Presentation Transcript

1. The Importance of Government

2. Economic Functions Provide a legal system that makes transactions fast and easy Promote and maintain competition in the market Ensure economywide stability Redistribute resources
3. Provide public goods Characteristics of public goods indivisible additional users do not add to cost not mutually exclusive in use hard to collect based on use Free rider problem
4. Merit and Demerit Goods Government is to promote the production and consumption of merit goods goods thought to benefit to society Government is to discourage the production and distribution of demerit goods goods thought to harm society
5. Correct for Externalities Negative Externality A transaction negatively impacts a third person Market Failure equilibrium quantity is too high and equilibrium price is too low
6. Correcting Negative Externalities Shift supply curve to the left tax number of firms in the industry Shift demand curve to the left population income tastes and preferences Supply Demand
7. Correct Externalities Positive Externality a transaction benefits a third party Market Failure Equilibrium quantity is too low and equilibrium price is too high
8. Correcting Positive Externalities Shift supply curve to right subsidies number of firms in the industry Shift demand curve to right population tastes and preferences income Supply Demand
9. Government Failure Government spends more correcting externality than the amount of the damage caused by the externality
10. Income Redistribution
11. Government Spending as a percentage of GDP 1930 - 10% 1950 - 13% 1970 - 21% 1994 - 19% Increased military spending Population growth Rising expectations Inflation Why is Government so Large?
12. Changing Attitudes In the beginning - “best that governs least” 1930s - Public demanded government action and help 1960s - Johnson’s “War on Poverty” 1990s - Government seen as too large, inefficient, and corrupt. Many want the states and local governments to take over
13. The Federal Budget The Office of Management and budget prepares budget 15 months ahead of implementation President presents as recommendation to Congress in January before implementation Congress makes any changes they feel necessary by passing appropriation and revenue bills; submit to president for signature May change because: unexpected may occur and tax revenues may fall due to recession
14. Federal Revenues
15. Federal Expenditures
16. State and Local Revenues
17. State and Local Spending
18. Financing Government Three sources of government funds taxation borrowing printing money
19. Why Taxes? Pay the cost of government Redistribute income and wealth Promote certain industries Influence consumer and business spending patterns Discourage certain behavior
20. Horizontal Equity Equal income is taxed equally no matter how it is earned Vertical Equity Unequal income is taxed unequally Ability to pay - those with higher incomes should pay more in taxes Benefits received - those who receive the greatest amount of benefit should pay more in taxes Principles of Taxation
21. Taxation Systems
22. Taxes in the United States
23. Federal Personal Income Tax Rates
24. Tax Incidence S2 S1 Inelastic Demand Tax can be shifted to the consumer S2 - After tax supply curve Qtax- A-amount received by producer A-B - tax paid by producer B-C -tax paid by consumer A-C -total amount of tax Price Ptax C Pe B A D1 Qtax Qe 0 Quantity
25. Tax Incidence S2 S1 Inelastic Demand Tax may be shifted back to suppliers A- amount that goes to producers A-B - amount of tax absorbed by producers B-C - higher price paid by consumer A-C- amount of tax Price Ptax C Pe B D1 A Qtax Qe 0 Quantity