1. Jump to first page Chapter 24 Taxes and Spending Norton Media Library Nariman Behravesh Edwin Mansfield

2. Jump to first page The following slide shows total government spending (federal, state, and local) as a share of the economy. Total government spending accounted for only 9.4% of GDP in 1930, and only one third of this spending was at the federal level. Government spending, particularly at the federal level, soared from 1930 to 1970. Total government spending rose from 9.4% of GDP in 1930 to 30.2% of GDP in 1970. Since 1970, government spending has been relatively constant at about one-third of the U.S. economy. Government Spending as a Share of the Economy, 1930-2006

3. Jump to first page Federal The Size of Government State & local Government Expenditures as a Share (%) of GDP 1930 1940 1950 1970 1980 1990 2000 3.06.59.48.415.77.3 1960 24.1 16.57.6 30.2 19.410.9 32.8 21.011.8 34.2 21.612.6 31.919.012.9 21.1 14.76.3 2006 33.820.313.5

4. Jump to first page How the Federal Government Spends (2006) Sources: Economic Report of the President, 2007, and Statistical Abstract of the United States, 2007. Defense 19.7% Net Interest 8.5% Transportation 2.6% Other 13.3% Social Security 20.7% Income Security 13.3% Medicare and health 21.9% Back to slide 29

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9. Education 28.8% How State and Local Governments Spend Sources: Economic Report of the President, 2007, and Statistical Abstract of the United States, 2007. Insurance trusts 8.9% Public welfare & Health 19.5% Police & Fire Protection 4.9% Transportation 5.5% Administration & other 21.9% Interest on debt 3.6% Utilities & liquor stores 6.9%

10. Jump to first page Financing the Public Sector: Taxation In order to make available public and correct inequity, government must free up resources from the production of private goods. Taxes shift resources from private to public use Taxing households and businesses reduces their incomes and spending, the private demand for products decreases, as does the private demand for resources. This is known as Deadweight Loss

11. Jump to first page Federal Government Personal Income Tax Corporate Income Tax Collection of Taxes THE U.S. TAX STRUCTURE

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13. Jump to first page State Governments Personal Income Tax Sales Tax County and City Governments Property Taxes Collection of Taxes THE U.S. TAX STRUCTURE

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16. TAXES Tax Incidence The Tax Incidence or Tax Burden is the determination of who actually pays the tax. Government must determine how to appropriate taxes from the citizens.

17. Jump to first page Personal Income Tax Individual Corporate Income Tax Stockholders – Consumers Sales Taxes Consumers Property Taxes Owner or Renter INCIDENCE OF U.S. TAXES THE U.S. TAX STRUCTURE

18. Jump to first page TAXES Tax Incidence Benefits-Received Principle Ability-to-Pay Principle

19. Jump to first page Benefits Received versus Ability to Pay The benefits-received principle is the idea that people who receive the benefit from government- provided goods and services should pay the taxes required to finance them. The ability-to-pay principle is the idea that people who have greater income should pay a greater proportion of it as taxes than those who have less income.

20. Jump to first page THE TAX BURDEN Progressive Tax Regressive Tax Proportional Tax Flat Tax

21. Jump to first page Progressive, Proportional, and Regressive Taxes A progressive tax is one whose average tax rate increases as the taxpayer’s income increases. A regressive tax is a tax whose average tax rate decreases as the taxpayer’s income increases. A proportional tax is a tax whose average tax rate remains constant as the taxpayer’s income increases. A flat tax is a tax which takes the same monetary amount regardless of income.

22. Jump to first page Progressive, Proportional, and Regressive Taxes In general, progressive taxes fall relatively more heavily on high-income households while regressive taxes are those that fall relatively more heavily on the poor.

23. Jump to first page Progressive, Proportional, and Regressive Taxes Taxes are classified as progressive, proportional, or regressive, depending on the relationship between average tax rate (total tax paid as a percentage of income) and marginal tax rate (the rate paid on each additional dollar of income).

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26. Tax year Top marginal tax rate (%) Taxable income over-- PRESIDENTGROWTH RATE 19137500,000 WILSON 1918771,000,000 192258200,000 HARDING 192343200,000 COOLIDGE 192525100,000 1932631,000,000 ROOSEVELT-1.3% 1936795,000,000 1940815,000,000 8.1% 194288200,000 18.5% 195194400,000 EISENHOWER8.7% 196570200,000 KENNEDY1.7% 198138.5215,400 REAGAN-0.2% 19862829,750 4.3% 199339.689,150 CLINTON4.0% 199439.6250,000 200335311,950 BUSH3.9%

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28. TAX APPLICATIONS: Personal Income Tax Progressive Sales Tax Regressive Corporate Income Tax Proportional Payroll Taxes Regressive Property Taxes Regressive Identify whether progressive, regressive, or proportional

29. Jump to first page Tax Progressivity in the U.S. The majority view of economists is as follows: The Federal tax system is progressive. The state and local tax structures are largely regressive. A general sales tax and property taxes are regressive with respect to income. The overall U.S. tax system is slightly progressive.

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31. THE TAX ISSUE The Liberal Position

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38. THE TAX ISSUE The Conservative Position

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44. End Chapter 24