an applications approach to contemporary economics by robert j. carbaugh 4th edition

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