copyright ©2006 by thomson south-western. all rights reserved. an applications approach to...
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Copyright ©2006 by Thomson South-Western. All rights reserved.
An Applications Approach to Contemporary EconomicsBy Robert J. Carbaugh4th Edition
Chapter 9:
The Mixed Economy of the United States
Carbaugh, Chap. 9 2
The Mixed Economy of the United States. The Mixed Economy of the United States includes
private sector and the public sector. The private sector include:
Millions of households businesses
The public sector include: Federal government States Local governments
Carbaugh, Chap. 9 3
Households as income recievers Distribution of income is the way income
is devided among members of society. Functional distribution of income shows
the shares of a nation’s income accruing to the factors of production.
Personal distribution of income addresses the issue of how indiidual households share the nation’s income; as seen in slides 4 & 5.
Carbaugh, Chap. 9 4
Functional distribution of income, 2002
The Mixed Economy: Households
Source: From U.S. Department of Commerce, 2004-2005 Statistical Abstract of the United States(Washington, D.C.: U.S. Government Printing Office), Table 672.
Wages and salaries72%
Rents2%
Interest8%
Corporate profit
9%
Proprietor income9%
Carbaugh, Chap. 9 5
Personal distribution of income, 2002
The Mixed Economy: Households
Lowest 20 percent4.2%
Second 20 percent
9.7%
Middle 20 percent
15.5%
Fourth 20 percent
23.0%
Top 20 percent47.6%
Source: From U.S. Department of Commerce, 2004-2005 Statistical Abstract of the United States(Washington, D.C.: U.S. Government Printing Office), Table 672.
Carbaugh, Chap. 9 6
Sources of income inequalty Determinants of income differences:
Age: with age come more education, training and experience.
Differences in productive resources: quantity and quality of resources.
Investment in human capital: sharpening productive talents, acquiring new skills.
Inheritance: cash, stocks, bonds, homes, land.. Discrimination: between male or female,
religion, races…..
Carbaugh, Chap. 9 7
Households as spenders Parts of household income flows into
consumption, the rest is to pay taxes or is saved( slide 7).
Carbaugh, Chap. 9 8
Households income, 2004
The Mixed Economy: Households
Amount Percent(billions) of total
Disposition of household income
Personal consumption expenditures $8,282 88% Durable goods 1,007 11 Non-durable goods 2,387 25 Services 4,888 52Personal taxes 1,044 11Personal savings 43 1
TOTAL $9,369 100%
Source: From National Economic Accounts, Bureau of Economic Analysis, U.S. Department of Commerce, available at http://www.bea.doc.gov/bea/dnl.htm.
Carbaugh, Chap. 9 9
Business sector Business is an org. established for
producing and selling goods and services. 3 types of businesses:
Sole proprietorship (độc chủ) Partnership ( hợp danh) Corporation (cổ phần)
Carbaugh, Chap. 9 10
U.S. business firms in 2001
The Mixed Economy: Business
Source: From U.S. Commerce Department, Bureau of the Census, 2004–2005 Statistical Abstract of the UnitedStates (Washington, D.C.: U.S. Government Printing Office), Table 716.
Number of Businessfirms (mill.) receipts (bill.)
Form of business Number Percent Dollars Percent
Proprietorships 18.3 71% $1,017 4%Partnerships 2.1 8% 2,569 11%Corporations 5.2 21% 19,308 85%
TOTAL 25.6 100% 22,894 100%
Carbaugh, Chap. 9 11
Business sector- proprietorship Owned & operated by 1 individual. Easy to set up and close down. Owner is not responsible or answerable to
anyone But small size of capital Unlimited liability
Carbaugh, Chap. 9 12
Business sector- partnership Owned by 2 or more persons. Contribution of labor, expertise, capital… Decision making is more cumbersome. Limited life: ends when 1 withdraws. Limited funds: personal sources of capital. Unlimited liability.
Carbaugh, Chap. 9 13
Business sector- corporation A “legal person”.Owners are stock-holders.
