continuing taxes deficit financing today: more on the us revenue system, including the corporate...

Continuing taxesDeficit financing

Today: More on the US revenue system, including the corporate tax; Deficit financing

Today

4 “mini-lectures” Other issues with personal income taxes

The marriage penalty International income

Changes in personal behavior due to taxation Number of hours worked Saving

Corporate taxation (briefly) Deficits and debts

Marriage penalty/Int’l income Previously…

Rate structure showed that there are different tax rates for married people than for single people

In this “mini-lecture…” We examine the marriage issue further Income earned by Americans in other countries is

also looked at

The marriage penalty

There are many reasons that people in the United States decide not to marry Costly to divorce if the marriage does not work out

well Many low-income people may lose benefits

People receiving public assistance may lose qualification for these programs if they marry someone who is working

Tax burden may increase as a married couple than as if they lived together unmarried

Example of the marriage penalty: Taxes Suppose a simple case

Only taxable income determines taxes that have to be paid

See what happens to tax burden when some couples get married

Recall marginal tax rates, 2007

Official Statutory Tax Rate Schedule (2007)

Single Returns Joint ReturnsTaxable Income Marginal

Tax RateTaxable Income Marginal

Tax Rate

$0-$7,825 10% $0-$15,650 10%

$7,825-$31,850 15 $15,650-$63,700 15

$31,850-$77,100 25 $63,700-$128,500 25

$77,100-$160,850 28 $128,500-$195,850 28

$160,850-$349,700 33 $195,850-$349,700 33

$349,700 and over 35 $349,700 and over 35

Source: http://www.irs.gov/formspubs/article/0,,id=164272,00.html

Example 1, single

Cameron has $80,000 in taxable income Tax burden: $16,510.75 total

10% of $7,825 15% of $24,025 25% of $45,250 28% of $2,900

Erin has $80,000 in taxable income Tax burden: $16,510.75 total

10% of $7,825 15% of $24,025 25% of $45,250 28% of $2,900


Single Returns Joint Returns

Taxable Income

Marginal Tax Rate

Taxable Income

Marginal Tax Rate

$0-$7,825 10% $0-$15,650 10%

$7,825-$31,850

15 $15,650-$63,700

15

$31,850-$77,100

25 $63,700-$128,500

25

$77,100-$160,850

28 $128,500-$195,850

28

$160,850-$349,700

33 $195,850-$349,700

33

$349,700 and over

35 $349,700 and over

35

As single people, Cameron and Erin pay a total of $33,021.50 in taxes

Example 1, married

Cameron and Erin get married

Total taxable income is $160,000 Tax burden: $33,792.50

total 10% of $15,650 15% of $48,050 25% of $64,800 28% of $31,500 $771 more than the total

paid if they are single



Taxable Income

Marginal Tax Rate

Taxable Income

Marginal Tax Rate

$0-$7,825 10% $0-$15,650 10%

$7,825-$31,850

15 $15,650-$63,700

15

$31,850-$77,100

25 $63,700-$128,500

25

$77,100-$160,850

28 $128,500-$195,850

28

$160,850-$349,700

33 $195,850-$349,700

33

$349,700 and over

35 $349,700 and over

35

Example 2, single

Pat has $30,000 in taxable income Tax burden: $4,108.75 total

10% of $7,825 15% of $22,175

Shannon has $200,000 in taxable income Tax burden: $52,068.25

total 10% of $7,825 15% of $24,025 25% of $45,250 28% of $83,750 33% of $39,150



Taxable Income

Marginal Tax Rate

Taxable Income

Marginal Tax Rate

$0-$7,825 10% $0-$15,650 10%

$7,825-$31,850

15 $15,650-$63,700

15

$31,850-$77,100

25 $63,700-$128,500

25

$77,100-$160,850

28 $128,500-$195,850

28

$160,850-$349,700

33 $195,850-$349,700

33

$349,700 and over

35 $349,700 and over

35

As single people, Pat and Shannon pay a total of $56,177 in taxes

Example 2, married

Pat and Shannon get married

Total taxable income is $230,000 Tax burden: $55,100 total

10% of $15,650 15% of $48,050 25% of $64,800 28% of $67,350 33% of $34,150 $1,077 less than the total

paid if they are single



Taxable Income

Marginal Tax Rate

Taxable Income

Marginal Tax Rate

$0-$7,825 10% $0-$15,650 10%

$7,825-$31,850

15 $15,650-$63,700

15

$31,850-$77,100

25 $63,700-$128,500

25

$77,100-$160,850

28 $128,500-$195,850

28

$160,850-$349,700

33 $195,850-$349,700

33

$349,700 and over

35 $349,700 and over

35

Why the difference?

