After reading this chapter, you should be able to: Identify the main categories of government spending and the main sources of government revenue; summarize the different philosophies regarding the distribution of a nation''s tax burden; explain the principles relating to tax shifting, tax incidence, and the efficiency losses caused by taxes; demonstrate how the distribution of income between rich and poor is affected by government taxes, transfers, and spending.
16 Public Finance: Expenditures and Taxes McGrawHill/Irwin Copyright © 2012 by The McGrawHill Companies, Inc. All rights reserved Government and the Circular Flow (1) Costs (1) Money income (rents, wages, interest, profits) RESOURCE MARKET (2) Resources (2) Land, labor, capital Entrepreneurial ability (7) Expenditures (8) Resources (10) (9) Goods and services Goods and services BUSINESSES Net taxes (11) Net taxes (12) (5) Expenditures (4) Goods and services (3) Revenues LO1 HOUSEHOLDS GOVERNMENT (6) Goods and services PRODUCT MARKET (4) Goods and services (3) Consumption expenditures 16-2 Government Finance • • • LO1 Government purchases • Exhaustive Transfer payments • Nonexhaustive Borrowing and deficit spending • Opportunity cost is low during recession; high during growth 16-3 Government Finance Government purchases, transfers, and total spending as percentages of U.S output Percentage of U.S Output 40 35 Government transfer payments 30 25 15% 5% 20 15 10 22% Government purchases 20% 1960 LO1 Year 2009 16-4 Federal Expenditures LO1 16-5 Federal Tax Revenues • Personal income tax • Progressive tax • Marginal tax rate • Payroll taxes • Corporate income tax • Excise taxes LO1 16-6 Local, State, and Federal Employment LO1 16-7 Apportioning the Tax Burden • • • LO2 Size, distribution, and impact of the costs that taxes impose on society Benefits-received principle Ability-to-pay principle 16-8 Apportioning the Tax Burden • • • LO2 Progressive tax – average tax rates increase as income increases Regressive tax – average tax rate declines as income increases Proportional tax – average rate stays the same as income increases 16-9 Tax Incidence and Efficiency Loss • Tax incidence • Who really pays the tax? • Excise tax • Tax burden depends on elasticity • Inelastic vs elastic • Efficiency loss • Deadweight loss • Transfer of surplus to government LO3 16-10 Elasticity and Tax Incidence P St 14 Price (Per Bottle) S 12 Tax $2 10 D 10 15 20 Quantity 25 Q (Millions of Bottles Per Month) LO3 16-11 Elasticity and Tax Incidence P P Tax Tax St S Pe St a P1 b P Pb a P1 S c b De Pa c Q2 Di Q1 Elastic Demand Q2 Q1 Inelastic Supply Smaller efficiency loss with inelastic demand LO3 16-12 Elasticity and Tax Incidence P P Tax Pe P1 Pa Tax St a S b St S Pi P1 a b c Pb c D Q2 Q1 Elastic Supply D Q Q2Q1 Q Inelastic Supply Smaller efficiency loss with inelastic supply LO3 16-13 Efficiency Loss of a Tax P Tax paid by consumers 14 St Price (Per Bottle) S Tax $2 12 10 Tax paid by producers 10 Efficiency loss (or D deadweight loss) 15 20 Quantity 25 Q (Millions of Bottles Per Month) LO3 16-14 ... (10) (9) Goods and services Goods and services BUSINESSES Net taxes (11) Net taxes (12) (5) Expenditures (4) Goods and services (3) Revenues LO1 HOUSEHOLDS GOVERNMENT (6) Goods and services PRODUCT... Local, State, and Federal Employment LO1 1 6-7 Apportioning the Tax Burden • • • LO2 Size, distribution, and impact of the costs that taxes impose on society Benefits-received principle Ability-to-pay... Year 2009 1 6-4 Federal Expenditures LO1 1 6-5 Federal Tax Revenues • Personal income tax • Progressive tax • Marginal tax rate • Payroll taxes • Corporate income tax • Excise taxes LO1 1 6-6 Local, State, and Federal Employment