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An Applications Approach to Contemporary Economics By Robert J. Carbaugh 4th Edition

An Applications Approach to Contemporary Economics By Robert J. Carbaugh 4th Edition. Chapter 9: The Mixed Economy of the United States. The Mixed Economy of the United States. The Mixed Economy of the United States includes private sector and the public sector. The private sector include:

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An Applications Approach to Contemporary Economics By Robert J. Carbaugh 4th Edition

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  1. An Applications Approach to Contemporary EconomicsBy Robert J. Carbaugh4th Edition Chapter 9: The Mixed Economy of the United States

  2. The Mixed Economy of the United States. • The Mixed Economy of the United States includes private sector and the public sector. • The private sector include: • Millions of households • businesses • The public sector include: • Federal government • States • Local governments Carbaugh, Chap. 9

  3. Households as income recievers • Distribution of income is the way income is devided among members of society. • Functional distribution of income shows the shares of a nation’s income accruing to the factors of production. • Personal distribution of income addresses the issue of how indiidual households share the nation’s income; as seen in slides 4 & 5. Carbaugh, Chap. 9

  4. Proprietor income 9% Corporate profit 9% Interest 8% Rents 2% Wages and salaries 72% The Mixed Economy: Households Functional distribution of income, 2002 Source: From U.S. Department of Commerce, 2004-2005 Statistical Abstract of the United States(Washington, D.C.: U.S. Government Printing Office), Table 672. Carbaugh, Chap. 9

  5. Lowest 20 Second 20 percent percent 4.2% 9.7% Middle 20 Top 20 percent percent 47.6% 15.5% Fourth 20 percent 23.0% The Mixed Economy: Households Personal distribution of income, 2002 Source: From U.S. Department of Commerce, 2004-2005 Statistical Abstract of the United States(Washington, D.C.: U.S. Government Printing Office), Table 672. Carbaugh, Chap. 9

  6. Sources of income inequalty • Determinants of income differences: • Age: with age come more education, training and experience. • Differences in productive resources: quantity and quality of resources. • Investment in human capital: sharpening productive talents, acquiring new skills. • Inheritance: cash, stocks, bonds, homes, land.. • Discrimination: between male or female, religion, races….. Carbaugh, Chap. 9

  7. Households as spenders • Parts of household income flows into consumption, the rest is to pay taxes or is saved( slide 7). Carbaugh, Chap. 9

  8. The Mixed Economy: Households Households income, 2004 Amount Percent(billions)of total Disposition of household income Personal consumption expenditures $8,282 88% Durable goods 1,007 11 Non-durable goods 2,387 25 Services 4,888 52 Personal taxes 1,044 11 Personal savings 43 1 TOTAL $9,369 100% Source: From National Economic Accounts, Bureau of Economic Analysis, U.S. Department of Commerce, available at http://www.bea.doc.gov/bea/dnl.htm. Carbaugh, Chap. 9

  9. Business sector • Business is an org. established for producing and selling goods and services. • 3 types of businesses: • Sole proprietorship (độc chủ) • Partnership ( hợp danh) • Corporation (cổ phần) Carbaugh, Chap. 9

  10. The Mixed Economy: Business U.S. business firms in 2001 Number of Business firms (mill.) receipts (bill.) Form of business Number Percent Dollars Percent Proprietorships 18.3 71% $1,017 4% Partnerships 2.1 8% 2,569 11% Corporations 5.2 21% 19,308 85% TOTAL 25.6 100% 22,894 100% Source: From U.S. Commerce Department, Bureau of the Census, 2004–2005 Statistical Abstract of the United States (Washington, D.C.: U.S. Government Printing Office), Table 716. Carbaugh, Chap. 9

  11. Business sector- proprietorship • Owned & operated by 1 individual. • Easy to set up and close down. • Owner is not responsible or answerable to anyone • But small size of capital • Unlimited liability Carbaugh, Chap. 9

