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Chapter 7
Market System Participants 
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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.

What People Did with Their 2006 Income
  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 Analysis

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.

Who Pays the Taxes in the USA ? from the Big Picture

  III. Business population
       A. Types of businesses include manufacturers, wholesalers, retailers, and services.
       B. Legal forms of business ownership

Legal Form

Definition

Ease of Formation

Length of Life

Raising Capital 

Owner's Liability

Taxes

Sole Proprietorship

One Owner

Easy

Limited

Difficult

Unlimited, personal assets at risk

Once as personal income

Partnership

Two or More Owners

Easy

Shortest

Easier

Unlimited, personal assets at risk

Once as personal  income

Corporation

Company is a legal entity

Somewhat Difficult

Unlimited

Easiest

Limited to investment

Twice as income & dividends

    C. Businesses come in all sizes.

Legal Forms of Business

Number of Firms

Percent of Firms

Percent of Sales

Sole Proprietorship

 16,154,000 75% 6%

Partnership

 1,493,000 7% 5%

Corporation

 3,965,00 18% 89%
Totals 21,612,000 100% 100%
Data from page 81 of 14th edition of Economics by McConnell and Brue, Irwin/McGraw-Hill
For more information on business ,visit The US Census Bureau/2002 Economic Census.

IV. Federal government 
      A. Government spending has grown because of
           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
              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) The average tax rate and amount paid by a single person having bracket ending taxable income for 2000 is appears below.

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    

                      2) After the recent tax cut, the average tax rate and amount paid by a single person having bracket ending taxable income for 2003
                           is appears below.

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    

                    3. For an historical view of tax rates which peaked at 88% in 1942-43 View CTJ Data Sheet as HTML .

           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)
            3. Corporate Income Taxes
           4. Excise Taxes are a sales tax on items such as jewelry, tobacco, and liquor.
           5. Licenses and Fees

2. State and local governments have mandatory balanced budget laws making the accumulation of debt difficult

  V. 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.


 VI. 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.
       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

 


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
Personal income taxes 48%  43% 38%
Social Security, Medicare, unemployment, and other retirement taxes 34% 35% 32%
Corporate income taxes 10% 7% 11%
Excise, customs, estate, gift, and miscellaneous taxes 8% 7% 6%
Borrowing to cover deficit   8% 13%
Source IRS 1040 FORMS


C. Outlays

Outlays 1999 2002 2005
Social security, Medicare, and other retirement 35% 38% 37%
National defense (15%) , veterans benefits and services (2%), and foreign affairs (1%) 18% 20% 24%
Social programs: 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%
Net interest on the debt 12% 8% 7%
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%
Surplus to pay down debt 7% NONE None
Law enforcement and general government 

2%

3%

2%
Source IRS 1040 FORMS

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