Chapter 18. Public Finance: Expenditures and Taxes

Chapter 18 Public Finance: Expenditures and TaxesCopyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.Government and the Circular Flow(1) CostsRESOURCEMARKETPRODUCTMARKETBUSINESSESHOUSEHOLDS(4)Goods and services(7)Expenditures(8)Resources(9)Goods and services(4)Goods and services(10)Goods and servicesNet taxes(12)Net taxes(11) (3) Consumption expenditures(3) RevenuesGOVERNMENT(2) Land, labor, capitalEntrepreneurial Ability(2) Resources(5) Expenditures(6) Goods and servicesLO1Government FinanceGovernment purchasesExhaustiveTransfer paymentsNonexhaustiveBorrowing and deficit spendingOpportunity cost is low during recession; high during growthLO2Government Finance19.6%40353025201510 5 0 2012 1960 GovernmentPurchasesGovernmenttransfer payments22%15.3%5% YearPercentage of U.S. outputGovernment purchases, transfers, and total spending as percentages of U.S. output, 1960 and 2012LO2Federal Expenditures LO3Federal Tax RevenuesPersonal income tax Progressive tax Marginal tax rate Payroll taxes Corporate income tax Excise taxesLO3Federal Tax Revenues(1)Total Taxable Income (2)Marginal TaxRate, % (3)Total Taxon HighestIncome inBracket (4) Average Tax Rate on Highest Income in Bracket % (3) / (1)$1-$17,85010$ 178510$17,851-$72,50015998314$72,501-$146,4002528,45819$146,401-$223,0502849,92022$223,051-$398,35033107,76927$398,351-$450,00035125,84728$450,001 and above39.6Federal Personal Tax Rates, 2013** For a married couple filing a joint returnLO3State FinancesLO4Local FinancesLO4Local, State, and Federal EmploymentLO5Apportioning the Tax BurdenSize, distribution, and impact of the costs that taxes impose on societyBenefits-received principleAbility-to-pay principleLO6Apportioning the Tax BurdenProgressive tax – average tax rates increase as income increasesRegressive tax – average tax rate declines as income increasesProportional tax – average rate stays the same as income increasesLO6Tax Incidence and Efficiency LossTax incidenceWho really pays the tax?Excise taxTax burden depends on elasticityInelastic vs. elasticEfficiency loss/deadweight lossTransfer of surplus to governmentLO7Probable Incidence of U.S. TaxesType of taxProbable Incidence Personal income taxThe household or individual on which it is leviedPayroll taxesWorkers pay the full tax levied on their earnings and partof the tax levied on their employersCorporate income taxShort Run: Full tax falls on owners of the businessesLong Run: Some of the tax may be borne by workers through lower wagesSales taxConsumers who buy the taxed productsSpecific excise taxesConsumers, producers or both, depending on elasticities of supply and demandProperty TaxesOwners in the case of land and owner-occupied residences, tenants in the case of rented property, consumers in the case of business propertyLO8The U.S. Tax StructureThe Federal tax system is progressive.The state and local tax structures are largely regressiveThe overall U.S. tax system is progressiveLO8