What are things the government should not do?

The Iron Lady“…a true-believing, Friedrich von Hayek-quoting enemy of what she saw as the excesses of the welfare state, of the unions that seemed to run it and of the mass of socialist encrustations that had formed on the Labor Party’s left wing in the years after World War II. She thought that statism was crushing the nation’s economy, destroying the morale of its people and rapidly diminishing its standing in the world.”

GOVERNMENT FINANCE

WHAT’S DR. S. SAYING IN THIS CHAPTER?

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. Most states have balanced-budget laws.

A bunch of terms• Balanced budget: if all current government spending is

paid for with money received from taxes. Most states have balanced-budget laws.

• Budget surplus:

A bunch of terms• Balanced budget: if all current government spending is

paid for with money received from taxes. Most states have balanced-budget laws.

• Budget surplus: a hypothetical status whereby 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. Most states have balanced-budget laws.

• Budget surplus: a hypothetical status whereby current tax receipts exceed current spending

• Last true federal budget surplus was in 1969, although some say President Clinton did it three times

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 2012 federal deficit• $3.5 trillion spent• -$2.45 trillion in revenues• $1.09 trillion 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?

$16.78 trillion

$16.78 trillion• Debt per person: $53,185• Debt per taxpayer $148,078• Debt is increasing $4.1 billion per day

Taxation

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• Our old friend the Laffer Curve

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

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

increased taxes• Our old friend 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• Our old friend 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 $113,700 earned (self-employed 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

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%)

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%)

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 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 will you look like when you’re my age?

What will 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, not 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, not 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 16 • Chapter 25: “The History of Economics”

Assignment for April 16 • 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!”