  12. Business sector- partnership • Owned by 2 or more persons. • Contribution of labor, expertise, capital… • Decision making is more cumbersome. • Limited life: ends when 1 withdraws. • Limited funds: personal sources of capital. • Unlimited liability. Carbaugh, Chap. 9

  13. Business sector- corporation • A “legal person”.Owners are stock-holders. Stock-holders vote for directors of BOD (Board of Directors). • Advantages: Large size of capital(may mobilize from sales of stocks);Unlimited life; Limited liability; easy transfer of ownership. • Disadvantages: double taxation; costly to set up and close down; problem of separation of ownership and control. Carbaugh, Chap. 9

  14. Government in the mixed economy • Gov. provides: • Legal & social framework, • Promote competition • Alters distributions of incomes by taxation • Provides public goods: national defense, education, fire fighting…. • Gov. expenditures = Gov. purchases + transfer payments • Gov. purchases: street lighting, sewage system, city playground, national park, jet planes… • Transfer payments: Carbaugh, Chap. 9

  15. Government in the mixed economyTransfer payments • Transfer payments: • Unemployment compensation. • Food stamps • Supplemental security income • Aid to families with Dependant children • Medicaid • Housing and energy subsidies • Agricultural assistance Carbaugh, Chap. 9

  16. Government in the mixed economy • US has devised a system of taxes and transfer payments to alter the distribution of iincome in favor of the poor: ‘Peter’ is taxed to hepl ‘Paul’. Carbaugh, Chap. 9

  17. Government finance • The charts shows the federal gov. budget for 2004 and state & local ones for 2002: includes receipts and expenditures. • Expenditures: largest portion was on income transfer programs: social security, medicare, income security(48%) • Then comes national defense( 20%) • Interest on public debts: Carbaugh, Chap. 9

  18. Government finance • Where does the Gov. obtain funds: • Personal income taxes • Social security, medicare, retirement taxes • Corporate income taxes Carbaugh, Chap. 9

  19. Federal Expenditures Federal Receipts SocialSecurity, Medicare & other retirement taxes 39% Other 15% Social security, Medicare, & other retirement 48% Personal income taxes 43% Health 10% National defense 20% Net interest on the debt 7% Corporate income taxes 10% Excise, Customs, Estate, Gift and misc. taxes 8% Government Finance Federal government receipts and expenditures, 2004 Source: From Office of Management and Budget, The Budget for Fiscal Year 2006, Historical Tables and Economic Report of the President, 2005. Carbaugh, Chap. 9

  20. Government Finance State and local receipts and expenditures, 2002 Receipts Expenditures Sales and Excise taxes 20% Other 29% Other 43% Education 34% Personal income tax 13% Property tax 17% Public welfare 16% Revenue from the Federal Government 19% Corporate income tax 2% Highways 7% Source: From Office of Management and Budget, The Budget for Fiscal Year 2006, Historical Tables and Economic Report of the President, 2005. Carbaugh, Chap. 9

  21. Taxation principles • Benefit-receive principle: Taxes are paid in propotion to the benefits that taxpayers get from public expenditure. • E.g.:gazoline tax, taxes on airline tickets, sales taxes, tolls… • Ability-to- pay principle: people with greater inomes & wealth should pay a higher rate. • E.g.: income taxes. Carbaugh, Chap. 9

  22. 3 types of taxation systems • 3 types: • Proportional taxation • Progressive taxation • Regressive taaxation • Table 9.6 (slide 24): • column 1: different levels of total income • Column 2: total taxes due at levels • co;lumn 3: avarage tax rate Carbaugh, Chap. 9

  23. Taxation Taxes and tax rates Total tax receipts as a percent of gross domestic output, 2003 Nation Average tax rate Sweden 59.3% France 50.4 Austria 50.4 Italy 45.8 Germany 45.3 Canada 41.2 Australia 37.0 United Kingdom 33.9 United States 31.0 Japan 30.9 Source: From U.S. Department of Commerce, Bureau of the Census, 2004–2005 Statistical Abstract of the United States (Washington, D.C.: U.S. Government Printing Office), Table 1344. Carbaugh, Chap. 9

