Budgets and Taxes

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Budgets and Taxes
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Chapter 4 additional terms
• Inflation\unemployment relationship
• Monetary and fiscal policy
• How Federal Reserve sets monetary policy
• Demand side vs. Supply side (as in Lafer curve)
• Line item veto\Balance Budget Amendment
Revenues and Spending (Outlays)
BUDGET CONTROL ACT OF 2011
• Raises the Debt Ceiling in exchange for long term budget cuts
(900 Billion 1.2 Trillion) over ten years.
• “Supercommittee must produce something better by November 23,
2011 (it didn’t)
• Mandatory cuts now go into place, beginning January 2013-2021
• SEQUESTER: Cuts:
across the board cuts, except Social Security, Medicare and
Medicaid beneficiaries
Total Government Surplus\ Deficit, % of GDP
OECD Economic Outlook, Statistical Appendix, 2012
Total Government Debt, % of GDP
OECD Economic Outlook, Statistical Appendix, 2012
Ten Largest Deficits and Debts, % of GDP, 2012
Deficits
Japan
United States
Ireland
Spain
Greece
United Kingdom
Portugal
Israel.....
Slovak Republic
France
Debt
-9.9%
-8.5
-8.1
-8.1
-6.9
-6.6
-5.2
-4.7
-4.6
-4.5
Greece
Japan
Italy
United States
Portugal
Belgium
Ireland
United Kingdom
France
Spain
146%
134
98
86
83
83
80
73
66
58
OECD Economic Outlook, Statistical Appendix, 2012
Health Care | Education | Higher Education | Poverty | Crime and
Fiscal 2013 Budget
Debt
triples
Interest
Payments
go down
Taxation
Fairness?
• absolute equity – all benefit from government
– all should pay equally
(head tax)
• Ability to pay -- justification for progressive
taxation
(graduated income tax)
• Benefit principle -- tax in proportion to the
benefit
(gas tax, social security payroll tax)
Economic Neutrality -Tax systems should exert minimal impact on the
spending and business decisions of individuals and
businesses.
Violations of neutrality:
(create positive and negative externalities)
• tax subsidies for oil drilling, homeownership,
health care
• Tax incentives for positive social behavior
• Sin taxes
• Brick and Mortar Sales tax vs Internet sales
Top 20 Biggest Tax Expenditure of US Govt.
Efficiency and Simplicity
• Cost of collecting taxes
(toll roads vs. IPass)
• Cost of compliance
(tax lawyers and accoutnants)
Visibility
• Taxes should not be hidden – those who
bear the burden should be aware
(Hidden taxes: Gross Receipts Tax,
Lottery?)
Other principles
•
•
•
•
Broad base (to allow lower rates)
Predictable and stable supply of revenue
Diverse sources (for stability and lower rates)
Addresses geographic competition
Tax
Federal
Income Tax
Ill State
Income Tax
Social Security
Medicare
Collection User Sin
Progressive? Costs Tax? Tax?
Economic Effects
Penalizes
Rewards
progressive
medium
Work
tax exempted
income
flat
medium
Work
tax exempted
income
very
regressive
very low

Corporation
tax
flat
low
Sales Tax
regressive
low
Gas tax
even
low

Toll roads
even
high

Property tax
flat
cigarette\
alcohol
regressive
business
investment
medium
low
work
--
brick &
mortar stores
driving,
large vehicles
savings,
Internet sales
public
transportation
property
improvmnt
homeownership
(exemption)
drinking
 smoking
healthy people
Revenues
The Laffer Curve
O
TAX RATE
100
FIGURE 3.1b
Income Tax Revenues after Tax Changes, Cumulative % Change
(constant$)
90%
+82% --70%
50%
+16%
|
+27%
|
-2%
|
30%
10%
0
-10%
'81 82 83 84 85 86 87 88 89
Reagan 1982 tax cut
92 93 94 95 96 97 98 99 00
Clinton 1993 tax increase
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