Up Coming Stuff GHS English Dept. •Quiz Chapter 5 Friday, 10/14 •Bonus Work Chapter 5 Monday, 10/17 •All homework Chapters 4 & 5 Tuesday, 10/18 •Review Wednesday, 10/19 • Test on Chapter 4 & 5 – Thursday, 10/20! GHS English Dept. Pure Capitalism to Mixed Economy. • If you could choose anywhere in the world to live where would it be and why???? • If you had to rate countries in the world in terms of their standards of living what characteristics would you use and why? • The next chapter begins to look at how the government intervenes in an economic system to allocate resources. • Chapter 5 gets us into some debatable issues dealing with tax rates, subsidies, social equality etc.. Does the government hurt or help?? • While watching the video look for those issues we have talked about with reference to how a capitalist economy works best. • Also look for the policies of the government that lead to inefficiencies. THE CIRCULAR FLOW REVISITED $ COSTS $ INCOMES RESOURCE MARKET RESOURCES BUSINESSES subsidy INPUTS Tax Payments GOVERNMENT GOODS & SERVICES HOUSEHOLDS FICA GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION private property freedom of enterprise freedom of choice self-interest competition roundabout production specialization division of labor medium of exchange barter money Five Fundamental Questions economic costs normal profit economic profit expanding industry declining industry consumer sovereignty dollar votes derived demand guiding function of prices “invisible hand” The Mixed Economy: Private and Public Sectors CHAPTER FIVE The Seven Roles of Government: 1. Maintain Competition 2. Protect Private Property (Life & Liberty) 3. Stabilize the Economy 4. Provide Public Goods: (Pure Private, Common Pool, Toll Goods, Pure Public) 5. Control Externalities/Spillovers: (Pollution Control v Schools) 6. Taxes – Redistribute Income HOUSEHOLDS AS INCOME RECEIVERS FUNCTIONAL DISTRIBUTION WAGES RENT INTEREST PROFIT/LOSS HOUSEHOLDS AS INCOME RECEIVERS FUNCTIONAL DISTRIBUTION WAGES RENT INTEREST PROFIT/LOSS PERSONAL DISTRIBUTION SHOWS ALLOCATION OF INCOME AMONG INDIVIDUAL HOUSEHOLDS I. How to measure economic activity? • A. Functional Distribution of Income • 1. Measures wages, profits, interest and rent. • 2. Profits are divided into two categories. • - proprietors income – profits of those self-employed, doctors, lawyers, farmers. • - Capitalist income or corporation income/ profits. HOUSEHOLDS AS INCOME RECEIVERS FUNCTIONAL DISTRIBUTION WAGES $7,103 Billion PROPRIETOR’S INCOME 900 Billion CORPORATE PROFITS 1,400 Billion INTEREST 700 Billion RENTS 200 Billion 71% 8% 12% 7% 2% HOUSEHOLDS AS INCOME RECEIVERS FUNCTIONAL DISTRIBUTION WAGES $7,103 Billion 70% PROFITS $2,349 Billion 21% INTEREST RENT $750 Billion $200 Billion 7% 2% $10,402 Billion WEASEL PUSS IS RED! 2004 GDP I. How to measure cont… • B. Personal Distribution of Income • 1. Indicates how much total income is divided among household units. • 2. The government uses this as a reference to how equitable or inequitable income is distributed in the U.S. • 3. The Lorenz Curve is a mathematically derived index of income inequality. HOUSEHOLDS AS INCOME RECEIVERS PERSONAL DISTRIBUTION Personal Income Received (Percent) 4.2% Lowest 20% Income Group 10.0% Second 20% Income Group 14.8% Middle 20% Income Group Fourth 20% Income Group Highest 20% Income Group 2004 US Census Bureau 22.1% 49.8% Share of Income - Historically Year 1968 Lowest Next 20% 20% 4.2 11.1 Middle Next 20% 20% 17.5 24.4 Highest 20% 42.8 1982 4.1 10.1 16.6 24.7 44.5 1992 3.8 13.4 15.8 24.2 46.9 2001 3.5 8.7 14.6 23.0 50.1 The Lorenz Curve 100 Percent of Income 80 Perfect Equality 60 40 Complete Inequality 20 0 Copyright McGraw-Hill, Inc. 20 40 60 Percent of Families 80 100 The Lorenz Curve 100 Lorenz Curve (actual distribution) Percent of Income 80 Perfect Equality 60 40 Complete Inequality 20 0 Copyright McGraw-Hill, Inc. 20 40 60 Percent of Families 80 100 The Lorenz Curve 100 Lorenz Curve (actual distribution) Percent of Income 80 Perfect Equality 60 40 Area between the lines shows the degree of income inequality 20 Complete Inequality 0 Copyright McGraw-Hill, Inc. 20 40 60 Percent of Families 80 100 The Lorenz Curve 100 Lorenz Curve (actual distribution) Percent of Income 80 Perfect Equality Two Adjustments: Taxes Cash Transfer Payments 60 40 Area between the lines shows the degree of income inequality 20 Complete Inequality 0 Copyright McGraw-Hill, Inc. 20 40 60 Percent of Families 80 100 GLOBAL PERSPECTIVE Percentage of total income