Vocabulary for Chap 9Vocabulary for Chap 9

Sin taxSin tax Tax loopholeTax loophole

Individual income taxIndividual income tax Proportional taxProportional tax

Progressive taxProgressive tax Regressive taxRegressive tax

FICAFICA IRSIRS

MedicareMedicare Excise taxExcise tax

Estate taxEstate tax Gift TaxGift Tax

Chapter 9Chapter 9

Sources of Government RevenueSources of Government Revenue

Economic Impact of TaxesEconomic Impact of Taxes(or how taxation affect the economy)(or how taxation affect the economy)• Affects how resources are allocatedAffects how resources are allocated

• Taxing an industry can drive up the cost of Taxing an industry can drive up the cost of productionproduction

• Taxing consumers can decrease demandTaxing consumers can decrease demand• Can attempt to adjust behaviorCan attempt to adjust behavior

• ““Sin” taxesSin” taxes• Can affect productivity and growthCan affect productivity and growth

• Can affect incentives to save; produce Can affect incentives to save; produce more goods; invest; workmore goods; invest; work

Taxes (contd.)Taxes (contd.)

• Criteria for effective taxesCriteria for effective taxes• Equitable, Simplicity, Efficient Equitable, Simplicity, Efficient • Our government officials “never” read these Our government officials “never” read these

pagespages• Two principles of taxationTwo principles of taxation

• Benefit principleBenefit principle• Whoever benefits from the service should Whoever benefits from the service should

paypay• Ability-to-PayAbility-to-Pay

• Suggests people should be taxed Suggests people should be taxed according to their ability to payaccording to their ability to pay

Types of TaxesTypes of Taxes• Progressive TaxProgressive Tax: the tax rate increases : the tax rate increases

as a person’s taxable income level rises. as a person’s taxable income level rises. A progressive tax is usually capped at A progressive tax is usually capped at some tax rate. The income tax in the U.S. some tax rate. The income tax in the U.S. is a progressive tax.is a progressive tax.

• Proportionate TaxProportionate Tax:: the same tax rate is the same tax rate is used for all levels. This is sometimes used for all levels. This is sometimes called a flat tax; e.g. property taxescalled a flat tax; e.g. property taxes

• Regressive TaxRegressive Tax: the tax rate decreases : the tax rate decreases as a person’s taxable income level rises; as a person’s taxable income level rises; e.g. a sales taxe.g. a sales tax

Federal RevenuesFederal Revenues

• The single largest component of federal revenue are The single largest component of federal revenue are individual income taxesindividual income taxes. During the year, the . During the year, the federal government collects some of the taxes due in federal government collects some of the taxes due in advance by advance by withholdingwithholding a portion of workers’ a portion of workers’ paychecks.paychecks.

• The second largest component of federal revenue are The second largest component of federal revenue are social insurance taxessocial insurance taxes (FICA) which are taxes (FICA) which are taxes levied on earnings to pay for Social Security and levied on earnings to pay for Social Security and Medicare.Medicare.

• Another tax paid directly by individuals and families Another tax paid directly by individuals and families are are estate and gift taxesestate and gift taxes..

Federal Revenues (Federal Revenues (ContinuedContinued))

• The The corporate taxcorporate tax is a tax levied on the earnings is a tax levied on the earnings of corporations. This tax raised less than 7.5% of of corporations. This tax raised less than 7.5% of total federal revenues during fiscal year 2009.total federal revenues during fiscal year 2009.

• The other sources of government revenue are The other sources of government revenue are relatively minor. relatively minor. Federal excise taxesFederal excise taxes are taxes are taxes levied on the sale of some products, e.g. like levied on the sale of some products, e.g. like gasoline, tires, firearms, alcohol and tobacco. gasoline, tires, firearms, alcohol and tobacco. Custom dutiesCustom duties are taxes levied on goods are taxes levied on goods imported to the United States such as foreign imported to the United States such as foreign cars or wines.cars or wines.

