public policy and taxation fiscal policy using government spending and taxation to correct the...
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Public Policy and Taxation
Fiscal Policy
• Using Government Spending and taxation to correct the economy.
GDP Gap
• Okun’s Law—For every 1% of unemployment, the GDP of a country declines by 2%.– We are currently at 10% Unemployment– Therefore we a a 20% GDP Gap– With a current GDP of $14,463.4, the GDP
could potentially be at 17,356.08 if we were fully employed.
– We have a gap of 2892.68
How do we get GDP to go up and get people back to work?
• What are the components of GDP?– C+I+G+(X-M)
• If we increase any one of those components GDP will increase and people will go back to work.
Philosophies on Fiscal Policy
• Keynesian Economics– Influence the demand for goods and services by increasing government spending.
• Supply-Side Economics– Influence the supply of goods through tax breaks to businesses and individuals as an incentive to work more, and invest more.
• Classical--- Do nothing and the economy will correct itself.
Keynesian Philosophy
• John Maynard Keynes– Used by FDR– New Deal
Keynes Philosophy
• Keynes philosophy is based on his theories on consumption and the multiplying effect.
• Keynes believes the single most important factor in your spending( Consumption) is _____________?_________________.
Keynes Believes the Government needs to get actively involved to
correct the economy.• The New Deal
– TVA– CCC– WPA
• Government gave people jobs to increase their income and subsequently their Consumption and finally GDP and Employment.
How it Works
• Government initiates new spending (Deficit) that counts toward GDP.
• MPC=.5– New Spending = $1.00– 2nd round =$0.50– 3rd round =$0.25– 4th round =$.125– 5th round =$.0625– 6th round =$.03125– 7th round =$.02– TOTAL $2.00
Benefits
• Gives immediate helping hand to those on the bottom socioeconomic rung.
• Effects felt in a short period
Negatives
• Inflation
• Deficit Spending (Increases the National Debt)
Supply-Side
• Reaganomics/Voodoo Economics/Trickle Down– Use Tax breaks to encourage business
growth and worker productivity.
Arthur Laffer
• Notable Supply-Side Economist who became influential during the Reagan Administration
How it works
• The Government gives tax breaks to companies
Benefits
• No inflation
How it Works
• Tax Break to Producer – Tax Break = $1.00(this round of spending
doesn’t count because nothing new is produced.
– 2nd round =$0.50– 3rd round =$0.25– 4th round =$.125– 5th round =$.0625– 6th round =$.03125– 7th round =$.02– TOTAL $1.00
Negatives
• Takes longer for $ to trickle to the bottom rung
Taxes
• Income Tax- Tax on a persons yearly income
2004 Tax Federal Income Tax Bracket
Single
Taxable income is
over
But not over
The tax is PlusOf the
amount over
$0 $7,150 $0.00 10% $0
7,150 29,050 715.00 15% 7,150
29,050 70,350 4,000.00 25% 29,050
70,350 146,750 14,350.00 28% 70,350
146,750 319,100 35,717.00 33% 146,750
319,100 92,592.50 35% 319,100
Taxes Cont’d
• Progressive Tax-- A tax that taxes higher incomes at a higher rate
• Regressive Tax– Taxes lower incomes at a higher rate than higher incomes.
• Proportional—Everyone pays the same proportion
Progressive TaxIf taxable income
is over--But not
over--The tax is:
$0 $7,550 10% of the amount over $0
$7,550 $30,650 $755 plus 15% of the amount over 7,550
$30,650 $74,200$4,220.00 plus 25% of the amount over
30,650
$74,200 $154,800$15,107.50 plus 28% of the amount over
74,200
$154,800 $336,550$37,675.50 plus 33% of the amount over
154,800
$336,550 no limit$97,653.00 plus 35% of the amount over
336,550
Regressive Tax
• EMS Tax---52.00----
• DISCLOSURE STATEMENT: You are entitled to receive a written explanation of your rights with regard to the audit, appeal, enforcement, refund and collection of local taxes by calling Capital Tax Collection Bureau’s Harrisburg Division at (717) 234-3217 during the hours of 8 a.m. – 4 p.m., Monday through Thursday and 8:30 a.m. – 4 p.m., Friday.
• Capital Gains– Profits made from the selling of real estate or other investments.
• Deductions– expenses that may be subtracted from your taxable income.
• Exemptions—A fixed amount that individuals are allowed to subtract for themselves and their dependents.
• Credit--- Subtraction from your tax liability
Other Taxes
• Excise Tax----A tax levied on the manufacture, sale, or consumption of certain (particular) non-essential goods or services
• Social Insurance—Social Security.
• Estate Tax/Death Tax-- Up to 55% • Gift Tax– up to $11,000 per year tax free. Then
up to 55%.• Customs Duties– Tax on imported goods.
c Employer's Name Your Class Name Goes Here
1 Wages, tips, other compensation 13,164.00
2 Federal Income Tax Withheld 1,316.40
3 Social Security Wages 13,164.00
4 Social Security Tax Withheld 816.17
b Student's social security number 123-45-6789
18 State Income Tax Withheld 263.28
19 State Disability Insurance 131.64
d Student's Name Sample Student
This is a simplified version of FORM W2
Where “IT” Comes From
$100
$10,000
$1 Million
$100 Million
$1 Billion
$1 Trillion
Right here is the man.