earned by top fifth of income receivers 30 Brazil South Africa Guatemala Mexico United Kingdom United States Japan Norway 40 50 60 70 GLOBAL PERSPECTIVE Percentage of total income earned by top 20% of income receivers 30 Brazil South Africa Guatemala Mexico United States United Kingdom Japan Norway 40 50 60 70 Executive Pay in some US. Industries is 300 Times Higher than an Average Worker’s Salary. Causes of Growing Inequality 1 - Demand for Highly Skilled Workers 2 - Demographic Changes 3 - International Trade & Pressures - Immigration + Illegal Immigration - Union Decline The Lorenz Curve AP Test 2004 graphically... Wage Data 138,000,000 US Workers US News and World Report • 100,000,000 full time US workers in 2001 earned less than $35,000/yr. • 84% earned less than $65,000 • 10% earned between $65,000 and $100,000 • 5.7% earned more than $100,000 US News and World Report Wage Data – Median Income for a Person • Median Income: $33,636 • Only 32.8% of all US jobs paid over $45,000 • Two-thirds of all wage earners work two jobs • Two-thirds of all mothers with children now work • Median paycheck for working wives: $18,000 Median Household Income: 2003 • USA Median Household Income: $42,409 • Half of US households earn more and half of US households earn less • 1999 Peak Median US Income: $43,915 • Wisconsin: $45,985 • Half of WI households earn more and half of WI households earn less Source: US Census Bureau Working Mothers Vote Kerry • 71.1 percent of mothers work • 53.7 percent of mothers with children under 1 year work • Unemployment Rate for unmarried mothers with children under age 18: 10.3% – Jobless Rate 20.5% Working Poor • Of the 46,000,000 Americans who are not yet married, median earnings $17,000 • For single womenhead of households, median income: $18,472 39,000,000 Working Poor • One in five full time 40 hr./week US jobs pays below the poverty-line $18,244 for a family of four • 20,000,000 children live in families with incomes below the poverty line Milwaukee Journal 28,000,000 Jobs • 28,000,000 service jobs pay less than $8.84 • $8.84 is the hourly rate that matches the poverty-line $18,244 Milwaukee Journal Helping the 39,000,000 Working Poor • • • • • Suggested Solutions??? Adult Education! Job Training Increased Minimum Wage Subsidize Child Care for low income workers Milwaukee Journal $36,388 – Low Income Family • A family of four living on an annual income of $36,388 is considered to be a low income family • A family of four living on an annual income of $18,244 is considered to be living in poverty. Milwaukee Journal Median Incomes US Families • White: $47,800 • Hispanic: $33,000 • African American: $29,600 Milwaukee Journal Median Family Net Worths • White Families: $88,000 up 17% since 1996 • Hispanic Families: $8,000 up 14% since 1996 • African American Families: $6,000 down 16% since 1996 Milwaukee Journal The Lorenz Curve 100 Lorenz Curve (actual distribution) Percent of Income 80 Perfect Equality 60 40 Area between the lines shows the degree of income inequality 20 Complete Inequality 0 Copyright McGraw-Hill, Inc. 20 40 60 Percent of Families 80 100 CAUSES OF INCOME INEQUALITY 1 - Ability Differences 2 - Education and Training 3 - Discrimination 4 - Tastes and Risks 5 - Unequal Distribution of Wealth 6 - Market Power 7 - Luck, Connections, and Misfortune EQUALITY-EFFICIENCY TRADEOFF Labor Market Theory The Real World Will Get You! • Human Capital – Education = Income • Sorting Mechanism –Hoops • Radical View –Rich Dad Poor Dad • Dual Labor Market –Good Job v Bad Job Market Family Income USA • • • • • • • 9.8% 8.9% 19% 16.3% 13% 14.4% 18.6% $100,000+ $75-99,999 $50-74,999 $35-49,999 $25-34,999 $15-24,999 <$15,000 • Family Income Distribution 2001 $355,000 – Top 1% • $130,600 – Top 5% • $93,800 – Top 10% • 60,800 – Top 25% • 33,400 – Top 50% 38,500,000+: Men, Women, and Children(13.1%) The typical poor person in the US: • Single Mom with Kids! • White unemployed female under forty • Found everywhere including Ozaukee County (2200+)! $18,810 for a family of four! $12,015 for a family of two! $9,573 for a single person!! Of the 200 largest US counties Waukesha with 3.0% of its residents in Poverty ranked second lowest in the US. Of all 5,700+ US counties Ozaukee with 2.2% of its Residents in Poverty ranked third lowest in the US. Wisconsin Poverty • 528,000 people or 9.8% of WI residents • WI residents without health insurance 593,000 • National rank 36th lowest poverty in poverty rate Poverty in America: 2003 Data • 37.6 Million Americans – Up 1.7 million from 2002 – 12.1 million are children • 12.1% of Americans • Wisconsin’s poverty rate 2003: 8.2% • Poverty Line 2003: – $18,244 for a family of 4 – $9,359 for a single person Source: US Census Bureau, Journal/Sentinel State Rankings on Poverty Families Living Below the Poverty Line 1. Mississippi 2. Louisiana 3. New Mexico 4. West Virginia 5. Kentucky 46. Iowa 47. Connecticut 48. Wisconsin 49. Minnesota 50. New Hampshire 16.0% 15.8% 14.5% 13.9% 12.7% 6.0% 5.6% 5.5% 5.1% 4.3% Total US Poor: 32,500,000 Average Per State: 9.2% State Rankings on Families Receiving Welfare 1. Alaska 2. Hawaii 3. Oklahoma 4. California 5. New York 46. Maryland 47. Kansas 48. Nevada 49. Alabama 50. Wisconsin 8.7% 7.2% 5.1% 4.9% 4.9% 2.4% 2.36% 2.35% 2.24% 1.71% Total Welfare Recipients: Less than 22,000,000 The Working Poor • Income less than $8.00/Hour • Yearly incomes less than $25,000 for a family of 4 • 30% of Americans: 74,000,000 people! • Uninsured Americans 58,000,000 The Working Poor • Hourly wages needed to afford a One Bedroom Apartment – $8.89 • Chance of a Welfare Recipient getting a $8.89/Hour Forty Hour/Week Job? – 97 to 1 Data: National Coalition for the Homeless Want Ads Functional Distribution of Income 7% 2% 12% 8% Wages Pro Inc Corp Inc Interest Rent How is the 10.4 Trillion 71%Dollars earned in the Economy? HOUSEHOLDS AS INCOME RECEIVERS PERSONAL DISTRIBUTION Personal Income Received (Percent) 4.2% Lowest 20% Income Group 10.0% Second 20% Income Group 14.8% Middle 20% Income Group Fourth 20% Income Group Highest 20% Income Group 22.1% 49.8% How is that income allocated??? What is in societies best interest??? Another way to measure!!! C. Household Income! Disposal Spending+Saving+Taxes=GDP GDP • W+P+i+R • Weasel puss is red • 1. All Income is spent or saved or lost to taxes! • What is the distribution of spending, saving, and taxes? HOUSEHOLDS AS SPENDERS WHERE DOES OUR INCOME GO? 6% to personal savings Milwaukee Journal 1997 DATA HOUSEHOLDS AS SPENDERS WHERE DOES OUR INCOME GO? 6% 14% to personal taxes excluding Social Security Affective tax rate for Americans: 14% + 7.5% = 21.5% Taxes as % of GDP = 29.9% 1997 DATA Taxes as a Percent of GDP • • • • • • • • Sweden Denmark Netherlands Belgium France Austria Germany Italy Source OECD 56.1% 49.9% 46.0% 44.3% 43.8% 41.0% 38.1% 37.8% • • • • • • • • Ireland Britain Canada Spain Greece Japan Australia USA 37.6% 36.5% 35.3% 34.4% 33.2% 30.6% 30.1% 29.9% HOUSEHOLDS AS SPENDERS WHERE DOES OUR INCOME GO? 6% 14% S A V I N G S T A X E S 80% to personal consumption Consumer Spending about 80% of income 1997 DATA HOUSEHOLDS AS SPENDERS WHERE NOTES: DOES OUR INCOME GO? 6% 14% Spending Classifications 83% to personal consumption 1- Durables 12% 1997 DATA HOUSEHOLDS AS SPENDERS WHERE NOTES: DOES OUR INCOME GO? 6% 14% Spending Classifications 83% to personal consumption 1- Durables 2- Nondurables 30% 1997 DATA HOUSEHOLDS AS SPENDERS NOTES: WHERE DOES OUR INCOME GO? 6% 14% Spending Classifications 83% to personal consumption 1-Durables 12% 2-Nondurables 30% 3-Services 58% 1997 DATA II. Business Organizations Plant – Firm - Industry Proprietorships Partnerships Corporations Hybrids THE BUSINESS POPULATION A. Terminology.... 1- PLANT One Location THE BUSINESS POPULATION A. Terminology.... 1- PLANT 2- FIRM One business organization - May have one or more plants THE BUSINESS POPULATION NOTES: Terminology.... 1- PLANTVertical Combinations 2- FIRM One business organization - May have one or more plants THE BUSINESS POPULATION NOTES: Terminology.... 1- PLANTVertical Combinations 2- FIRM Horizontal One business Combinations organization - May have one or more plants THE BUSINESS POPULATION NOTES: Terminology.... 1- PLANTVertical Combinations 2- FIRM Horizontal One business Combinations organization - May have one or Conglomerates more plants THE BUSINESS POPULATION A. Terminology.... 