The Economics of Collective Decision Making

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Chapter 24
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Government Spending as a Share of the Economy,
1930-2006

• The following slide shows total government
  spending (federal, state, and local) as a share
  of the economy.
• Total government spending accounted for only 9.4
  of GDP in 1930, and only one third of this
  spending was at the federal level.
• Government spending, particularly at the federal
  level, soared from 1930 to 1970.
• Total government spending rose from 9.4of GDP
  in 1930 to 30.2 of GDP in 1970.
• Since 1970, government spending has been
  relatively constant at about one-third of the
  U.S. economy.

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The Size of Government
Government Expenditures as a Share () of GDP
Federal
1930
State local
1940
1950
1960
1970
1980
1990
2000
2006
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How the Federal Government Spends (2006)
Sources Economic Report of the President, 2007,
and Statistical Abstract of the United States,
2007.
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How State and Local Governments Spend
Sources Economic Report of the President, 2007,
and Statistical Abstract of the United States,
2007.
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Financing the Public Sector Taxation

• In order to make available public and correct
  inequity, government must free up resources from
  the production of private goods.
• Taxes shift resources from private to public use
• Taxing households and businesses reduces their
  incomes and spending, the private demand for
  products decreases, as does the private demand
  for resources.
• This is known as Deadweight Loss

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THE U.S. TAX STRUCTURE
Collection of Taxes

• Federal Government
• Personal Income Tax
• Corporate Income Tax

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(Social Security)
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THE U.S. TAX STRUCTURE
Collection of Taxes

• State Governments
• Personal Income Tax
• Sales Tax
• County and City Governments
• Property Taxes

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TAXES
Tax Incidence The Tax Incidence or Tax Burden is
the determination of who actually pays the tax.
Government must determine how to appropriate
taxes from the citizens.
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THE U.S. TAX STRUCTURE
INCIDENCE OF U.S. TAXES
Personal Income Tax Individual Corporate Income
Tax Stockholders Consumers Sales
Taxes Consumers Property Taxes Owner or Renter
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TAXES

• Tax Incidence
• Benefits-Received Principle
• Ability-to-Pay Principle

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Benefits Received versus Ability to Pay

• The benefits-received principle is the idea that
  people who receive the benefit from
  government-provided goods and services should pay
  the taxes required to finance them.
• The ability-to-pay principle is the idea that
  people who have greater income should pay a
  greater proportion of it as taxes than those who
  have less income.

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THE TAX BURDEN

• Progressive Tax
• Regressive Tax
• Proportional Tax
• Flat Tax

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Progressive, Proportional, and Regressive Taxes

• A progressive tax is one whose average tax rate
  increases as the taxpayers income increases.
• A regressive tax is a tax whose average tax rate
  decreases as the taxpayers income increases.
• A proportional tax is a tax whose average tax
  rate remains constant as the taxpayers income
  increases.
• A flat tax is a tax which takes the same monetary
  amount regardless of income.

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Progressive, Proportional, and Regressive Taxes

• In general, progressive taxes fall relatively
  more heavily on high-income households while
  regressive taxes are those that fall relatively
  more heavily on the poor.

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Progressive, Proportional, and Regressive Taxes

• Taxes are classified as progressive,
  proportional, or regressive, depending on the
  relationship between
• average tax rate (total tax paid as a percentage
  of income) and
• marginal tax rate (the rate paid on each
  additional dollar of income).

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Tax year Top marginaltax rate () Taxableincome over-- PRESIDENT GROWTH RATE
1913 7 500,000 WILSON
1918 77 1,000,000
1922 58 200,000 HARDING
1923 43 200,000 COOLIDGE
1925 25 100,000
1932 63 1,000,000 ROOSEVELT -1.3
1936 79 5,000,000
1940 81 5,000,000 8.1
1942 88 200,000 18.5
1951 94 400,000 EISENHOWER 8.7
1965 70 200,000 KENNEDY 1.7
1981 38.5 215,400 REAGAN -0.2
1986 28 29,750 4.3
1993 39.6 89,150 CLINTON 4.0
1994 39.6 250,000
2003 35 311,950 BUSH 3.9
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TAX APPLICATIONS
Identify whether progressive, regressive, or
proportional

• Personal Income Tax
• Progressive
• Sales Tax
• Regressive
• Corporate Income Tax
• Proportional
• Payroll Taxes
• Regressive
• Property Taxes
• Regressive

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Tax Progressivity in the U.S.

• The majority view of economists is as follows
• The Federal tax system is progressive.
• The state and local tax structures are largely
  regressive. A general sales tax and property
  taxes are regressive with respect to income.
• The overall U.S. tax system is slightly
  progressive.

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THE TAX ISSUE
The Liberal Position
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THE TAX ISSUE
The Conservative Position
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EndChapter 24