Lifeconomics and
Financial Fitness For
Life
A Continuing Education Workshop
for Teachers
Outline
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Your Government
Your Life
Your Money
Financial Fitness for Life Curriculum
What is economics?
• Observing the world full of mysteries
– Why does the government tax us?
– Should you take that second job?
– Should you fix the leak or call the
roofer?
– Why does a stock price fluctuate?
What is economics?
• Trying to solve these mysteries in a
manner consistent with human behavior.
• Sometimes, hard to solve these…
• … so we make assumptions, say there are
only 2 goods in the world: Milk and
Gasoline
What is economics?
• Use simple models as representations
of the ‘real world’.
• Apply this to explain our mysteries.
Your Government
How the government affects your
everyday life
Calculating your tax
burden (Ch 20)
• Taxes: Do we pay - too much?
- just enough?
- not enough?
• Tax Burden: the portion of income
paid in form of taxes (federal, state,
local etc)  39% (CA average) 2005
Tax Burden…
• As income rises, taxes rise (both
actual and proportion)  Progressive
taxation (pay more taxes and at a
higher rate)
QuickTime™ and a
TIFF (Uncompressed) decompressor
are needed to see this picture.
Calculating Tax Burden
•
1.
Only count direct taxes
Federal Tax Withheld  Box 2 W-2
a.
2.
3.
Other federal taxes  SS, Medicare (Boxes 4,6)
State Tax (Box 17)
•
4.
Add/ subtract extra taxes from return
Adjust (add/ subtract) any taxes from return
Gas Tax (Both fed/ state taxes included in pump price)
(p 113/ website)
Calculating Tax Burden
5.
6.
7.
8.
9.
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Sales Tax (on all purchases) (p113/website )
Actual (add all taxes from all receipts)
Estimate:
•
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Total Amount Spent x Tax Rate
(0.95) x Take home pay x Tax Rate
Property Tax (Home, Vehicle)  check bill
Total Tax
Total Income
Tax Burden = 7/ 8
Tax Burden Example
• Bob wants to estimate his tax bill. In
2003 he made $14 000, received a tax
refund of $100 and paid the following:
Medicare $214; State tax $509; federal
tax $1461; property tax $200; social
security $742. He also purchased 400
gallons of gas and took home $10 000.
What is his tax burden?
Estimating Tax Burden
1. Federal Tax Withheld
a. Refund
2. Other Federal Taxes:
a. SS
b. Medicare
$ 1461
-100
3. State Tax
509
4. Gas Tax
400 gallons x 0.354
5. Sales tax (estimated)
0.95 x 10 000 x .06
142
742
214
200
Estimating Tax Burden
6. Property Tax
200
7. Total Taxes
3738
8. Total Income
14 000
9. Tax Burden (7/8)
0.267
Or 26.7%
Tax Burden = Proportion of income paid in taxes
Now you try it…
Jack grossed $27 000 in 2003. He paid the
following proportion of his gross income:
10% for federal tax, 2% state tax, 0%
property tax, 12% other federal tax. Gas
tax is 0.50/ gallon in his state. His old car
consumed 3000 gallons of gasoline, and he
managed to save 4% of his take home pay,
$17 000. Sales tax in his state is 6%.
What is Jack’s tax burden?
Answer
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Federal = 2700
State =
540
Other = 3240
Gas = 1500
Sales =
680
Total = 8660  32%
Using your tax bracket
(Ch 21)
• Tax burden also known as average tax rate
i.e., on average, the taxes you pay out of
each dollar of income.
• Sometimes want to know how much more
taxes you will pay if your income rises.
• Or, how much you will save if invest in a
tax-free investment
• Here, average tax rate not all that helpful.
Why?
Tax Bracket
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Two reasons:
1.
Some taxes stop at certain income
–
eg. SS max $94,200 (2006)
2. Federal tax is progressive, i.e. pay higher
RATE at higher income
So need to know ‘marginal tax rate’
Marginal Rate = additional tax pay for
additional income aka tax bracket
What to count?
• Only those taxes that one must
automatically pay with higher income such
as federal taxes (FICA = Federal Insurance
Contributions Tax= SS + Medicare {7.65%} ), state income
taxes.
• Not count: property taxes, sales tax and
gasoline tax (unless change spending)
Government and Money
Then and Now…
Government spending elsewhere
70
60
50
40
% GDP
30
20
10
0
US
Japan
UK
Canada
France
Sweden
Deficit as a % of GDP
Why the difference?
• Governments in different countries vary
expenditures (G) because priorities are
different  choice made by society.
• US: spends more on military
• Others: spend more on social services
• Even within a given country where the
money goes can change over time.
Components of the federal budget
100%
90%
80%
70%
60%
Military
50%
Other
SS/Med
40%
Interest
30%
20%
10%
0%
1968
1978
1988
1998
2004
Where do Federal
Dollars go?
• During Vietnam war, almost half of govt spending
on military. Today, again increase in defense
spending.
• After end of cold war, big decrease in military
spending.
• Where did the savings end up? SS and Medicare
• As population ages, this will increase.
• Much borrowing (deficit spending) during ’80s.
• Interest payments will continue to make larger
portion of govt spending
Where the government dollars go…
Who suffers?
• As deficit keeps rising, either need to tax more
or cut spending.
• Generally taxes fallen over the last few years.
• So spending cuts.
• Which programs get cut?
– Natural Resources and Environment (NRE); Education
and other training (Edu); Housing, food and
unemployment assistance (Hou)
• Where has spending increased? Health  rising
costs
Social programs as % of G
Health
Educ
1998
NRE
1980
Com Dev
Housing
0
2
4
6
%
8
10
Who pays the taxes?
