Ch 4 presentation 3- Taxes (Chapter 4 Presentation 3


Macro Chapter 4

Presentation 3

Government Purchases

• The products directly use up resources and are part of domestic output

• Ex- missile production uses scientists, machines, engineers etc.

Transfer Payments

• Do not directly use resources or create output

• Recipients make no current contribution for them

• Ex- Welfare, Social Security

The Circular Flow Revisited





Goods &




Goods &


Net Taxes


Net Taxes

Goods &





Average Tax Rate

• Total tax paid divided by total taxable income

Personal Income Tax

• Tax collected on taxable income (after deductions such as mortgage interest, charitable donations, education expenses) from households and businesses

• Fed. govt’s main revenue

Personal Income Tax Contd .

• The Federal income tax is considered progressive - the average tax rate increases as your income goes up

Marginal Tax Rate

• The rate at which a tax is paid on each additional unit of taxable income

• Rate on your next dollar earned

Key Question

Suppose in Fiscalville there is no tax on the first $10,000 of income, but a 20 percent tax on earnings between $10,000-20,000 and a 30 percent tax on income between

$20,000 and $30,000. Any income above

$30,000 is taxed at 40 percent. If your income is $50,000, how much in taxes will you pay? Determine your marginal and average tax rates.

Key Question Solutions

• $0-10,000 = no taxes paid

• 10,000-20,000 = (10,000 x .20= $2,000)

• 20,000-30,000 = (10,000 x .30 = $3,000)

• 30,000-50,000 = (20,000 x .4 = $8,000)

• Total Tax = $13,000

Key Question Solutions Contd

• Average Tax Rate = total tax / taxable income

= $13,000/$50,000


Key Question Solutions Contd.

• Marginal tax rate = tax rate on next unit of income

• = 40% (all income above $30,000 @


Payroll Taxes

• Federal taxes based on wages and salaries

• Fund Social Security and


• Both workers and employers pay equally

Sales and Excise Taxes

• Sales tax cover a wide range of products that are taxed

• Excise taxes target specific goods such as alcohol, tobacco, and gasoline

State and Local Taxes

• States’ main revenue comes through excise and sales taxes----education is the highest expense

• Local governments’ highest revenue comes from property taxes---education is also the highest expense