1- PLANT 2- FIRM 3- INDUSTRY B. US Business Organizations 1. Type of Business • • • • Proprietorships Partnerships Corporations Hybrids/Corps Percent of Market 75% 7% 18% Total Number 17,000,000 1,500,000 4,000,000 500,000 23,000,000 (Both Bush and VP Dick Cheney claimed in the last year’s debates that 900,000 "small businesses" would be hurt by restoration of taxes on $200,000+ incomes.) Small Businesses US • The United States Small Business Administration classifies companies with fewer than 500 employees as "small." There are more than 5 million such businesses that have payrolls, and they employ about half of the nation's private-sector workers. Of those 5 million firms, 4.3 million have fewer than 20 employees each. The small business owner's reputation as underdog and risk-taker is a hard-earned one. Every year sees 600,000 to 800,000 companies start up, just as 500,000 or so go under. • Let's give credit where credit is due. Bush has cut taxes for all Americans, which has helped small business owners continue to generate 60 to 80 percent of all new jobs annually. (US Chamber of Commerce) B. US Business Organizations 2. Type of Business • Proprietorships • Partnerships • Corporations Percent of Market Sales 6% 5% 89% Top 10 US Corporations by Revenues 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Wal-Mart Exxon Mobile General Motors Ford Motor General Electric Citigroup Chevron Texaco Philip Morris IBM Microsoft $217,799,000,000 $187,510,000,000 $177,260,000,000 $162,412,000,000 $125,679,000,000 $112,022,000,000 $106,245,000,000 $89,942,000,000 $85,866,000,000 $83,654,000,000 Top 10 International Corporations by Revenues 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Wal-Mart Exxon Mobile Shell General Motors Ford Motor Daimler Chrysler BP General Electric Citigroup Mitsubishi $217,799,000,000 $187,510,000,000 $177,281,000,000 $177,260,000,000 $162,412,000,000 $152,446,000,000 $148,062,000,000 $125,679,000,000 $112,022,000,000 $110,787,000,000 C. LEGAL FORMS OF BUSINESS ENTERPRISES 1. Sole Proprietorship Advantages... •Easy to Organize •Proprietor is Own “Boss” C. LEGAL FORMS OF BUSINESS ENTERPRISES 1. Sole Proprietorship Advantages... •Easy to Organize •Proprietor is Own “Boss” Disadvantages... •Limited Resources •No Help With Decision Making •Unlimited Liability C. LEGAL FORMS OF BUSINESS ENTERPRISES 2. Partnership Advantages... •Also Easy to Organize •More Management Skills •Greater Resources Available C. LEGAL FORMS OF BUSINESS ENTERPRISES 2. Partnership Advantages... •Also Easy to Organize •More Management Skills •Greater Resources Available Disadvantages... •Difficulty Making Decisions •Possibly Limited Financial Resources •Partnership Continuity Problems •Unlimited Liability C. LEGAL FORMS OF BUSINESS ENTERPRISES 3. Corporation Advantages... •Most Effective Raising Capital - Stocks, Bonds •Limited Liability****** •Easy Expansion of Size & Scope •Infinite Life LEGAL FORMS OF BUSINESS ENTERPRISES Corporation Advantages... •Most Effective Raising Capital - Stocks, Bonds •Limited Liability •Easy Expansion of Size & Scope •Infinite Life Disadvantages... •Corporate Regulations & Legal Expenses •Some Unscrupulous Practices •Double Taxation •Separation of Ownership & Control LEGAL FORMS OF BUSINESS ENTERPRISES NOTES: Corporation Advantages.... •Most Effective Raising Capital - Stocks, Bonds Principal•Limited Liability •Easy Expansion of Size & Scope Agent •Infinite Life Problem Disadvantages •Corporate Regulations & Legal Expenses •Some Unscrupulous Practices •Double Taxation •Separation of Ownership & Control Principle Agent Problem B U S H Ken Lay – CFO Enron • Partnership and Proprietorship the owner/owners is/are the principle agents! • Corporate America has a board of directors and CEO that serve as the principle agents for stockholders! 10 Highest Paid CEO’s in the US December 2001 1. Michael Dell Dell Computers $235,192,000 2. Sanford Weill Citigroup $216,183,000 3. Gerald Levin AOL Time Warner $164,388,000 4. John Chambers Cisco Systems $157,305,000 5. Henry Silverman Cendant $137,447,000 6. Louis Gerstner Jr. IBM $103,410,000 7. Joseph Nacchio Qwest Com. $97,387,000 8. Walter Sanders Advanced Micro $92,246,000 9. Steven Jobs Apple Computers $90,000,000 10. Jeffery Skilling Enron $84,449,000 Corporations • 90% of Revenue • 80% of Output • Wal-Mart’s revenue greater than the GDP of 170 nations • Wal-Mart and GM combined revenues exceed total revenue of all US farms combined LEGAL FORMS OF BUSINESS ENTERPRISES Corporation Advantages... •Most Effective Raising Capital - Stocks, Bonds •Limited Liability •Easy Expansion of Size & Scope •Infinite Life Disadvantages... •Corporate Regulations & Legal Expenses •Some Unscrupulous Practices •Double Taxation •Separation of Ownership & Control LEGAL FORMS OF BUSINESS ENTERPRISES NOTES: Corporation Advantages.... Limited•Most Effective Raising Capital - Stocks, Bonds •Limited Liability •Easy Expansion of Size & Scope •Infinite Life Liability Companies Disadvantages •Corporate Regulations & Legal Expenses (LLCs) •Some Unscrupulous Practices •Double Taxation •Separation of Ownership & Control 4. Hybrids • LLC – Taxed like a partnership – Limited Liability like a corporation • S-Corporations – Fewer than 35 employees – Limited liability – No double taxation III. Five Major Roles of Government in a Capitalist Economy • Provide Social and Legal Framework • Maintain Competition • Redistribute Income • Correct Market Failure • Stabilize the Economy ECONOMIC FUNCTIONS OF GOVERNMENT A. LEGAL AND SOCIAL FRAMEWORK 1. Seeks to strengthen the market system. ECONOMIC FUNCTIONS OF GOVERNMENT “Microsoft will Rule the World!’ Bill Gates 2002 B. MAINTAINING COMPETITION ECONOMIC FUNCTIONS OF GOVERNMENT Notes: 1.MONOPOLY- illegal MAINTAINING COMPETITION ECONOMIC FUNCTIONS OF GOVERNMENT Notes: 1.MONOPOLY- illegal 2. NATURAL MAINTAINING MONOPOLIES COMPETITION ECONOMIC FUNCTIONS OF GOVERNMENT Notes: 1. MONOPOLY- illegal 2. NATURAL MAINTAINING MONOPOLIES COMPETITION MARKET BIASES & SHORTCOMINGS CAN COMPEL ACTION BY GOVERNMENT ECONOMIC FUNCTIONS OF GOVERNMENT C. REDISTRIBUTION OF INCOME.... 1. Transfer Payments Of $10,000.00 Paid in Federal Income Tax: $2,620.00 goes to the military $2,260.00 goes to pay the interest on the national debt $1,900.00 goes to health care $550.00 goes to income security $340.00 goes to benefits for veterans $320.00 goes to education $250.00 goes to nutrition spending $160.00 goes to housing $160.00 goes to the environment Excludes FICA @ $40.00 goes to job training $1,400.00 goes to all other expenses 7.5% Ten Largest Militaries in the World 1. China 2. US 3. India 4. North Korea 5. Russia 6. South Korea 7. Pakistan 8. Turkey 9. Iran 10. Vietnam 2,340,000 1,365,800 1,303,000 1,082,000 1,004,000 683,000 612,000 609,000 513,000 484,000 Total US Military Spending: $352,000,000,000 Top Military Spenders 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. USA $352,000,000,000 Japan $46,700,000,000 Britain $36,000,000,000 France $33,600,000,000 China $31,100,000,000 Germany $27,700,000,000 Saudi Arabia $21,600,000,000 Italy $21,100,000,000 Iran $17,500,000,000 South Korea $13,500,000,000 The sum of spending by the India $12,900,000,000 other top 25 countries does not equal US spending! Russia $11,400,000,000 Countries with the Highest Life Expectancy USA Worldwide 77.5 66.0 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Japan Sweden Iceland Australia Israel Martinique Switzerland Canada France Norway 81.5 yrs. 80.1 yrs. 79.4 yrs. 79.2 yrs. 79.2 yrs. 79.1 yrs. 79.1 yrs. 79.0 yrs. 79.0 yrs. 78.9 yrs. ECONOMIC FUNCTIONS OF GOVERNMENT C. REDISTRIBUTION OF INCOME.... 1. Transfer Payments 2. Personal Income Tax Taxes in the USA • 3. Theories of Taxation: – Ability to Pay – Benefits Received • 4. Types of Taxes: – Progressive – Proportional – Regressive Apportioning the Tax Burden Benefits-Received Principle Apportioning the Tax Burden Benefits-Received Principle Ability-to-Pay Principle Apportioning the Tax Burden Benefits-Received Principle Ability-to-Pay Principle • Progressive Tax & Marginal Tax Rates! Progressive Tax • • • • • • • • The fraction of income paid in taxes increases as a person’s income increases. Marginal tax rate - rate at which the tax is paid on each additional unit of income. Example - Earning $50,000 – What do you pay in taxes given the following rates? 1 – 41,200 15% $8,644 41,201 – 99,600 28% What is your average tax?? 99,601 – 151,750 31% 17% 151,751 – 271,050 36% 271,050 39.6% Apportioning the Tax Burden Benefits-Received Principle Ability-to-Pay Principle • Progressive Tax • Regressive Tax Apportioning the Tax Burden Benefits-Received Principle Ability-to-Pay Principle • Progressive Tax • Regressive Tax • Proportional Tax Proportional and Regressive • Proportional is a tax where the fraction of income paid in taxes remains constant as a person’s income increases. A flat tax. • Regressive is a tax where the fraction of income paid in taxes increases the lower your income. • Sales taxes are what seem to be a proportional tax but indeed are regressive. Family 1 Family of 4 Family 2 • Example 35,000 5,000 6% $300 .8% 75,000 Food expenses 5,000 tax rate – flat tax 6% tax paid $300 of income .4% Tax Applications: Identify whether progressive, regressive, or proportional • Personal Income Tax • Sales Tax • Corporate Income Tax • Payroll Taxes • Property Taxes Taxes as a Percent of GDP • • • • • • • • Sweden Denmark Netherlands Belgium France Austria Germany Italy Source OECD 56.1% 49.9% 46.0% 44.3% 43.8% 41.0% 38.1% 37.8% • • • • • • • • Ireland Britain Canada Spain Greece Japan Australia USA 37.6% 36.5% 35.3% 34.4% 33.2% 30.6% 30.1% 29.9% ECONOMIC FUNCTIONS OF GOVERNMENT C. REDISTRIBUTION OF INCOME.... •1. Transfer Payments FICA to People • 2-4. Taxes 5. Market Intervention Minimum wages and subsidies. ECONOMIC FUNCTIONS OF GOVERNMENT D. REALLOCATION OF RESOURCES... 