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Chapter 7 Market System Participants

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Economists Critique
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I. Market system participants  
  A. Households (families and individuals)
  B. Businesses
  C. Governments

II. Households receive income in return for their economic resources. 

2000 Functional Distribution of Income 
(in billions of dollars)

  2000 2006

Wages and Salaries
$5,639 70.3% 7,448.3 69.9%

Corporate Profit
960 12.0% 1,553.7 14.6%

Proprietors' Income
711 8.9% 1,006.7 9.4%

Interest
568 7.1% 598.5 5.6%

Rents
140 1.7% 54.5 0.5%

Data take from
Gross Domestic Product
 of the Bureau of Economic Analysis

For more information on income distribution, visit
The US Census Bureau.
One-hundred years ago productivity increase force people off the farm, now it is forcing them out of the factory.

 

 

 

 

 

 

 

 

 

 

 

 

The beginning of a sea-change in household-deleveraging? 6/9/13

What People Did with Their 2006 Income

Analysis: One of the weaknesses of National Income Accounting, covered in the next chapter, is it doesn't measure everything. Here, we see negative saving because expenditures from the underground economy have been included but income has not been included as people illegally avoid taxes. Also, expenditures on home improvements count, but gains when the home is sold are not personal income but capital gains. SS and Medicare tax rates go uo continually and aren't help when people get older and aren't savings.

Who Pays the Taxes in the USA ? from the Big Picture
  in billions % of PI
Personal Income 10,983.4 100.0%
Personal Taxes 1,354.3 12.3%
Disposal PI 9,629.1 87.7%
Consumption 9,590.3 87.3
Savings 38.8 0.4

Data take from Gross Domestic Product of the Bureau of Economic 

  III. Business population
         A. Types of businesses include manufacturers, 
              wholesalers, retailers, and services.
         B. Legal forms of business ownership
   C. Businesses come in all sizes Data from Economist Magazine 10/20/12 and 

   http://www.middlemarketcenter.org/wp-content/uploads/2012/01/Middle_Market_Research4.pdf

    See also The US Census Bureau/20010 Economic Census.

Legal Form

Definition

Ease of Formation

Length of Life

Raising Capital 

Owner's Liability

Taxes

Size of Business Firms Employees

Sales

 Survived 2007-10

2007-10 
job creation

2010-11 
employment change
In Business > 20 YEAR

Sole 
Proprietorship

One Owner

Easy

Limited

Difficult

Unlimited, personal assets at risk

Once as personal income

Small

6 mil

31%

<$10,000,00

57% 2.5% 16%

Partnership

Two or More Owners

Easy

Shortest

Easier

Unlimited, personal assets at risk

Once as personal  income

Medium  197,000

40 mil   

34%

$10 Million  to $1 Billion

82% +2.2 mil 3,8% 70%

Corporation

Company is a legal entity

Somewhat Difficult

Unlimited

Easiest

Limited to investment

Twice as income & dividends

Large 

2,100 

35%

> 1 $Billion 97% -3.7 million 0.8% 71%
IV. Federal government  

      A. Why government spending has grown
          1. Population growth
          2. War and defense requirements
          3. Urbanization
          4. Environmental concerns
          5. Inflation
                 6. Transfer payments
              a. Social Security
              b. Medicare and Medicaid
              c. Social programs for the needy such as Aid to Families
                             with Dependent Children
              d. Mid-1960's social programs were  3% of national output,
                             today they are 12% of output
                7. Terrorism 

      B. Government spending and taxing
          1. Federal spending and taxing
              a. Expenditures
                 1. Income security
                 2. Defense (military preparedness)
                 3. Interest on public debt
                 4. Discretionary programs

Fiscal Cliff Avoided with partial reversal of Bush II tax cuts, 1/2/12  from WSJ

                       b. Receipts
                           1. Personal income taxes
                               a. Marginal rate is the rate paid on additional or incremental income.
                                   1) Mathematically it is the increase in taxes paid divided by the
                                        increase in income. 
                                    2) With a progressive tax system, each higher tax bracket
                                         (grouping) has a higher rate on the income in the higher bracket. 
                             