Federal Revenues/IncomeFederal Revenues/IncomeSources of Federal Government Revenue, Fiscal Sources of Federal Government Revenue, Fiscal

Year 2009Year 2009

CategoryCategory Receipts Receipts (billions)(billions)

% of revenues% of revenues

Total revenueTotal revenue $1,782$1,782

Individual income taxesIndividual income taxes 794794 4545

Social insurance taxesSocial insurance taxes 713713 4040

Estate and gift taxesEstate and gift taxes 2222 11

Corporate income taxesCorporate income taxes 132132 77

Excise taxes and customs Excise taxes and customs dutiesduties

8787 55

Miscellaneous receiptsMiscellaneous receipts 3434 22

Federal Revenues (Federal Revenues (ContinuedContinued))

Components of Federal Revenue, 2009Components of Federal Revenue, 2009

Excise and customs

duties, 5%Corporate taxes, 7%

Estate and gift taxes, 1%

Social insurance

taxes, 39%

Miscellaneous taxes, 2%

Income taxes, 44%

Vocabulary for Chapter 10Vocabulary for Chapter 10

• Public sectorPublic sector• Private sectorPrivate sector• Transfer paymentTransfer payment• Federal budgetFederal budget• Federal budget surplusFederal budget surplus• Federal budget deficitFederal budget deficit• Fiscal yearFiscal year• Mandatory spendingMandatory spending• Discretionary spendingDiscretionary spending

Chapter 10Chapter 10

Government SpendingGovernment Spending

Chapter 10 Chapter 10 Government SpendingGovernment Spending

• Government spending is referred to as Government spending is referred to as spending in the “public sector”.spending in the “public sector”.

• Government spending includesGovernment spending includes

• Expenditures on goods and servicesExpenditures on goods and services

• Transfer payments, or direct Transfer payments, or direct payments to individuals, such as payments to individuals, such as social security, unemployment, etc.social security, unemployment, etc.

Federal SpendingFederal Spending• Discretionary spendingDiscretionary spending constitutes constitutes

all the programs that Congress all the programs that Congress authorizes on an annual basis, which authorizes on an annual basis, which are not automatically funded by prior are not automatically funded by prior laws passed by Congress.laws passed by Congress.

• Mandatory (Entitlement) spendingMandatory (Entitlement) spending constitutes all spending that Congress constitutes all spending that Congress authorized by prior laws. They are the authorized by prior laws. They are the single largest component of the federal single largest component of the federal budget. budget.

Federal SpendingFederal Spending• Examples of mandatory spending:Examples of mandatory spending:

• Social securitySocial security provides retirement provides retirement payments to retirees, as well as a host of payments to retirees, as well as a host of other benefits to widows and families of other benefits to widows and families of disabled workers.disabled workers.

• MedicareMedicare provides health care to all provides health care to all individuals once they reach the age of 65.individuals once they reach the age of 65.

• MedicaidMedicaid provides health care to the poor, in provides health care to the poor, in conjunction with the states.conjunction with the states.

The Federal BudgetThe Federal Budget

• The Federal Budget “prescribes” government The Federal Budget “prescribes” government spending for a fiscal year. The fiscal year for the spending for a fiscal year. The fiscal year for the government starts Oct 1government starts Oct 1stst and ends Sep 30 and ends Sep 30thth..

• Following is timeline of how the budget is Following is timeline of how the budget is prepared for the Fiscal Year starting Oct 1, 2009prepared for the Fiscal Year starting Oct 1, 2009

• The President’s Office of Management and The President’s Office of Management and Budget begins assessing the government Budget begins assessing the government agencies budget requirements around agencies budget requirements around September/October of 2008. (contd. on next slide)September/October of 2008. (contd. on next slide)

Federal Budget (contd.)Federal Budget (contd.)

• The President sends his proposed budget to the The President sends his proposed budget to the House of Representatives in February 2008.House of Representatives in February 2008.

• The budget is reviewed by affected House The budget is reviewed by affected House Committees and subcommittees and is sent to Committees and subcommittees and is sent to the Senate by Sep 15, 2008.the Senate by Sep 15, 2008.

• After Senate approval, the completed budget is After Senate approval, the completed budget is sent to the President.sent to the President.

• The final budget is signed by the President.The final budget is signed by the President.• Lakers on a 5 game losing streak, golden Lakers on a 5 game losing streak, golden

state?? Come on man!state?? Come on man!

Federal Budget (contd.) *Federal Budget (contd.) *

• In the process, the House, the Senate, or the In the process, the House, the Senate, or the President may disagree with the budget as it President may disagree with the budget as it was presented to them and a compromise was presented to them and a compromise may be necessary.may be necessary.

• In 1995, the government was “shut down” In 1995, the government was “shut down” (except for essential services) because the (except for essential services) because the budget delivered to President Clinton was budget delivered to President Clinton was vastly different than the one he gave to vastly different than the one he gave to Congress 8 months earlier.Congress 8 months earlier.