Stock-holders vote for directors of BOD (Board of Directors).
Advantages: Large size of capital(may mobilize from sales of stocks);Unlimited life; Limited liability; easy transfer of ownership.
Disadvantages: double taxation; costly to set up and close down; problem of separation of ownership and control.
Carbaugh, Chap. 9 14
Government in the mixed economy Gov. provides:
Legal & social framework, Promote competition Alters distributions of incomes by taxation Provides public goods: national defense, education, fire
fighting…. Gov. expenditures = Gov. purchases + transfer
payments Gov. purchases: street lighting, sewage system, city
playground, national park, jet planes… Transfer payments:
Carbaugh, Chap. 9 15
Government in the mixed economyTransfer payments Transfer payments:
Unemployment compensation. Food stamps Supplemental security income Aid to families with Dependant children Medicaid Housing and energy subsidies Agricultural assistance
Carbaugh, Chap. 9 16
Government in the mixed economy US has devised a system of taxes and
transfer payments to alter the distribution of iincome in favor of the poor: ‘Peter’ is taxed to hepl ‘Paul’.
Carbaugh, Chap. 9 17
Government finance The charts shows the federal gov. budget
for 2004 and state & local ones for 2002: includes receipts and expenditures. Expenditures: largest portion was on income
transfer programs: social security, medicare, income security(48%)
Then comes national defense( 20%) Interest on public debts:
Carbaugh, Chap. 9 18
Government finance Where does the Gov. obtain funds:
Personal income taxes Social security, medicare, retirement taxes Corporate income taxes
Carbaugh, Chap. 9 19
Federal government receipts and expenditures, 2004
Government Finance
Personal income taxes43%
Corporate income taxes
10%
Excise, Customs, Estate, Gift and misc. taxes8%
SocialSecurity,
Medicare & other retirement
taxes39%
Federal Receipts
Source: From Office of Management and Budget, The Budget for Fiscal Year 2006, Historical Tables and Economic Report of the President, 2005.
Net interest on the debt
7%
Federal Expenditures
Social security, Medicare, & other retirement48%
National defense20%
Other15%
Health 10%
Carbaugh, Chap. 9 20
Education34%
Highways7%
Other43%
Expenditures
State and local receipts and expenditures, 2002
Government Finance
Sales and Excise taxes20%
Other29%
Property tax17% Revenue from
the Federal Government19%
Corporate income tax
2%
Receipts
Personal income tax
13%
Public welfare16%
Source: From Office of Management and Budget, The Budget for Fiscal Year 2006, Historical Tables and Economic Report of the President, 2005.
Carbaugh, Chap. 9 21
Taxation principles Benefit-receive principle: Taxes are paid in
propotion to the benefits that taxpayers get from public expenditure. E.g.:gazoline tax, taxes on airline tickets, sales
taxes, tolls…
Ability-to- pay principle: people with greater inomes & wealth should pay a higher rate. E.g.: income taxes.
Carbaugh, Chap. 9 22
3 types of taxation systems 3 types:
Proportional taxation Progressive taxation Regressive taaxation
Table 9.6 (slide 24): column 1: different levels of total income Column 2: total taxes due at levels co;lumn 3: avarage tax rate
Carbaugh, Chap. 9 23
Taxes and tax rates
Taxation
Nation Average tax rate
Sweden 59.3%France 50.4Austria 50.4Italy 45.8Germany 45.3Canada 41.2Australia 37.0United Kingdom 33.9United States 31.0Japan 30.9
Total tax receipts as a percent of gross domestic output, 2003
Average Tax Rate
Total Taxes DueTotal Income
Marginal Tax Rate
Change in Taxes DueChange in Income
Source: From U.S. Department of Commerce, Bureau of the Census, 2004–2005 Statistical Abstract of the UnitedStates (Washington, D.C.: U.S. Government Printing Office), Table 1344.
