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
Resource
Market
Businesses
Expenditures
Goods &
Services
Government
Resources
Goods &
Services
Net Taxes
Expenditures
Net Taxes
Goods &
Services
Households
Product
Market

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
=26%

Key Question Solutions Contd.
• Marginal tax rate = tax rate on next unit of income
• = 40% (all income above $30,000 @
.40)

Payroll Taxes
• Federal taxes based on wages and salaries
• Fund Social Security and
Medicaid
• 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