Government Finance Government Finance Decisions governments make affect

Government Finance

Government Finance � Decisions governments make affect the economy as a whole by changing incentives

Government Finance � Decisions governments make affect the economy as a whole by changing incentives � Heavily taxed activities, products, localities, industries or people react accordingly… move elsewhere, convert money to alternate uses, not work as hard, illegal behavior (avoiding taxes)

Government Finance � Decisions governments make affect the economy as a whole by changing incentives � Heavily taxed activities, products, localities, industries or people react accordingly… move elsewhere, convert money to alternate uses, not work as hard, illegal behavior (avoiding taxes) � In short, people change their behavior in response to governmental financial operations

How does government get its money?

How does government get its money? � Taxes, bonds, sale of goods and services and the good old printing press

How does government get its money? � Taxes, bonds, sale of goods and services and the good old printing press � Each of which has its own consequences, no matter what the intent

A bunch of terms � Government bonds: An instrument of indebtedness, where the issuer owes the holder a debt and must repay it along with interest. Essentially a claim on future tax revenues.

A bunch of terms � Government bonds: An instrument of indebtedness, where the issuer owes the holder a debt and must repay it along with interest. Essentially a claim on future tax revenues. � Feds issue: Treasury bills – one year or less Treasure notes – two to 10 years Treasury bonds – 30 years TIPS – five, 10, 15 years

Bonds � Corporations also issue bonds to expand business, fund innovation and acquire new companies. These bonds create wealth

Bonds � Corporations also issue bonds to expand business, fund innovation and acquire new companies. These bonds create wealth � Government bonds create no wealth… in fact, they pull money that could be productive out of the system, thus negatively affecting wealth creation

A bunch of terms � Balanced budget:

A bunch of terms � Balanced budget: if all current government spending is paid for with money received from taxes and other revenues. Most states have balancedbudget laws.

A bunch of terms � Balanced budget: if all current government spending is paid for with money received from taxes and other revenues. Most states have balancedbudget laws. � Budget surplus:

A bunch of terms � Balanced budget: if all current government spending is paid for with money received from taxes and other revenues. Most states have balancedbudget laws. � Budget surplus: when current tax receipts exceed current spending

A bunch of terms � Balanced budget: if all current government spending is paid for with money received from taxes and other revenues. Most states have balancedbudget laws. � Budget surplus: when current tax receipts exceed current spending � Last true federal budget surplus was in 1969, although thanks to accounting schemes, President Clinton is credited with it three times in his terms

Couple more terms � Deficit:

Couple more terms � Deficit: the preferred way to govern whereby tax receipts don’t even come close to covering current expenses so gap is closed by bonds and printing press

Fiscal 2013 federal deficit � $3. 45 trillion spent � $2. 77 trillion in revenues � $680 billion deficit

Couple more terms � Deficit: the preferred way to govern whereby tax receipts don’t even come close to covering current expenses so gap is closed by bonds and printing press � National debt:

Couple more terms � Deficit: the preferred way to govern whereby tax receipts don’t even come close to covering current expenses so gap is closed by bonds and printing press � National debt: the accumulation of those deficits over time, or the total amount owed by the national government. How big is U. S. debt?

$17. 5 trillion

$17. 5 trillion � Debt person: $55, 280 � Debt per taxpayer $151, 950 � Debt is increasing about $2 billion per day

National debt � Two pieces � Public debt, that held by the public, foreigners, corporations. 71% of debt � Intra-government holdings, or debt held by government accounts: 29%

Taxes

What is a tax?

What is a tax? � “A sum of money demanded by a government for its support or for specific facilities or services, levied upon incomes, property, sales, etc. ” � From the Latin “taxo” � It "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority”

Taxes � All that governments control is tax rates

Taxes � All that governments control is tax rates � Increases in tax rates don’t necessarily translate to increased taxes

Taxes � All that governments control is tax rates � Increases in tax rates don’t necessarily translate to increased taxes � Meet the Laffer Curve

The Laffer Curve � Relationship revenue between tax rates and government

The Laffer Curve � Relationship between tax rates and government revenue � Taxable-income elasticity: income will change in response to tax rates

The Laffer Curve � Relationship between tax rates and government revenue � Taxable-income elasticity: income will change in response to tax rates � Raising tax rates beyond a certain point will result in less tax revenues

The Laffer Curve � Relationship between tax rates and government revenue � Taxable-income elasticity: income will change in response to tax rates � Raising tax rates beyond a certain point will result in less tax revenues � Cutting taxes can result in more revenue

Laffer on the Dutch � Cut top marginal rate from 70% to 28% � Cut corporate tax rate from 46% to 34% � Tax brackets “pushed out” � Cut pages in Federal Registry from 80, 000 to 48, 000 � Ended price controls on oil and gas � Created 21 million jobs � Increased tax revenues 60%

More Laffer “The true lessons to be learned from Reagan presidency is that good economics isn’t Republican or Democrat, right wing or left wing, liberal or conservative. It’s simply good economics. President Obama should take heed and not limit his vision while seeking a workable solution to America’s tragically high unemployment rate. ”

Taxes � All that governments control is tax rates � Increases in tax rates don’t necessarily translate to increased taxes � Meet the Laffer Curve � CBO has been very wrong about impacts of tax increases and decreases

Taxes � All that governments control is tax rates � Increases in tax rates don’t necessarily translate to increased taxes � Meet the Laffer Curve � CBO has been very wrong about impacts of tax increases and decreases � Key point: tax rates change behavior

Couple more terms � Regressive tax:

Couple more terms � Regressive tax: one that affects lower-income people disproportionally

Couple more terms � Regressive tax: one that affects lower-income people disproportionally � Example?