Federal Spending for Fiscal Year 2009Federal Spending for Fiscal Year 2009CategoryCategory Outlays Outlays

(billions)(billions)% of Budget% of Budget

Total outlaysTotal outlays $2,158$2,158

Discretionary spendingDiscretionary spending 825825 3838

DefenseDefense 405405 1919

Non-DefenseNon-Defense 420420 1919

Entitlements and mandatory Entitlements and mandatory spendingspending

1,1791,179 5555

Social SecuritySocial Security 470470 2222

Medicare and MedicaidMedicare and Medicaid 535535 2525

Other programsOther programs 174174 88

Net interest (also mandatory Net interest (also mandatory spending)spending)

153153 77

Why the Budget Can’t be Why the Budget Can’t be Tamed?Tamed?

• Discretionary spending is approximately 38% Discretionary spending is approximately 38% of the Federal Budgetof the Federal Budget

• Of that 38%, 19% is defense spending which Of that 38%, 19% is defense spending which can’t or won’t be reduced.can’t or won’t be reduced.

• The remaining 19% (education, highways, The remaining 19% (education, highways, social services, NASA, etc) is the only portion social services, NASA, etc) is the only portion which could be reduced. Which of those which could be reduced. Which of those agencies do YOU think could operate with agencies do YOU think could operate with less money? less money?

The Federal “Deficit” and “Debt”The Federal “Deficit” and “Debt”

• The federal government runs a The federal government runs a budget deficitbudget deficit when it when it spends more than it receives in tax revenues. For FY spends more than it receives in tax revenues. For FY 2008 the deficit is projected to be $480 billion (this will be 2008 the deficit is projected to be $480 billion (this will be added to the Debt)added to the Debt)

• If the government collects more in taxes than it spends, it If the government collects more in taxes than it spends, it will run a will run a budget surplusbudget surplus. The last years for surplus were . The last years for surplus were 1999 and 2000. 1999 and 2000.

• The total of all annual deficits is the The total of all annual deficits is the Federal (or Public) Federal (or Public) Debt.Debt. The current debt is over $9.8 trillion. Currently, The current debt is over $9.8 trillion. Currently, approximately 14% of the Federal Budget is spent paying approximately 14% of the Federal Budget is spent paying the the interestinterest on the debt – the principal of the debt (the on the debt – the principal of the debt (the $9.8 trillion) is not and will not be paid.$9.8 trillion) is not and will not be paid.

Federal Taxes, Spending, and Federal Taxes, Spending, and Deficits,1992-2003Deficits,1992-2003

Vocabulary Chapter 11Vocabulary Chapter 11

• MoneyMoney• Medium of exchangeMedium of exchange• Measure of valueMeasure of value• Store of valueStore of value• Gold standardGold standard• Fiat moneyFiat money• Central BankCentral Bank• Run of the BankRun of the Bank• Bank HolidayBank Holiday

CHAPTER 11 CHAPTER 11 MONEY AND BANKINGMONEY AND BANKING

PG 285-290; 296-298;300-302

The Gold Standard - 1900The Gold Standard - 1900

• Under the gold standard, money was Under the gold standard, money was equal to, and could be exchanged for a equal to, and could be exchanged for a unit of goldunit of gold

• Advantages of a gold standardAdvantages of a gold standard• Makes people feel secureMakes people feel secure• Limited the governments production Limited the governments production

of moneyof money

• Disadvantages of the gold standardDisadvantages of the gold standard

• Growth of gold supply may not Growth of gold supply may not support growth of moneysupport growth of money

• People could convert money to goldPeople could convert money to gold

• Price of gold fluctuatesPrice of gold fluctuates

• End of gold standardEnd of gold standard• 1930’s gold reserves were being money 1930’s gold reserves were being money

drained drained • The inconvertible Fiat money standard began The inconvertible Fiat money standard began

in 1934.in 1934.• Today we use “Fiat” moneyToday we use “Fiat” money

• A dollar is worth a dollar because the A dollar is worth a dollar because the government says it is. government says it is.

• The U.S. manages the money supplyThe U.S. manages the money supply

MODERN BANKINGMODERN BANKING

• Federal reserve act of 1913Federal reserve act of 1913

• created a central bankcreated a central bank

• The Federal Reserve (THE FED)The Federal Reserve (THE FED)

• Controls the money supplyControls the money supply

• Problems in the banking area during the Problems in the banking area during the Great DepressionGreat Depression

• Bank runsBank runs

• Bank holidaysBank holidays

• Created the FDIC (FEDERAL Created the FDIC (FEDERAL DEPOSITORS INSURANCE DEPOSITORS INSURANCE CORPORATION)CORPORATION)

• INSURED DEPOSITS UP TO INSURED DEPOSITS UP TO $100,000 (NOW $250,000)$100,000 (NOW $250,000)