Households
Play a starring role in a market economy
Determines what gets produced
Supplies labor, capital, natural resources and entrepreneurial ability
Maximize utility
Functional Distribution of Income
Indicates how the nation’s earned income is apportioned among Wages labor Rents land Interest owners of property resources Profit owners of businesses
Functional Distribution of Income
Distribution of Personal Income
Self Employment
income
Profits
InterestRents
Wages
1 2 3 4 5
Personal Distribution of Income
How the nation’s money income is divided among individual households.
Top 20% earn over 50% of the income
Businesses
Constitute the second major part of the private sector
Is a business organization that owns and operates plants.
Types of Firms
Sole proprietorships A firm with a single owner who has the right to all profits
and who bears unlimited liability for the firm’s debts. Partnerships
A firm with multiple owners who share the firm’s profits and who bears unlimited liability for the firm’s debts.
Corporations A legal entity owned by stockholders whose liability is
limited to the value of their stock. Distinct and separate from the individual stockholders
who own it.
Role of Government
Providing legal structurePromoting competitionRegulating monopoliesRedistributing income
Transfer payments Market invention Taxation
Reallocating resources Market failure
Role of Government
Externalities A cost or benefit that falls on a third party and is
therefore ignored by the two parties to the market transaction
Externalities
An externality occurs when some of the costs or the benefits of a good are passed to or spill over to someone other than the immediate buyer or seller. Negative externality
Production or consumption costs inflicted on a third party without compensation
Environmental pollution Positive externalities
Benefits education
Role of government
Public good A good that once produced is available for all to
consume regardless of who pays National defense
Government structure
Federal National security Economic stability Market competition
State Public higher education Prisons Transportation
Local Education protection
Size of Government
Government spending has increased over the years
Government is the green in the chart
1930 – 10% of economy
2004 – 36% of economy
Government Purchase and Transfers
Government purchases Exhaustive
Directly absorb resources and are part of the domestic output
Transfer payments Non-exhaustive
Federal Expenditures
Pension and income security 35%
National defense 20%
Health 21%
Interest on debt 7%
Sources of Government Revenue
Taxes Bulk of government revenues at all
levels Tax principles
Ability to pay principle Benefits received tax principle
Tax incidence Distribution of tax burden among
taxpayers Proportional tax Progressive Regressive Marginal tax rate
Types of taxes
Personal income tax Tax on earnings of individuals Progressive tax All but six states have it Single taxpayer
If taxable income is over--But not over-- The tax is:
$0 $7,150 10% of the amount over $0
$7,150 $29,050 $715.00 plus 15% of the amount over 7,150
$29,050 $70,350 $4,000.00 plus 25% of the amount over 29,050
$70,350 $146,750 $14,325.00 plus 28% of the amount over 70,350
$146,750 $319,100 $35,717.00 plus 33% of the amount over 146,750
$319,100 no limit $92,592.50 plus 35% of the amount over 319,100
Types of Taxes
Corporate income tax Tax on earnings of
corporations Progressive tax Federal and state
If taxable income (line 30, Form 1120, or line 26, Form 1120-A) on page 1 is:
Over— But not over— Tax is:
Of the amount over—
$0 $50,000 15% $0
50,000 75,000 $ 7,500 + 25% 50,000
75,000 100,000 13,750 + 34% 75,000
100,000 335,000 22,250 + 39% 100,000
335,000 10,000,000 113,900 + 34% 335,000
10,000,000 15,000,000 3,400,000 +
35%10,000,000
15,000,000 18,333,333 5,150,000 +
38%15,000,000
18,333,333 - - - - - 35% 0
Types of taxes
Sales tax Tax on purchases of goods and services Some services excluded Some goods excluded Flat rate State and local government
Types of taxes
Property taxes Tax on the value of real property Tax on the value of tangible property Flat rate Local governments
Excise taxes Tax on consumption of specific goods Alcohol, tobacco, and gasoline Sin taxes All levels of government
Level of Government Services Provided Taxes Imposed
Federal National defenseTransfer paymentsTransfers to states
Personal income taxCorporate income taxExcise taxes
State Public transportationWelfareHigher education
Personal income taxCorporate income taxExcise taxesSales taxes
Local Police and fire protectionPrimary and Secondary education
Excise taxesProperty taxes