ECO2030 1nd Edition Lecture 28Outline of Last Lecture I. Cost-benefit AnalysisOutline of Current Lecture II. The Tax SystemIII. Calculating the marginal tax rate systemIV. What government spends revenue onCurrent LectureChapter 12: The Tax System - know the big ideas of all charts in this chapter● Government should stay away from private goods but should play a role in public goods as well as goods that have externalities. ● If they do this, then government can improve our well being● Governments revenue increased:○ As a percent of total income ○ As the economy’s income has grown (economy has grown)■ Also, the governments revenue from taxation has grown substantially○ As a country becomes richer - government takes a larger share of income tax■ Governments have a hard time taxing people with no money as is the case in many poor countriesTax chart over timeas a % of GDPas you can see therevenue ofgovernment hasincreased over timeand federalgovernment makesup the majority oftax revenue! (chartfrom PPT)These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.● Countries tax as a percent of GDP: US does not have a large tax burden compared to the rest of the developed world - because try not to have large tax burden - focus more on efficiency● Sweden, France, England, germany and many other European countries have much higher tax revenues. ● Europe tries to balance equity and efficiency - germany is quite good at itFederal government’s receipts (ways they get revenue)● Individual income tax - based on total income (marginal tax rate)● Payroll taxes - a tax on wages○ Social insurance taxes - these pay for social security and medicare● Corporate income tax - a tax which is based on profitMost of Government revenue from income and social insurance taxes!The federal income tax rate: Marginal tax rate system (Table 3)● Understand how to calculate this. eg. if Alfred makes %70,000 how much tax does he pay? Calculate percent tax for each bracket then add them up. Example: $0 $10,000 10%10,000 30,000 2030,000 100,000 30Total 1000+4000+12000 = $15,000● 10% of 10,000 = 1000● 20% of 30,000 - 10,000 = 4000● 30% of 70,000 - 30,000 = 12,000The federal government’s spending● social security - 19%○ transfer payments to the elderly - (we pay the elderly people now and the youngergeneration will pay for us)● National defense - 19%● Income security - 15%○ transfer payments to poor needy families○ Temporary assistance for needy families (TANF)○ Food stamps (SNAP)○ unemployment compensation● Medicare - a health plan for the elderly● Other health spending includes, Medicaid (a health program for the poor), medical research spending and Net interest on federal deficits!Budget deficits and surpluses are an annual amount, not cumulative● Budget deficit - Excess of government spending over governments receipts○ Financed or borrowed from the public● Budget Surplus - Excess of government receipts over government spending○ Could use the excess recipts to reduce the cummulative outstanding deptsThe fiscal challenge ahead:● In 2009 the federal budget deficit was $1,413 billion○ 8 times greater than in 2007● Long-term projection - governments will spend a lot more than they will take in as tax revenue, taxes will stay constant but spending will increase○ This is due to the politics of the system○ Representatives do not get praised for raising taxes but do for spending● the pending economic disaster - growing amount of retired people, people living longer (not
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