  24. Taxation Progressive, proportional & regressive taxes Total Taxes Average Marginal income due tax rate tax rate Progressive tax $0 $0 - - 100 5 5% 5% 200 20 10% 15% 300 45 15% 25% Regressive tax $0 $0 - - 100 30 30% 30% 200 50 25% 20% 300 60 20% 10% Proportional tax $0 $0 - - 100 10 10% 10% 200 20 10% 10% 300 30 10% 10% * In a progressive tax system, the average tax rate and marginal tax rate rise as income increases. * In a regressive tax system, the average tax rate and marginal tax rate fall as income increases. * In a proportional tax system, the average tax rate and marginal tax rate remain the same as income increases. Carbaugh, Chap. 9

  25. 3 types of taxes • Propotional taxation: also called flat-tax: as income rises, taxes due rise by the same fraction. • Regressive taaxation: a smaller fraction of income is taken in taxes as income rises. • Progressive taxation: a larger fraction of income is taken in taxes as income rises. Carbaugh, Chap. 9

  26. US tax structure • Federal personal income tax: • Federal corporate income tax • Social security tax • Sales, excise, and property taxes • Overall U.S tax system Carbaugh, Chap. 9

  27. 1.Federal personal income tax • Taxable income = Gross income – exemptions, deductions and credits • Gross income: wages, salaries, tips, bonuses, ….. • Exemption: allowance for each household member • Deduction: home mortgage interest payments, business expenses, charitable contribution, medical expenses, state&local taxes • Credits: child care, elderly and disabled, low-income allowance Carbaugh, Chap. 9

  28. Taxation Federal income tax rates for a single taxpayer, 2005 Tax bracket Taxes Average Marginal Over Up to due* tax rate tax rate $0 7,300 $ 730 10% 10% 7,300 29,700 4,090 14% 15% 29,700 71,950 14,653 20% 25% 71,950 150,150 36,549 24% 28% 150,150 326,450 94,728 29% 33% 326,450 and over 35% * Computed at the top of the six taxable income brackets. Source: From Internal Revenue Service, 2005 Tax Rate Schedules. Carbaugh, Chap. 9

  29. Taxation Share of federal personal income tax paid by various income groups, 2001 Percentiles ranked Adjusted gross income Percentage of federal adjusted gross income threshold on percentiles personal income tax paid Top 1% $292,913 34% Top 5% 127,904 53 Top 10% 92,754 65 Top 25% 56,085 83 Top 50% 28,528 96 Bottom 50% less than 28,528 4 Source: From New IRS Data on Income and Tax Shares, Joint Economic Committee, September 2003, available at http://www.house.gov/jec. Carbaugh, Chap. 9

  30. 2. Federal corporate income tax • Federal corporate income tax is essentially propotional tax with a flat rate of 35% for almost all companies Carbaugh, Chap. 9

  31. 3. Social security tax • Social security tax: imposed on individual’s wage income up to $90,000. • Social security tax is large ly a propotional tax, but having some regressive features. • E.g.: in 2005: 6.2% applied to the first $90,000, but 3.1% on an income of $180,000 Carbaugh, Chap. 9

  32. 4. Sales, excise, and property taxes • Sales, excise, and property taxes are regressive. • Why? Carbaugh, Chap. 9

  33. Should US tax system be reformed? Carbaugh, Chap. 9

  34. Tax rate Progressive tax Flat-rate tax 20% 0 Taxable income Taxation Progressive vs. flat-rate income tax Carbaugh, Chap. 9

  35. 31.3% United Kingdom 28.8% Germany Italy 25.6% 25.2% France 24.7% Canada Japan 19.0% United States 16.1% 0% 5% 10% 15% 20% 25% 30% 35% 40% Taxes on goods and services as a percent of total revenue, 2001 Taxation Taxes on goods & services as a share of total tax revenue Source: From U.S. Department of Commerce, Bureau of the Census, 2004–2005 Statistical Abstract of the United States (Washington, D.C.: U.S. Government Printing Office), Table 1345. Carbaugh, Chap. 9

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