Historic Debt
Monetary Policy
• Controls the flow of money in the economy to stabilize the value of the dollar.
Monetary Policy Tools
• Interest rates
• Reserve Ratio
• Buying and Selling Securities
Interest Rate
• Interest Rate– A fee paid for borrowing money or received for lending money.
• Higher Interest rates _______ people to spend money and _______ people to save money.
• Lower Interest Rates ________people to spend money ___________people to save money.
What would the Fed Do?
• If they wanted to expand the money supply.
• If they wanted to contract the money supply.
Required Reserve Ratio
• Amount of $ a bank must hold in reserve. (based on a % of an account)
How Do Banks Make Money?
Example
• Tim Burr deposits $200,000 in Anybank USA.
• The Required Reserve Ratio is 10%.
• How Much of Tim’s money must the bank hold in reserve?
• What do they do with the rest?
Mr. Yocum borrows $180,000 to buy my new car.
I go to Hoffman Ford with my borrowed $180,000 and buy my new car.
What happens next?
• Hoffman Ford deposits his money in Anybank USA.$180,000
• How much of this money can they lend out?
Do you mean there is more?
Bob borrows $162,000 to buy his new estate.
The bank has created more money in Supply.
• Don’t believe me?
• Take a look!!!
• From the 200,000 deposit:– 180,000 Mr. Yocum spent on new car– 162,000 spent on their lovely estate.– Total $342,000– An We could keep going
Buying and selling securities
• What is a savings bond?
Series EE
How does the Series EE Bond Work?
• You Pay ½ of face value and wait for the maturation period.
What are Treasury bills?
• Treasury bills (or T-bills) are short-term securities that mature in one year or less from their issue date. You buy T-bills for a price less than their par (face) value, and when they mature we pay you their par value. Your interest is the difference between the purchase price of the security and what we pay you at maturity (or what you get if you sell the bill before it matures). For example, if you bought a $10,000 26-week Treasury bill for $9,750 and held it until maturity, your interest would be $250.
What are Treasury notes and bonds*?
• Treasury notes and bonds* are securities that pay a fixed rate of interest every six months until your security matures, which is when we pay you their par value. The only difference between them is their length until maturity. Treasury notes mature in more than a year, but not more than 10 years from their issue date. Bonds*, on the other hand, mature in more than 10 years from their issue date. You usually can buy notes and bonds* for a price close to their par value.
What is barter?The direct exchange of one good for another good, rather than for money
What is the problem with barter?It requires a
coincidence of wants
What is money?Anything that serves as a medium of exchange, unit of account, and store of value
What is the advantage of money?
The use of money simplifies and therefore increases market transactions
What are the functions of money?• Medium of exchange• Unit of account• Store of value
What is amedium of exchange?The primary function of money to be widely accepted in exchange for goods and services
What is aunit of account?
The function of money to provide a common measurement of the relative value of goods and services
What does it mean that money is liquid?
It is available to spend in exchange for goods and services without any additional expense
Are credit cards money?
No, credit cards fail to meet the store-of-value criterion and are therefore not money
What is the best level of scarcity for money ?
The supply of money must be great enough to meet ordinary transactions needs, but not be so plentiful that it becomes worthless
What are other properties of money?Money must be …
• portable• divisible• uniform• acceptable
What iscommodity money?
Anything that serves as money while having market value in other uses
Is our money backed up by gold or silver?
No, our paper money was exchangeable for gold until 1934, and in 1963 Congress removed the right to exchange $1 bills for silver
What is fiat money?Money accepted by law and not because of redeemability or intrinsic value
What makes our dollar bills fiat money?
All our bills claim that “This note is legal tender for all debts public and private”
What doeslegal tender mean?
Legally dollar bills cannot be refused as payment for a debt
What is currency?Money, including coins and paper money
Business Regulation
• Trusts—business combination formed to limit competition and fix prices.– Standard oil
• Regulation of public utilities• Food Production regulation• Regulations on advertising
– Cigarette advertising on radio and TV was banned
• Consumer Product safety commission
Labor laws
• CHILD LABOR
• What is the youngest age at which a person can be employed?
• Must young workers be paid the minimum wage?
• What hours can youth work?
• What kinds of work can youth perform?
• Must a youth have a work permit to work?
Workplace safety
• OSHA
• Worker’s Compensation
Unemployment compensation
• $comes from a tax on employers which buys a form of insurance.
Agriculture Policy
• Land-Grant Colleges—Grants funds from public lands to schools for the teaching of agriculture, veterinary medicine etc…
Environmental Policy
• National Parks
Mesa Verde
Mammoth Cave
Grand Teton
Badlands
Crater Lake
Arches
Energy Policies
• OPEC– Organization of Petroleum-Exporting Countries
Nuclear Power
• TMI
• March 28, 1979 a partial meltdown occurred where some radioactive material was released into the atmosphere.