Source
1960
2000
2004
Individual Income
Tax
44%
50%
43%
Corporate Income
Tax
23%
10%
9%
Social Security
16%
32%
41%
Excise Taxes
13%
3%
4%
Other
4%
4%
3%
Sources of Government Revenue
Who pays the taxes?
• Individual Income Taxes: Unchanged over
4 decades
• Corporate taxes: Fell by large amount
(especially during the ’80s)
• SS: Increased as more people entered
workforce (women, baby boomers)
• Excise Taxes: Tax on gasoline, alcohol and
cigarettes, also fell
Declining Democracy
• How does society change its priorities?
– In a democracy, through elections.
– People vote for those who best represent their
interests.
• Voter apathy increased over last 40 years.
• Who votes most often?
• How to influence?
Declining Democracy
Presidential Elections Voter Turnout (%)
70
60
50
40
30
20
10
0
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
How do others compare?
• 1996: Italy – 87%; Japan – 60%; India –
60%; Guatemala – 31%; Cameroon – 41%;
Canada – 55%
• Other ways to influence govt: lobby groups
• 1998: $1.42 B industry  $2.7 M/ member
of Congress
Will the real deficit and debt
stand up (Ch 23)
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Today, national debt approx $8.4 trillion;
1995: $5 T; 1929: $17 B
Does this mean that it increased 49312%
since 1929 and 68% since 1995?
Two problems:
Not adjusted for purchasing power (that
dollars are worth different in various
periods).
Does not count for the changing size of the
economy
Realistically Speaking…
• If your debt is $10 000, would not
worry much if income was $100 000.
But would if income was $20 000.
• Similarly debt as a percent of GDP
(national income) is what matters
rather than the actual debt.
The surReal Deficit…
• Similar true of federal deficit
• As indicated by graph, high deficit
during war years
• Looking at these figures, both annual
deficit and total debt have increased
as a percent of GDP.
Dollar values over different time
periods (Ch 1)
• Earned $30 000 in 1985; earned $50 000 in 2005.
Did you really earn more in 2005 than in 1985?
• Depends, things tend to cost more over time
(purchasing power declines or cost-of-living rises)
so later years $ buy less than prior years
• How do you calculate how much money is worth
over time, i.e., how do you compare prices from
different time periods? Purchasing power
converter (PPC) p 4
• Multiply $ from any year by the PPC
(based on say 2005 $)  value in terms of 2005$
Example using PPC
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1985: $30 000; 2005: $50 000
PPC1985 = 1.80
$(1985) x PPC(1985) = $ (2005)
$30000 x 1.80 = $54 000 in 2005$
So it would take $54 000 in 2005 to buy
what $30 000 bought in 1985. Actual
salary in 2005 is $50 000, in terms of
purchasing power, you are worse off in
2005 than in 1985.
PPC for selected years
1950 - 2005
1953
1956
1959
1962
1965
1968
1971
1974
7.26
7.13
6.66
6.42
6.15
5.57
4.79
3.93
1977
1980
1983
1986
1989
1992
1995
2005
3.20
2.35
1.95
1.77
1.56
1.38
1.27
1.00
Another example
• Govt spent $3M for a program in 1965, in 1995 same
program spent $10 M. In which year was the govt program
spending more in terms of purchasing power?
• PPC1965 = 6.15; PPC1990 = 1.48
• $ (1965) x PPC (1965) = $ (2005)
• $3 M x 6.15 = $18.5 M
• $(1990) x PPC (1990) = $ (2005)
• $10 M x 1.48 = $14.8 M
• So $14.8M was spent in 1995 (2005 $) vs $18.5 M spent in
1965 (2005 $). So more was spent in 1965 in terms of
purchasing power.
Now you try it!
• In 1983 gasoline cost $1.20 per
gallon. Today (2005) it costs $2.70.
Are the prices ‘really’ higher today?
PPC1983
= 1.95 (2005 $)
$(1983) x PPC (1983) = $ (2005)
1.20 x 1.95 = $2.34
So gas prices are actually cheaper
compared to 1983 in terms of 2005
purchasing power.
Caveats about PPC
• When comparing prices over years, must make
sure product is essentially the same in both years.
• If different features or better technology, then
can not use PPC.
• When comparing salaries need to make sure that
no major changes in working conditions. Use takehome salary. PPC only accounts for higher prices,
not higher taxes (or lower).
All – Time US Box Office Receipts
Total Gross ($ )
Film
Year
1. Titanic
1997
600,779,824
2. Star Wars
1977
400,935,665
3. Shrek 2
2004
436,471,036
4. ET
1982
434,949,459
5. Star Wars – Episode I
1999
431,065,444
6. Spider Man
2002
403,706,375
7. Lord of the Rings: Return of the King
2003
377,019,252
8. Spider Man 2
2004
373,377,893
9. The Passion of the Christ
2004
370,270,943
10. Jurassic Park
1998
356,784,000
The Most Popular Movies of All Time, Inflation
Adjusted
Film
Year of
Release
Total domestic gross
in millions of 1999 dollars
1. Gone with the Wind
1939
$920
2. Star Wars
1977
798
3. The Sound of Music
1965
638
4. Titanic
1997
601
5. E.T.–The Extra Terrestrial
1982
601
6. The Ten Commandments
1956
587
7. Jaws
1975
574
8. Doctor Zhivago
1965
543
9. The Jungle Book
1967
485
10. Snow White and the Seven Dwarfs
1937
476