 b. Average tax rate is the taxes paid divided by total taxable
                                   income. 
                                   1) Calculating the average tax rate and amount paid by a 2000
                                       single person.
                                   2) How the recent tax cut affected the average tax rate and amount
                                        paid by a single person for 2003.
                                  3. The U.S. federal income tax rate peaked at 88% in 1942-43
                                       Country Tax Rates. Note: The U.S. pays less than half the
                              medical costs while most industrial countries pay most of it
                         2. Payroll Taxes: premiums paid on compulsory insurance plans  
                              a. social security and Medicare (both employer and employee pay)  
                              b. unemployment taxes (just employer pays)
                              c. average tax up dramatically dramatically last few decades
                         3. Corporate Income Taxes                            

                             a. Corporations also paying less taxes
                            b. Corporate tax dodgers/sorry state of corp taxes


                           
 
corporate-tax-rates-effective
                        
  
                           

                        4. Excise Taxes are a sales tax on items such as jewelry, tobacco,
                             and liquor.
                        5. Licenses and Fees
                      
V. State and local governments have mandatory balanced budget laws
      making the
accumulation of debt difficult

c. People Paying less income and capital gains taxes.

 

 

 

 

 

 

 

 


 

 

 

Analyzing 2000 Tax Rates for a Single Filer

Taxable Income Marginal Rate Bracket Taxes Paid Average Rate
0 to 26,250 15 .15(26,250)  = 3,937.50 3,937/26,250 = .150
26,251 to 63,550 28 .28(63,550-26,250) =  10,444 (3,937 + 10,444) = 14,381/63,550 = .226
63,551 to 132,600 31 .31(132,600-63,550) = 21,405 (14,381+ 21,405) = 35,786/132,600 = .269
132,601 to 288,350 36 .36(288,350-132,600) = 56,070 (35,786 + 56,070) = 91856/ 288,350 = .319 
288, 351 and over 39.6    

Analyzing 2003 Tax Rates for a Single Filer

Taxable Income Marginal Rate Bracket Taxes Paid Average Rate Calculation
Add previous bracket total to bracket this total and divide by bracket upper limit.
0 to 7,000 10 .1(7,000)  = 700 700/7,000 = .10 is average rate on $7,000.
7,001 to 28,400 15 .15(28,400-7,000) =  3,210 (700 + 3,210) = 3,910/28,400 = .138 is the average rate on 28,400.
28,401 to 68,800 25 .25(68,800-28,400) = 10,100 (3,910 + 10,100) = 14,010/68,800 = .204  is the average rate on 68,800.
68,801 to 143,500 28 .28(143,500-68,800) = 20,916 (14,010 + 20,916 = 34,926/143,500 = .243  is the average rate on 143,500.
143,501 to 311,950 33 .33(311,950-143,500) = 55,589 (34,926 + 55,589) = 90,515/ 311,950 = .290 is the average rate on 311,950.
311951 and over 35  

Economics AP Reviews from amazon.com

VI. Taxation philosophies

      
A. Ability to pay
           1. Those with the ability (income or wealth),
               pay more.
           2. Examples
               a. Income tax
               b. Sales tax
               c. Estate taxes
       B. Benefit received (User taxes)
           1. Those who derive a benefit from some  
               government action pay for said activity.
           2. Examples
              a. Gasoline taxes are used to improve roads.
              b. Social security taxes are used to provide
                  retirement and other benefits for participants.
          3. It's the Inequality Stupid 02/04/11  Issue of Mother Jones
          4. Taxing the rich 4/11/11, NY Times

 

Some want higher taxes on the Wealthy.

 


 VII. Types of tax rates
        A. Progressive
            1. Tax rate increases as income increases
            2. Tax rate decreases as income decreases
            3. Those earning higher income pay a higher average tax rate.
            4. Example: Federal Income Tax                
                Note:
Moving into a higher tax bracket does not result in your paying a
                higher rate on lower bracket earnings.
            5.
How progressive is the U.S. Federal Tax System? A Historical and International Perspective  
                   
