitable Principles of Taxation

Taxable income: Gross income - income exempt from taxes. Example: For single filers who use the 1040EZ: Average tax rate (ATR): Tax payments as a percent of taxable income. Marginal tax rate (MTR): The tax rate applied to the last dollar of taxable income.

Progressive tax: The proportion of taxable income taken in taxes increases as taxable income increases. Regressive tax: The proportion of taxable income taken in taxes decreases as taxable income increases. Proportional tax: The proportion of taxable income taken in taxes remains constant as taxable income increases.

By making the tax structure “progressive,” governments can make the after-tax distribution of income more equitable (or even). Affluent Needy

Federal personal Income Tax rates Under the 1993 Tax Reform Act (Married couple filing jointly)

Average and Marginal Tax Rates under the Tax Reform Act of 1993 (for a couple with 2 children)

Family (1) Income (2) Spending for items subject to excise tax (3) = (2)/(1) (4) Excise Tax Paid (5)= (4)/(1) ATR Greens$27,000$16, $1,1884.4% Jones64,00025, , Lemons270,00040, , Assume a 7.13 percent excise tax on groceries, gasoline, cigarettes, and liquor Moral of the story: Low income families tend to spend a greater proportion of their income on items subject to excise taxes. Hence excise taxes tend to be regressive.