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This 6 page Class Notes was uploaded by Shelby Sorrell on Friday October 9, 2015. The Class Notes belongs to ECO2013 at a university taught by Deborah Paige in Fall 2015. Since its upload, it has received 28 views.
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Date Created: 10/09/15
Ch 7 The Government Sector The Growing Economic Role of Government 0 Most of the growth was due to the Depression and World War II o The government exerts four basic economic in uences t spends trillions of dollars levies trillions of dollars in taxes redistributes hundreds of billions of dollars and regulates our economy Government Spending Federal Government Spending Federal transfer payments ie Social Security Medicare and Medicaid have gone through the roof Spending on public assistance unemployment insurance bene ts and food stamps has shot up since the early 19705 0 One of the fastest growing expenditures was interest on the national debt State and Local Government Spending Over half of all state and local government expenditures goes towards education health and welfare 0 Another expenditure that has rapidly increased is police protection Government Purchases vs Transfer Payments 0 Government spends over 55 trillion a year and nearly half of that goes to individuals as transfer payments and the rest goes to government purchases 0 Transfer payments are payments by one branch of government to another or to an individual 0 Government purchases include all goods and services bought by federal state and local government GDPCGXn Transfer payments do not count in the G because they do not represent that kind of spending it goes into the C category because once the money is handed over to the consumer to spend Graphing the C G line Taxes The Average Tax Rate and the Marginal Tax Rate 0 The average tax rate the overall rate you pay on your entire income while marginal rate is the rate you pay on your last few hundreds or thousands of dollars earned The average tax rate ATR Taxes paid Taxable income Suppose a person paid 3000 on a taxable income of 20000 How much is the average tax rate ATR 3000 20000 015 or 15 o The marginal tax rate taxable income Suppose you had to pay an additional 420 on an additional taxable income of 1000 How much is your marginal tax rate MTR 420 1000 42100 042 or 42 7ype of Taxes 0 Direct tax is a tax on a particular person o If you earn a certain amount of money you must pay these taxes 0 Indirect tax is a tax on a thing rather than on a particular person 0 A direct tax is on which is demanded from the very persons who it is intended or desired should pay it lndirect taxes are those which are demanded from one person in the expectation and intention that he shall indemnify himself at the expense of another 0 Progressive tax places greater burden on those with best ability to pay 0 In terms of the average tax rate then people in higher income brackets pay a substantially higher than average tax rate than those in lower brackets Proportional tax places an equal burden on the rich the middle class and the poor 0 A at income rate that would place a much greater burden on poorer people and the working class than the rich Regressive tax falls more heavily on the poor than on the rich The incidence of the Social Security Tax at Various lncome Levels in 2013 Level of Earned Income Taxes Paid Average Tax Rate 10000 620 62 100000 62000 62 1000000 704940 705 The primary income sources of the rich are dividends interest and pro t none of the nonrich is subject to the Social Security tax Sources of Federal Reserve 0 The Personal Income tax is a percentage of one s income paid by individuals 0 The largest source of federal revenue is the personal income tax 0 You don39t pay all of your income you may subtract various deductions and exemptions and consequently very few people with low incomes have to pay any federal income tax 0 The payroll tax is a tax paid equally by all employee and employer based on employees wages So how much payroll tax would the government collect all together on wages of 20000 3060 20000 X 0153 We added 00765 that the employee paid to the 00765 that the employer paid the employee would pay 1530 20000 X 00765 and this would be matched to the employer The corporate income tax is a tax on a corporations pro ts Corporate taxes are now just 13 of all federal revenue and the maximum rate is 35 Excise tax is a sales tax levied on a particular good or service ie tires cigarettes liquor gasoline and phone calls Excise taxes which account for 6 of federal revenue have another purpose besides serving as a source of revenue they tend to reduce consumption of certain products of which the federal government takes a dim view Estate tax is a percentage of the value of an estate left to ones heirs Recent Tax Regulation KempRoth Tax Cut of 19881 This law lowered the average persons tax bill by 23 over a year period was strongly supported by President Ronald Reagan Tax Reform Act of 1986 This cut personal income taxes still further The maximum rate was lowered to 28 and millions of poorer families was taken off income tax rolls entirely The Tax Cut of 2001 This law passed at the behest of President George W Bush immediately lowered the minimum marginal tax rate from 15 to 10 and gradually lowered the other marginal tax rates over the next 10 years The Tax Cut of 2003 This law passed by Congress with strong support from Bush has 3 main provisions The top federal personal income tax rate paid by stockholders on corporate dividends and on capital gains were lowered to 15 American Taxpayer Relief Act of 2012 This law signed by Obama extended to the Bush income tax cuts for all single taxpayers earning less than 400000 and all married taxpayers lling jointly earnings less than 450000 Sources of State and Local Revenue The Personal Income Tax slightly over onethird of all state revenue comes from personal income tax Generally these progressive taxes falling on mostly heavily on the rich The Sales Tax Module 2 Key Points 0 The public sector is made of the all the levels of government and is a major economic player today 0 Government spending has two components purchases and transfers 0 Gov39t purchases are when the gov39t buys a good or service money flows to the production sector 0 Gov39t transfers are when the gov39t doesn39t buy a good or service money mainly flows to households Disposable income is income after taxes and transfers this has the strongest link to consumption Marginal and Average tax rates are different US Federal Income Tax brackets are marginal rates 0 Progressive taxes tax higher income groups at a higher rate flat taxes at the same rate and regressive taxes at a lower rate compared to lower income groups 0 We do not agree as a society how high taxes should be or how they should be distributed 0 Net Exports summarizes the effect of the foreign sector on total spending and is X M 0 Net Exports is positive when a country exports more than imports this is called a trade surplus Net Exports is negative when a country imports more than exports this is called a trade deficit The US has run large trade deficits for some years now 0 Net Exports is a much larger of GDP than 40 or more years ago as well as turning negative o All the components of spending together CIGXn equal Aggregate Expenditures when compared to income and Aggregate Demand when compared to prices Module 2 Vocabulary and Formulas PUBLIC SECTOR GOVERNMENT PURCHASES GOVERNMENT TRANSFERS DISPOSABLE INCOME Gross Income plus household transfers minus personal income taxes AVERAGE vs MARGINAL TAX RATES Ave Tax Rate Tax Income Marginal Tax Rate ATax Alncome PROGRESSIVE TAXES REGRESSIVE TAXES PROPORTIONAL OR FLAT ABILITYTOPAY PRINCIPLE SYMMETRY PRINCIPLE BENEFITS RECEIVE OR PAYFORUSE PRINCIPLE AGGREGATE EXPENDITURES also known as aggregate demand in a closed economy CG FOREIGN SECTOR EXPORTS IMPORTS NET EXPORTS X M TRADE DEFICIT vs TRADE SURPLUS AGGREGATE EXPENDITURES also known as aggregate demand in an open economy CGXn OUTSOURCE vs OFFSHORE
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