by Tom Piketty and Emmanuel Saez
            6. Merely Affluent vs. Truly Rich explores the change in top bracket taxes.
               NYT, Nov 2, 2010
        B. Proportional
            1. Tax rate as percentage stays the same.
            2. Examples: Social Security taxes are proportional up to the maximum income
                level of about $76,200 because both 
                employer and employee pay a constant rate of about 8%, but then the tax is
                regressive as the rate drops to zero
        C. Regressive 
            1. Amount paid divided by income drops as income increases.
            2. Happens one of two ways
                a. Rate drops as income increases (FICA after about $76,200 in 2000) 
                b. Amount of tax is constant so at higher incomes, the effective tax rate
                    is lower (excise taxes on cigarettes, liquor, etc.)
  VII. Shifting the tax incidence
         A. Passing the burden of taxes onto others (consumers ultimately pay)
         B. Businesses and professionals try to do this
         C. The consumer bears most of the tax burden in a market economy

Average Tax Rate from Wiki its taxes paid/ taxable incom

"The “tax wedge”, the difference between total labor costs to the employer and employees’ take-home pay, rose by 0.2 percentage points to 35.9% in 2013. Of the 34 mostly rich countries in the OECD, 25 reported a rise in the tax burden in the past three years. The largest increase in the tax wedge was in Portugal. America’s wedge also grew as reductions in employees’ Social Security contributions expired. Overall, there has been little change in taxation for single workers, which in all OECD countries except Mexico and Chile is higher than it is for those with families. Belgium’s tax wedge remains the biggest, at 55.8%; that is more than double the figure in Mexico and New Zealand—and eight times that in Chile."  http://www.economist.com/

 

effective  tax rates

The key word here is "effective" -- these are the tax rates people actually pay after factoring in things like the mortgage interest deduction, the child tax credit and the myriad other deductions and credits written into the U.S. tax code. Values for 2011 and 2012 aren't yet available, but the CBO does provide projections for 2013 tax filings, which I've plotted, as well.  from Washington Post  4/11/14 Editors Note: The latest data shows that the top tenth of the top 1% get most of that percentiles income! We need a Teddy Roosevelt to get us out of the second Gilded age!  Please  

VIII. Major Categories of Federal Income and Outlays for Fiscal Year 1999 and 2002
         A. Reported by IRS in form 1040 after the Tax Rates Schedules.
         B. Income
Income Source 1999 2002 2005 2008

http://motherjones.com/politics/2011/02/income-inequality-in-america-chart-graph

Personal income taxes 48%  43% 38% 39%
Social Security, Medicare, unemployment, and other retirement taxes 34% 35% 32% 38%
Corporate income taxes 10% 7% 11% 10%
Excise, customs, estate, gift, and miscellaneous taxes 8% 7% 6% 6%
Borrowing to cover deficit Surplus 8% 13% 15%
Source IRS 1040 FORMS
C. Outlays 1999 2002 2005 2008

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Social security, Medicare, and other retirement 35% 38% 37% 37%
National defense in 1999 (15%) , veterans benefits and services (2%), and foreign affairs (1%) 18% 20% 24% 24%
Social programs: in 1999, 12% for Medicaid, food stamps, temporary assistance for needy families, supplemental security income  and related programs and 6% for health research and public health programs, unemployment compensation, assisted housing, and social services   17% 21% 20% 20%
Net interest on the debt 12% 8% 7% 8%
Physical, human and community development (agriculture, natural resources, environment, transportation, aid to elementary and secondary education and direct assistance to college students, job training, deposit insurance, commerce and housing credits, community development, space, energy, and general science) 9% 10% 10% 9%
Surplus to pay down debt 7% None None None
Law enforcement and general government 

2%

3%

2%

2%

Source IRS 1040 FORMS        
IX. Additional Reading:  
     A.
Democratic Capitalism vs. Capitalistic Democracy  
     B. How Tax Rates have Changed NYT, 11/29/12 
     C. Household Income and Tax Distribution-in 2010 5/12/13 CBO
     D.
Options for taxing more to reduce the deficit  12/11/13 CBO
     E. Great Recession Lowers Government Employment 9/8/13 Seeking Alpha
     F Presidents-2015 budget in pictures 3/19/14
    G.U.S. tax rates the big picture 4/15/14

 

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washingtonpost.com/blogs/wonkblog/wp/2013/06/21/washington-has-missed-the-real-inequality-story/

Andrew Fieldhouse/EPI