1. The government will intervene when it feels a market failure has taken place. 2. The market produces the wrong type or amount of goods. 3. The market fails to allocate any resources for the production of a good. ECONOMIC FUNCTIONS OF GOVERNMENT D. REALLOCATION OF RESOURCES.... 4. Spillovers or Externalities - Spillover Costs When a producer avoids some of the costs of producing a product. Example – pollution A larger output is produced than is socially acceptable. ECONOMIC FUNCTIONS OF GOVERNMENT REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Costs - Correcting For Spillover Costs •Legislation ECONOMIC FUNCTIONS OF GOVERNMENT REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Costs Correcting For Spillover Costs •Legislation •Specific Taxes Correcting for Spillover Costs P Spillover s + Tax costs S New market price paid by consumers Price too Low! Amount of Tax needed to correct Negative externality! D 0 Qd = Q s Overallocation Q Correcting for Spillover Costs P Spillover costs S + Tax S Tax Consumer pays Producer Receives TAX To Fix Spillover cost 0 D Q Overallocation Corrected ECONOMIC FUNCTIONS OF GOVERNMENT REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Benefits The Underallocation of Resources You don’t directly get all the utility or receive all the benefits, so you don’t consume as much as you could if you did receive all of the benefits. Example - Education ECONOMIC FUNCTIONS OF GOVERNMENT REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Benefits Correcting for Spillover Benefits.... • Increase Demand Correcting for Spillover Benefits P S Spillover Benefits Initially priced too low!!! D + Subsidy Underallocation Correction 0 Federal Grants for Education D Q Correcting for Spillover Benefits P Amount of the subsidy needed to correct externality! S Subsidy to consumer Price is Increased! D + Subsidy Underallocation Corrected 0 D Q ECONOMIC FUNCTIONS OF GOVERNMENT REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Benefits Correcting for Spillover Benefits.... • Increase Demand • Increase Supply Correcting for Spillover Benefits P S S + Subsidy Subsidy to producers Price for consumers falls Subsidy to business Underallocation D Corrected Q 0 Madison costs less than Marquette ECONOMIC FUNCTIONS OF GOVERNMENT REALLOCATION OF RESOURCES.... Spillovers or Externalities Spillover Benefits Correcting for Spillover Benefits.... • Increase Demand • Increase Supply • Government Provision 5. Ownership Rights • Some goods need to be produced because they produce a societal benefit but would not be produced if the gov’t did not intervene. • In order to determine when the gov’t should intervene they classify goods according to categories. • Exclusion principle - One of the main determining factors is if the good will be adequately produced in the market. Does the purchaser have an exclusive right to that good? Pure Private Goods • No Shared Consumption! • Exclusion permitted! • Hands off my burger!! • Depletability Toll Goods • You pay to use a resource • Using the resource doesn’t deplete its supply or usefulness • You may be denied use if you fail to pay • Applies to private goods Pure Public Goods • Indivisible – too large for individuals to consume. • Free Rider Problem • The benefits to one user does not exceed the cost! • Highways, space shuttle, aircraft carrier Private Goods: Divisibility & Depletability Public Goods: Indivisible Public or Social Goods Are... Indivisible Subject to the free-rider problem May Provide Large Spillover Benefits Quasi-public Goods Can be produced by market or government but have large spillover benefits. Common Pool Goods • Joint ownership • Fish in Lake Michigan • The UN plan to save the Whales and Dolphin • Gate Foundation to purchase from UN all whales and dolphins! Public Goods & Services Note: The Exclusion Principle Does Not Apply Public Goods & Services Note: The Exclusion Principle Does Not Apply Some Goods & Services Would Not Be Produced By The Market System Public or Social Goods Are... The Free Rider Problem: Visitors to Ozaukee County may use this public good even if they have never paid at tax in this county. Public or Social Goods Are... Indivisible Subject to the free-rider problem May Provide Large Spillover Benefits E. Stabilization of the Economy 1. Should the Government take a Role? 2. Action