• Within 30 seconds, a 2billion dollar investment was rendered worthless.
Fuel alternatives
• Hydro electric
• Geothermal
• Solar Power
Hydroelectric Dam
Solar Power
Windmill Fields in Centralia, PA
Social Programs
• Social Security
Overview
• How Social Security Works– Financing Social Security– How Benefits Are Determined
• Financial Troubles• How to Fix It
– Raise Taxes– Cut Benefits– Increase Investment Returns
• A two-tier System
How Many People Get Social Security?
• 47.7 million people receive Social Security each month
• 1 in 6 Americans get Social Security benefits
• Nearly 1 in 4 households get income from Social Security
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
Who Gets Social Security?
• 30.0 million retired workers
• 4.8 million widows and widowers
• 6.2 million disabled workers
• 0.8 million adults disabled since childhood
• 3.1 million children
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
How Much Does Social Security Pay?
www.ssa.gov/OACT/COLA/colaeffect.html
Type of Beneficiary Average
Monthly Benefit
All Retired Workers $1,044
Aged widow(er), non-disabled $1,008
Disabled worker $979
Aged couple-both receiving $1,713
Widowed mother and two children $2,167
Social Security and Poverty
• 2007 Poverty Levels– Single individuals – $10,210 ($851/month)– Married couples – $13,690 ($1,141/month)
• With Social Security only 9% were poor– in 2000
• Without it, 48% would have been poor
Financing Social Security
• Workers and their employers pay with Social Security taxes
• Workers pay– 6.2% of their earning for Social Security, and– 1.45% of their earnings for Hospital Insurance under
Medicare (Part A)
• Employers pay an equal amount• The total is 12.4% for Social Security and 2.9%
for HI• Social Security tax base is $97,500 in 2007
Worker Benefits
• Workers over 62 are eligible– If they have worked 10 years
• Benefits are based on a workers earnings history– Career-average earnings– Average Indexed Monthly Earnings (AIME)
Full Retirement Age
http://www.ssa.gov/retire2/retirechart.htm
Year of Birth Full Retirement Age
1937 or earlier 65
1938 - 1942 plus 2 months per year
1942 – 1954 66
1955 - 1959 plus 2 months per year
1960 and later 67
How do benefits compare to earnings?
$19,600$22,500
$15,800
$35,300
$55,400
$90,000
$14,800
$9,000
57%
42%
35%25%
$0
$20,000
$40,000
$60,000
$80,000
"low" "medium" "high" "maximum"
Earnings Amount
Past Wages Benefits
Retired worker age 65, 2005
How many people rely on Social Security for most of their income?
• 90% of people 65 and older get Social Security
• Nearly 2 in 3 (66%) get half or more of their income from Social Security
• About 1 in 5 (22%) get all their income from Social Security
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
Most elderly don’t receive pensions
Percent with Employer-Sponsored Pensions
All age 65+ 41%
Couples 51%
Unmarried men 39%
Unmarried women 32%
National Academy of Social Insurance, Social Security Finances: A Primer (2005)
Family Benefits
• Spouses, dependents, and survivors
• Husband or wife gets 50% of worker’s PIA– Together, couple gets 150%
• Widow or widower gets 100% of worker’s PIA
• A joint and two-thirds annuity
• Dual entitlement rule limits benefits
Estimates for 2006 Finances
Trust Fund income = $745 billion (taxes)
Trust Fund outgo = $555 billion (benefits)
Surplus = $190 billion
By law, surpluses are invested in U.S. government securities and earn interest that goes to the trust funds.
Social Security Administration 2007 Trustees’ Report
The Long-Range Forecast(Best estimate)
• In 2017, tax revenues into the trust funds forecasted to be less than benefits due that year. Interest on the reserves and the assets themselves will help pay for benefits until 2041.
• In 2041, reserves are projected to be depleted. Income is forecast to cover 75% of benefits due then.
• By 2081, assuming no change in taxes, benefits or forecasts, revenue would cover 70% of benefits due then.
Only 3 Ways to Fix Social Security
• Raise Taxes
• Cut Benefits
• Increase Investment Returns– Private investment– Either government or individual
Options: Raise Taxes
OPTION• Increase tax rate by 2%
total• Tax all earnings• Tax 90% of earnings• Include new state &
local govt. workers• Tax SS benefits like
pensions
% of Deficit Eliminated
104%
93%
40%
10%
20%
National Academy of Social Insurance, Social Security Brief No. 18 (2005); American Academy of Actuaries (2004).
Options: Cut Benefits
OPTION• Raise retirement age (to
67 faster & index)• Reduce COLA by ½%
each year• Cut benefits by 5% for
those starting to get benefits in 2005
• Increase # years in wage avg. to 40
% of Deficit Eliminated
28%
41%
32%
21%
National Academy of Social Insurance, Social Security Brief No. 18 (2005); American Academy of Actuaries (2004).
Options: Increase Investment Returns
OPTION• Investments in equities
% of Deficit Eliminated
36% - 50%
National Academy of Social Insurance, Social Security Brief No. 18 (2005); American Academy of Actuaries (2004).