Carbaugh, Chap. 9 24
Progressive, proportional & regressive taxes
Taxation
Total Taxes Average Marginalincome due tax rate tax rate
Progressive tax$0 $0 - -
100 5 5% 5%200 20 10% 15%300 45 15% 25%
Regressive tax$0 $0 - -
100 30 30% 30%200 50 25% 20%300 60 20% 10%
Proportional tax$0 $0 - -
100 10 10% 10%200 20 10% 10%300 30 10% 10%
* In a progressive tax system, the average tax rate and marginal tax rate rise as income increases.
* In a regressive tax system, the average tax rate and marginal tax rate fall as income increases.
* In a proportional tax system, the average tax rate and marginal tax rate remain the same as income increases.
Carbaugh, Chap. 9 25
3 types of taxes Propotional taxation: also called flat-tax: as
income rises, taxes due rise by the same fraction.
Regressive taaxation: a smaller fraction of income is taken in taxes as income rises.
Progressive taxation: a larger fraction of income is taken in taxes as income rises.
Carbaugh, Chap. 9 26
US tax structure Federal personal income tax: Federal corporate income tax Social security tax Sales, excise, and property taxes Overall U.S tax system
Carbaugh, Chap. 9 27
1.Federal personal income tax Taxable income = Gross income –
exemptions, deductions and credits Gross income: wages, salaries, tips, bonuses,
….. Exemption: allowance for each household
member Deduction: home mortgage interest payments,
business expenses, charitable contribution, medical expenses, state&local taxes
Credits: child care, elderly and disabled, low-income allowance
Carbaugh, Chap. 9 28
Federal income tax rates for a single taxpayer, 2005
Taxation
Tax bracket Taxes Average MarginalOver Up to due* tax rate tax rate
$0 7,300 $ 730 10% 10%7,300 29,700 4,090 14% 15%
29,700 71,950 14,653 20% 25%71,950 150,150 36,549 24% 28%
150,150 326,450 94,728 29% 33% 326,450 and over 35%
* Computed at the top of the six taxable income brackets.
Source: From Internal Revenue Service, 2005 Tax Rate Schedules.
Carbaugh, Chap. 9 29
Share of federal personal income tax paid by various income groups, 2001
Taxation
Percentiles ranked Adjusted gross income Percentage of federaladjusted gross income threshold on percentiles personal income tax paid
Top 1% $292,913 34%Top 5% 127,904 53Top 10% 92,754 65Top 25% 56,085 83Top 50% 28,528 96Bottom 50% less than 28,528 4
Source: From New IRS Data on Income and Tax Shares, Joint Economic Committee, September 2003, available athttp://www.house.gov/jec.
Carbaugh, Chap. 9 30
2. Federal corporate income tax Federal corporate income tax is essentially
propotional tax with a flat rate of 35% for almost all companies
Carbaugh, Chap. 9 31
3. Social security tax Social security tax: imposed on individual’s
wage income up to $90,000. Social security tax is large ly a propotional
tax, but having some regressive features. E.g.: in 2005: 6.2% applied to the first $90,000,
but 3.1% on an income of $180,000
Carbaugh, Chap. 9 32
4. Sales, excise, and property taxes Sales, excise, and property taxes are
regressive. Why?
Carbaugh, Chap. 9 33
Should US tax system be reformed?
Carbaugh, Chap. 9 34
Progressive vs. flat-rate income tax
Taxation
Progressive tax
Flat-rate tax
Tax
ra
te
0
20%
Taxable income
Carbaugh, Chap. 9 35
Taxes on goods & services as a share of total tax revenue
Taxation
Source: From U.S. Department of Commerce, Bureau of the Census, 2004–2005 Statistical Abstract of the United States (Washington, D.C.: U.S. Government Printing Office), Table 1345.
31.3%
28.8%
25.6%
25.2%
24.7%
19.0%
16.1%
0% 5% 10% 15% 20% 25% 30% 35% 40%
United Kingdom
Germany
Italy
France
Canada
Japan
United States
Taxes on goods and services as a percent of total revenue, 2001