is taken to deal with issues of unemployment and inflation. ECONOMIC FUNCTIONS OF GOVERNMENT In A Recession STABILIZATION....when GDP: Growing to Slowly Or High Unemployment • Cut Taxes • Raise Government Spending • Run a Deficit ECONOMIC FUNCTIONS OF GOVERNMENT In A Period of Inflation STABILIZATION.... GDP: Growing too Fast Prices Rising out of Control • Raise Taxes • Cut Government Spending • Run a Surplus THE CIRCULAR FLOW REVISITED $ COSTS $ INCOMES RESOURCE MARKET RESOURCES BUSINESSES INPUTS GOVERNMENT GOODS & SERVICES HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION THE CIRCULAR FLOW REVISITED $ COSTS NET TAXES FLOW RESOURCE TO GOVERNMENT MARKET FROM BUSINESSES RESOURCES BUSINESSES GOVERNMENT GOODS & SERVICES $ INCOMES INPUTS HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION THE CIRCULAR FLOW REVISITED $ COSTS RESOURCE GOVERNMENT GOODS & SERVICES MARKET FLOW TO BUSINESSES RESOURCES BUSINESSES GOVERNMENT GOODS & SERVICES $ INCOMES INPUTS HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION THE CIRCULAR FLOW REVISITED $ COSTS RESOURCE MARKET RESOURCES BUSINESSES GOVERNMENT GOODS & SERVICES $ INCOMES NET TAXES FLOW TO GOVERNMENT FROM HOUSEHOLDS INPUTS HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION THE CIRCULAR FLOW REVISITED $ COSTS $ INCOMES RESOURCE MARKET RESOURCES BUSINESSES GOVERNMENT GOODS & SERVICES GOODS & SERVICES FLOW TO HOUSEHOLDS FROM GOVERNMENT INPUTS HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION THE CIRCULAR FLOW REVISITED $ COSTS $ INCOMES EXPENDITURES FLOW TO ACQUIRE RESOURCES RESOURCES BUSINESSES RESOURCE MARKET INPUTS GOVERNMENT GOODS & SERVICES HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION THE CIRCULAR FLOW REVISITED $ COSTS $ INCOMES RESOURCE MARKET RESOURCES BUSINESSES GOVERNMENT GOODS & SERVICES RESOURCES FLOW TO INPUTS GOVERNMENT HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION THE CIRCULAR FLOW REVISITED $ COSTS $ INCOMES RESOURCE MARKET RESOURCES BUSINESSES INPUTS GOVERNMENT GOVERNMENT EXPENDITURES GOODS & FLOW TO SERVICES PRODUCT MARKET HOUSEHOLDS GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION THE CIRCULAR FLOW REVISITED $ COSTS $ INCOMES RESOURCE MARKET RESOURCES BUSINESSES INPUTS GOVERNMENT HOUSEHOLDS GOODS & SERVICES FLOW TO GOODS & GOVERNMENT SERVICES GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION THE CIRCULAR FLOW REVISITED $ COSTS $ INCOMES RESOURCE MARKET RESOURCES BUSINESSES subsidy INPUTS Tax Payments GOVERNMENT GOODS & SERVICES HOUSEHOLDS FICA GOODS & SERVICES PRODUCT MARKET $ REVENUE $ CONSUMPTION The Federal Budget! Total Revenues (Taxes) – Total Costs (Expenditures) + Budget Surplus 0 Balanced Budget - Budget Deficit 2004 Deficit: $480 Billion Sum of all yearly Projected deficits is the National 2005 Debt of: 333 7.4 Trillion Dollars! Billion GOVERNMENT GROWTH Purchases & Transfers... •Government Purchases GOVERNMENT GROWTH Purchases & Transfers... •Government Purchases •Transfer Payments The Federal Budget Federal Expenditures How Does Government Spend Its Money???? The Federal Budget Federal Expenditures Income Security 38% The Federal Budget Federal Expenditures Income Security Health 38% 20% The Federal Budget Federal Expenditures Income Security Health National Defense 38% 20% 18% The Federal Budget Federal Expenditures Income Security Health National Defense Interest on Public Debt 38% 20% 18% 15% The Federal Budget Federal Expenditures Income Security Health National Defense Interest on Public Debt All Other 38% 20% 18% 15% 9% The Federal Budget Funded on a Percentage Basis of Income Tax Dollars 26.2% goes to the military 22.6% goes to pay the interest on the national debt 19.0% goes to health care 5.5% goes to income security 3.4% goes to benefits for veterans 3.2% goes to education 2.5% goes to nutrition spending 1.6% goes to housing Remember….. 1.6% goes to the environment FICA funds Social 0.4% goes to job training Security Payments! 