Look at marginal tax rates and the cut-offs

Example 1: Cameron/Erin, $80K each




Tax Rate

$0-$7,825 10% $0-$15,650 10%

$7,825-$31,850 15 $15,650-$63,700 15

$31,850-$77,100 25 $63,700-$128,500 25

$77,100-$160,850 28 $128,500-$195,850 28

$160,850-$349,700 33 $195,850-$349,700 33

$349,700 and over 35 $349,700 and over 35

More income is taxed in the 28% bracket after they get married

Example 2: Pat $30K/Shannon $200K




Tax Rate

$0-$7,825 10% $0-$15,650 10%

$7,825-$31,850 15 $15,650-$63,700 15

$31,850-$77,100 25 $63,700-$128,500 25

$77,100-$160,850 28 $128,500-$195,850 28

$160,850-$349,700 33 $195,850-$349,700 33

$349,700 and over 35 $349,700 and over 35

As a married couple, less income is taxed in the 28% and 33% brackets; more in the 25% bracket

Two reasons that this happens When there is one person

that earns almost all of the income, more money is usually subject to the lower marginal rates Notice that the two lowest

brackets vary by a factor of two

At the higher brackets, the income ranges converge Notice that the 35% bracket

is the same whether or not you are married



Taxable Income

Marginal Tax Rate

Taxable Income

Marginal Tax Rate

$0-$7,825 10% $0-$15,650 10%

$7,825-$31,850

15 $15,650-$63,700

15

$31,850-$77,100

25 $63,700-$128,500

25

$77,100-$160,850

28 $128,500-$195,850

28

$160,850-$349,700

33 $195,850-$349,700

33

$349,700 and over

35 $349,700 and over

35

For more on the marriage penalty… Read p. 406-409

Three principles, including marriage neutrality Changes to the marriage penalty over the years Is the marriage tax equitable? Is the marriage tax

efficient? Argument in favor of family as taxable unit:

“Bedchamber transfers of property” from high-earning spouse to low-earning spouse could be a risky strategy

Argument in favor of individual as taxable unit: Elasticity of labor supply differs between men and women

What is a family?

International income

The United States uses a global taxation system Income is taxed no matter where it is earned Credit is given for taxes paid to other countries, up

to the total tax liability Most other countries use a territorial system

Someone earning income outside of her home country only pays taxes to the country where the money was earned

Summary: Marriage penalty/int’l income When two single people marry, the combined

tax burden typically changes Example 1: Equal incomes by both spouses

Tax burden goes up Example 2: Big differences in income between

the two spouses Tax burden goes down

International income is taxed differently depending on the country you are a citizen in

Changes in behavior due to taxation Although taxation typically is on income, it is

indirectly based on other types of decisions Labor decisions Saving decisions

Labor decisions

Taxes reduce the marginal wage that a person receives

How do taxes alter people’s behavior? See Figure 18.1, p. 416 See Figure 18.2, p. 417 See Figure 18.3. p. 418 See Figure 18.4, p. 418

Empirical literature

Who responds to changes in tax rates? Women

Example: Tax Reform Act of 1986 (TRA86) Marginal tax rates for high incomes were decreased

significantly Women with husbands earning a lot increased their work

by a lot (on average) Women with husbands earning moderate amounts

increased their work by a smaller amount (on average) For more, see Eissa (2001)

The Laffer curve

Is there a limit to the amount of tax revenue that the government can get through a labor tax? Yes

As tax rates increase, people have less of an incentive to work Look at a simple example

See Figure 18.5, p. 422

The Laffer curve

Eventually, increasing the tax rate will lower tax revenue collected This leads to the question: What is the tax rate

that maximizes labor taxes that are collected? This idea was popularized by Arthur Laffer

See Figure 18.6, p. 423

Changes in saving

How does saving change when interest is taxed and interest payments are deductible See Figure 18.7, p. 426 See Figure 18.8, p. 427 See Figure 18.9, p. 427