Couple more terms � Regressive tax: one that affects lower-income people disproportionally � Example? � Sales tax get a higher percentage of income from low-income people. � Social Security tax also is regressive because the 7. 65% tax stops after $117, 000 earned (selfemployed SS tax is 15. 3%)

Still more terms � Progressive tax:

Still more terms � Progressive tax: a tax that hits the higher-income people disproportionally

Still more terms � Progressive tax: a tax that hits the higher-income people disproportionally � Examples: income tax with higher marginal rates

2013 federal income tax rates 2013 Tax Brackets Single Married Filing Jointly 10% Bracket $0–$8, 925 $0–$17, 850 15% Bracket $8, 926 –$36, 250 $17, 850–$72, 500 25% Bracket $36, 250–$87, 850 $72, 500–$146, 400 28% Bracket $87, 850–$183, 250 $146, 400–$223, 050 33% Bracket $183, 250–$398, 350 $223, 050–$398, 350 35% Bracket $398, 350–$400, 000 $398, 350–$450, 000 39. 6% Bracket $400, 000+ $450, 000+

One more term � Hypocrite: a politician who loves taxing and spending but is greedy with their own money

One more term � Hypocrite: a politician who loves taxing and spending but is greedy with their own money � President Obama: 2003 income of $238, 000… contributions to charity/religious organizations, $3, 400 (1. 4%)

One more term � Hypocrite: a politician who loves taxing and spending but is greedy with their own � President Obama: 2003 income of $238, 000… contributions to charity/religious organizations, $3, 400 (1. 4%) � Vice President Biden: 2007 income of $319, 853… contributions $995 (0. 0000001%) � Joe since increased it to 1. 5% of income � Tithe: 10% of your first-fruits to God

Other taxes � Most states (all but Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming) and many cities also tax your income

Other taxes � Most states (all but Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming) and many cities also tax your income � Least tax-friendly states: New York, New Jersey, California, Vermont, Rhode Island, Minnesota, North Carolina, Wisconsin, Maryland

What? ? Another term? ? � VAT:

What? ? Another term? ? � VAT: value-added tax

What? ? Another term? ? � VAT: value-added tax � Big in Europe: a tax imposed on things as they move through the supply chain; an indirect tax in that consumers don’t see the impact of the tax when they make a purchase even though something has been hammered each step of the way

Dr. S. Theorem “The less visible a tax is, the more revenue that can be collected without resistance or electoral retribution…”

Our old buddies, government bonds � What’s a bond?

Our old buddies, government bonds �A bond is a legal obligation to pay a fixed amount of $ on a fixed date, a way for governments to borrow

Our old buddies, government bonds �A bond is a legal obligation to pay a fixed amount of $ on a fixed date, a way for governments to borrow � 47% of the U. S. public debt (bonds) is held by foreigners, primarily China and Japan

Our old buddies, government bonds �A bond is a legal obligation to pay a fixed amount of $ on a fixed date, a way for governments to borrow � 47% of the U. S. public debt (bonds) is held by foreigners, primarily China and Japan � “Future generations of Japanese or Chinese will be able to collect wealth from future generations of Americans…”

What might you look like when you’re my age?

Charges for goods & services � Mass transit:

Charges for goods & services � Mass transit: formerly run privately, now almost universally nationalized, i. e. , subsidized and run by highly compensated government employees

Charges for goods & services � Mass transit: formerly run privately, now almost universally nationalized, i. e. , subsidized and run by highly compensated government employees � Why so inefficient?

Charges for goods & services � Mass transit: formerly run privately, now almost universally nationalized, i. e. , subsidized and run by highly compensated government employees � Why so inefficient? Lack of incentives for government to be efficient

Stop with the terms!!!!! � Entitlements:

Stop with the terms!!!!! � Entitlements: spending that is beyond the control of government officials once it’s law… such as unemployment, government worker retirements, Social Security

Stop with the terms!!!!! � Entitlements: spending that is beyond the control of government officials once it’s law… such as unemployment, government worker retirements, Social Security � More than 60% of the U. S. budget is for entitlement programs

Stop with the terms!!!!! � Entitlements: spending that is beyond the control of government officials once it’s law… such as unemployment, government worker retirements, Social Security � More than 60% of the U. S. budget is for entitlement programs � President Obama has vastly expanded entitlements, as did Bush 43

Cost vs Expenditures � Government programs are rarely discussed in terms of overall cost to economy

Cost vs Expenditures � Government programs are rarely discussed in terms of overall cost to economy � Good example: people complain about the cost of imprisoning people, but the cost of the criminals committing crimes would be a much great impact on the economy

Assignment for April 15 � Chapter 25: “The History of Economics”

Assignment for April 15 � Chapter 25: “The History of Economics” � Write a 350 -word essay: “Why I want to be (or don’t want to be) an economist. ” Have fun; this one is your opinion of what you think of econ as a course of study and profession. You are the “sez who!”