14.0% goes to all other expenses Of $10,000.00 Paid in Federal Income Tax: $2,620.00 goes to the military $2,260.00 goes to pay the interest on the national debt $1,900.00 goes to health care $550.00 goes to income security $340.00 goes to benefits for veterans $320.00 goes to education $250.00 goes to nutrition spending $160.00 goes to housing Excludes $160.00 goes to the environment FICA @ $40.00 goes to job training 7.5% $1,400.00 goes to all other expenses The Federal Budget Federal Receipts/Revenues How Does Government Raise Its Money???? The Federal Budget Federal Receipts/Revenues Personal Income Tax45% The Federal Budget, 1996 Notes: Federal Receipts Personal MARGINAL Income Tax45% TAX RATES The Federal Budget, 1996 Notes: Federal Receipts Personal MARGINAL Income Tax45% TAX RATES AVERAGE TAX RATES The Federal Budget Federal Receipts/Revenues Personal Income Tax45% Payroll Taxes 35% The Federal Budget Federal Receipts/Revenues Personal Income Tax45% Payroll Taxes 35% Corporate Income Tax 12% The Federal Budget Federal Receipts/Revenues Personal Income Tax45% Payroll Taxes 35% Corporate Income Tax 12% Excise or Sales Taxes 4% The Federal Budget Federal Receipts/Revenues Personal Income Tax45% Payroll Taxes (FICA) 35% Corporate Income Tax 12% Excise or Sales Taxes 4% All Other 4% STATE & LOCAL FINANCE State Expenditures Public Welfare 1994 DATA 32% STATE & LOCAL FINANCE State Expenditures Public Welfare Education 1994 DATA 32% 21% STATE & LOCAL FINANCE State Expenditures Public Welfare Education Health & Hospitals 1994 DATA 32% 21% 10% STATE & LOCAL FINANCE State Expenditures Public Welfare Education Health & Hospitals Highways 1994 DATA 32% 21% 10% 10% STATE & LOCAL FINANCE State Expenditures Public Welfare Education Health & Hospitals Highways Public Safety 1994 DATA 32% 21% 10% 10% 8% STATE & LOCAL FINANCE State Expenditures Public Welfare Education Health & Hospitals Highways Public Safety All Other 1994 DATA 32% 21% 10% 10% 8% 21% STATE & LOCAL FINANCE State Receipts Sales Taxes 1994 DATA 49% STATE & LOCAL FINANCE State Receipts Sales Taxes Income Taxes (Personal & Corporate) 1994 DATA 49% 32% STATE & LOCAL FINANCE State Receipts Sales Taxes Income Taxes (Personal & Corporate) Corporate Income Tax 1994 DATA 49% 32% 7% STATE & LOCAL FINANCE State Receipts Sales Taxes Income Taxes (Personal & Corporate) Corporate Income Tax Property Taxes 1994 DATA 49% 32% 7% 2% STATE & LOCAL FINANCE State Receipts Sales Taxes Income Taxes (Personal & Corporate) Corporate Income Tax Property Taxes Death & Gift Taxes 1994 DATA 49% 32% 7% 2% 1% STATE & LOCAL FINANCE State Receipts Sales Taxes Income Taxes (Personal & Corporate) Corporate Income Tax Property Taxes Death & Gift Taxes Licenses Other Taxes 1994 DATA 49% 32% 7% 2% 1% 9% STATE & LOCAL FINANCE Local Expenditures Education 1994 DATA 42% STATE & LOCAL FINANCE Local Expenditures Education 42% Welfare, Health, & Hospitals 14% 1994 DATA STATE & LOCAL FINANCE Local Expenditures Education 42% Welfare, Health, & Hospitals 14% Housing & Sewerage 8% 1994 DATA STATE & LOCAL FINANCE Local Expenditures Education 42% Welfare, Health, & Hospitals 14% Housing & Sewerage 8% Public Safety 10% 1994 DATA STATE & LOCAL FINANCE Local Expenditures Education 42% Welfare, Health, & Hospitals 14% Housing & Sewerage 8% Public Safety 10% Highways 5% 1994 DATA STATE & LOCAL FINANCE Local Expenditures Education Welfare, Health, & Hospitals Housing & Sewerage Public Safety Highways All Others 1994 DATA 42% 14% 8% 10% 5% 21% STATE & LOCAL FINANCE Local Receipts Property Taxes 1994 DATA 75% STATE & LOCAL FINANCE Local Receipts Property Taxes Sales & Excises 1994 DATA 75% 15% STATE & LOCAL FINANCE Local Receipts Property Taxes Sales & Excises Personal & Corporate Income Taxes 1994 DATA 75% 15% 6% STATE & LOCAL FINANCE Local Receipts Property Taxes Sales & Excises Personal & Corporate Income Taxes All Other 1994 DATA 75% 15% 6% 4% STATE & LOCAL FINANCE Local Receipts Property Taxes Sales & Excises Personal & Corporate Income Taxes All Other LOTTERIES 1994 DATA 75% 15% 6% 4% STATE & LOCAL FINANCE Local Receipts Property Taxes 75% Sales & Excises 15% Personal & Corporate Income Taxes 6% All Other 4% Fiscal Federalism LOTTERIES 1994 DATA STATE & LOCAL FINANCE Local Receipts Property Taxes 75% Sales & Excises 15% Personal & Corporate Income Taxes 6% All Other 4% Fiscal Federalism LOTTERIES 1994 DATA Page 2 functional distribution of income personal distribution of income durable good non-durable good services plant firm vertical combination horizontal combination Copyright McGraw-Hill, Inc. 1999 conglomerate combination industry sole proprietorship partnership corporations stocks bonds limited liability double taxation principal-agent problem Page 1 monopoly spillover costs spillover benefits exclusion principle public goods free-rider problem quasipublic goods government purchases transfer payments Copyright McGraw-Hill, Inc. 1999 personal income tax marginal tax rate average tax rate payroll taxes corporate income tax sales & excise taxes property tax fiscal federalism lotteries Next: The United States in the Global Economy Chapter 6