Empirical literature

There appears to be very little change in saving due to the tax system Not much research has been done to conclusively

answer this question, however

Summary: Changes in behavior Theory is unclear as to how people change

their labor and saving decisions when taxes change Empirical evidence shows that women with high-

earning husbands increase their labor supply significantly when marginal tax rates decrease

Saving does not seem to be affected by tax laws The Laffer curve predicts that there is a tax

rate that maximizes total tax revenue collected

Corporate taxation

Corporations are businesses that usually determine ownership through stocks Limited stockholder liability Legal entities

Corporations provide about 10% of federal taxes collected

Corporate taxation

Reasons supporting corporate taxation Corporations are distinct financial entities Limited liability gives corporations a big advantage

over non-corporate businesses Without the corporate tax, no tax money is

collected if profits are retained by the corporation Reason against supporting corporate taxation

Double taxation Taxation occurs at the corporate and individual levels

Corporate taxation

Structure of the corporate tax Graduated Most corporate taxes paid are at the highest

bracket: 35% What can be deducted?

Employee compensation Interest Direct costs of doing business

Note that depreciation of capital occurs over time

Basic structure

Revenue - Expenses incurred earning revenues Taxable Income* Tax rate (15% - 35%) Tax- Credits Total Tax

More on corporate taxation

If you are interested in corporate taxation, you can read other topics in Chapter 19 Corporate behavior Corporate finance State corporation taxes Taxing multinational corporations Reform

You are only responsible for knowing pages 438-443

Summary: Corporate taxation Corporations are independent legal entities Stockholders of corporations have limited

legal liability Corporate earnings are taxed

Different system than for individual taxes

Debts and deficits in the US Debt by the US government has been a

significant percentage of GDP for decades “Official” government debt at the end of 2005

$4.6 trillion, or $4,600,000,000,000 A better way of seeing this is that this is about

37% of yearly national GDP See Figure 20.2, p. 464

Some terminology

Two “flow” terms Deficit

“The excess of expenditures over revenues during a period of time” (R/G p. 462)

Surplus “The excess of revenues over spending during a period

of time” (R/G p. 462)

One “stock” term Debt

“The total amount owed at a given point in time; the sum of all past deficits” (R/G p. 462)

Some terminology

On-budget versus off-budget deficit Some revenues and expenditures are considered

“on-budget” Some programs, like Social Security, are

considered “off-budget”

The US federal deficit

Over the last 40, the US federal government has incurred a deficit almost every year On-budget deficit in 2005: $493.6 billion Off-budget surplus in 2005: $175.3 billion Total deficit in 2005: $318.3 billion

See Figure 20.1, p. 463, for deficits and surpluses since 1965

Two other factors

Not all “promises” made by the US government are calculated in the official debt numbers Social Security (SS) Medicare However, SS and Medicare policies can be

revised by the federal government as it pleases The US government has many assets,

including land, gold, and buildings

For more factors, see p. 464-466

What are the effects of public debt? Lerner’s view

When debt is held by its own citizens, there is no burden for future generations Note that Lerner views a generation as anyone alive at

the same time When future debt is paid off, bondholders are paid

off by other people in the same generation Reality

In the US, about 53% of privately held federal debt is held by foreigners

What are the effects of public debt? Overlapping generations model

Think of each generation as being 20 years long There is no private saving The old do not lend to the government, since they

will die before the debt is repaid

Overlapping Generations Model The Period 2007-2027

Young Middle-Aged Old

(1) Income $12,000 $12,000 12,000

(2) Government Borrowing -6,000 -6,000

(3) Government- provided consumption

4,000 4,000 4,000

The Year 2027

Young Middle-Aged Old

(4) Government raises taxes to pay back debt

-4,000 -4,000 -4,000

(5) Government pays back debt +6,000 +6,000

What are the effects of public debt? Other factors are important in determining the

effects of public debt Crowding out hypothesis

Public debt decreases private investment Market interest rate increases

Bequest effect comes into play if the oldest generation care about future generations

Summary: Debts and deficits in the US US debt has been about 30-50% of GDP

since the early 1980s On-budget deficits and debts calculated by

the US government do not account for all assets and liabilities

Many factors affect the outcomes of public debt

Next lecture

Wrap up the material of this class Tax reform

Read p. 478-490 State and local governments

Read Chapter 22

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