© 2007 Thomson South-Western 11. THE TAX SYSTEM. © 2007 Thomson South-Western U.S. NATIONAL DEBT CLOCK The Outstanding Public Debt as of Oct. 12, 2011

© 2007 Thomson South-Western

11. THE TAX SYSTEM


U.S. NATIONAL DEBT CLOCK• The Outstanding Public Debt as of Oct. 12,

2011 is: 14,800,000,000,000

• It is about 95% of the U.S. GDP

• The estimated population of the United States is 311,000,000so each citizen's share of this debt is

$47,731.


Public Debt to GDP ratio, 2010 Debt to GDP ratio

(CIA)

Debt to GDP ratio

(IMF)

Japan 197.5 225.9

Italy 119.5 118.4

Belgium 100.9 100.2

Singapore 105.8 98.9

U.S. 63.3 92.7

France 82.4 84.2

Canada 84 81.7

Spain 60.1 64.5

Nigeria 11.9 16.3

http://en.wikipedia.org/wiki/List_of_sovereign_states_by_public_debt


Difference between public debt and external debt

• Public debt: government’s liability including domestic and foreign ones

• External debt: foreign currency liability

• U.S. external debt = U.S. debt owned by foreign countries - dollar liability = ?

5

Debt change during …


Does the U.S. have too much spending or too much tax? 2010

Tax burden % of GDP (all levels)

Government expenditure % of GDP

France 59.8 52.8

Sweden 47.9 52.5

U.K. 38.9 47.3

Germany 40.6 43.7

Norway 42.1 40.2

Canada 32.2 39.7

U.S. 26.9 38.9

Japan 28.3 37.1

Australia 30.8 34.3http://en.wikipedia.org/wiki/Government_spending


“In this world nothing is certain but death and taxes.”

. . . Benjamin Franklin

020

4060

80100

Taxes paid in Ben Franklin’s time accounted for 5 percent of the

average American’s

income.1789


“In this world nothing is certain but death and taxes.”

. . . Benjamin Franklin

020

4060

80100

1789 Today

Today, taxes account for up

to a third of the average American’s

income.


Figure 1 Government Revenue as a Percentage of GDP

State and local

Federal

0

Revenue as

Percent of

GDP

Total government

1902 1922 19271913 1932 1940 1970 1980 1990 20001950 1960

35

30

25

20

15

10

5


Table 1: Central Government Tax Revenue as a Percentage of GDP

Source: World Development Report 1998/99


The Federal Government

• The U.S. federal government collects about two-thirds of the taxes in our economy.

• The largest source of revenue for the federal government is the individual income tax.

• Individual Income Taxes• The marginal tax rate is the tax rate applied to each

additional dollar of income.• Higher-income families pay a larger percentage of

their income in taxes. (Progressive tax)



• The Federal Government and Taxes • Payroll Taxes: tax on the wages that a firm pays its

workers.• Social Insurance Taxes: taxes on wages that is

earmarked to pay for Social Security and Medicare.

• Excise Taxes: taxes on specific goods like gasoline, cigarettes, and alcoholic beverages.


Source: Economic Report of the President, 2005, Table B-81.

Table 2 Receipts of the Federal Government: 2004


Receipts of the Federal Government 2004

Individual Income Tax, 43%

Social Insurance Tax, 39%

Corporate Tax, 10%

Other, 8%


Table 3 Federal Income Tax Rates: 2004



• Federal Government Spending• Government spending includes transfer payments

and the purchase of public goods and services.• Transfer payments are government payments not made in

exchange for a good or a service.

• Transfer payments are the largest of the government’s expenditures.



• Federal Government Spending• Expense Category:

• Social Security

• National Defense

• Income Security

• Net Interest

• Medicare

• Health

• Other


Table 4 Spending of the Federal Government: 2004



Federal Government Spending: 2004

Social Security, 22%

Defense, 20%

Income Security, 15%Medicare, 12%

Health, 10%

Net Interest, 7%Other, 15%



• Budget balance : T - G

• Budget Surplus: T – G > 0• A budget surplus is an excess of government

receipts over government spending.

• Budget Deficit: G – T > 0• A budget deficit is an excess of government

spending over government receipts.



• Financial Conditions of the Federal Budget• A budget deficit occurs when there is an excess of

government spending over government receipts.• Government finances the deficit by borrowing from the

public.

• A budget surplus occurs when government receipts are greater than government spending.

• A budget surplus may be used to reduce the government’s outstanding debts.



Figure 1. Outlays, Receipts, and the Surplus, 1970 — 2004


The Demographic and Fiscal Challenge


The Demographic and Fiscal Challenge


State and Local Government

• State and local governments collect about 40 percent of taxes paid.



• Receipts• Sales Taxes• Property Taxes• Individual Income Taxes• Corporate Income Taxes• Federal government transfer• Other

Taxes

$



Table 5 Receipts of State and Local Governments: 2002



• Spending• Education• Public welfare• Highways• Other



Table 6 Spending of State and Local Governments: 2002


TAXES AND EFFICIENCY• Policymakers have two objectives in designing

a tax system...– Efficiency – Equity


TAXES AND EFFICIENCY• One tax system is more efficient than another

if it raises the same amount of revenue at a smaller cost to taxpayers.

• An efficient tax system is one that imposes small deadweight losses and small administrative burdens.


TAXES AND EFFICIENCY • The Cost of Taxes to Taxpayers

– The tax payment itself– Deadweight losses– Administrative burdens


Marginal Tax Rates versus Average Tax Rates

• The average tax rate is total taxes paid divided by total income.

• The marginal tax rate is the extra taxes paid on an additional dollar of income.


Lump-Sum Taxes

• A lump-sum tax is a tax that is the same amount for every person, regardless of earnings or any actions that the person might take.


Table 7 Three Tax Systems


Source: Congressional Budget Office. Figures are estimates for 2005. Dollar figures are expressed in 2001 dollars.

Table 8 The Burden of Federal Taxes

Documents

© 2007 Thomson South-Western 11. THE TAX SYSTEM. © 2007 Thomson South-Western U.S. NATIONAL DEBT CLOCK The Outstanding Public Debt as of Oct. 12, 2011