ECON 2301: CH. 15

Use the following table of marginal tax rates to calculate the total income tax paid by someone earning $70,000. Keep in mind that when calculating taxes, you leave off the cents.

$11,258 The tax is (10% of $9,700) + (12% of 39,475-9701) + (22% of 70,000-39,476).

Calculate the federal income tax liability of a worker who earned $522,503 in 2019, and who takes the standard deduction of $12,200. Keep in mind that calculations of federal income tax drop any numbers after the decimal point.

$153,799.00 This result is from first subtracting the standard deduction of $12,200, and then calculating the results of: ($9,700 × .10)+ ([$39,475 - $9,700] × .12)+ ([$84,200 - $39,475] × .22+ ([$160,725 - $84,200)] × .24)+ ($204,100 - $160,725] × .32)+ ([$510,300 - $204,100] × .35)+ ($3 × .37), disregarding whatever is after the decimal point

In 2014, the middle-income quintile in the United States (20% of households) paid approximately _____% of all income and social insurance taxes paid. The wealthiest quintile paid about _____% of all income and social insurance taxes in 2014.

10, 70 Most taxes in the United States are paid by wealthy households. The bottom quintile pays only 1% of payroll (income + social insurance) taxes paid to the federal government.

As of 2019, social insurance tax on a typical worker's income is calculated as _____ of the worker's pretax paycheck amount. Only half of that amount is actually deducted from the worker's paycheck. The other half is paid by the employer. Self-employed individuals, however, must pay the full amount themselves. For Social Security, though not for Medicare, the amount of income taxed is capped. The cap for 2019 is _____.

15.3%, $118,500 The bulk, 12.4%, is for Social Security. The remaining 2.9% goes to Medicare. This cutoff figure is adjusted every year or two.

The U.S. Constitution was amended to allow the federal government to collect an income tax in _____. Prior to that date, most tax revenues were generated by _____ taxes. The income tax originally set the highest marginal tax rate at _____, however, marginal rates have risen substantially since then. During the 1950s, the top rate was close to its historically highest level, above _____.

1913, import, 6%, 90% The top marginal rate has since come back down to settle into the 30%-to-40% range from 1993 onward.

Over the last 100 years, marginal tax rates have changed frequently. Place the years in order by how high the top marginal rate was at the time. Place the year with the highest rate first.

1945, 1964, 2012, 1913 In 1945 the top rate peaked, at 94%. Top marginal rates have swung wildly up and down over the years, but have moved into a fairly narrow range after 1993.

Fill in the blanks to complete the passage on the U.S. national debt from 1990-2017. The total amount of U.S. federal government debt has grown to almost $_____ trillion in recent years, even exceeding annual GDP in the United States. But much of this debt is owned by agencies of the government itself (in other words, the government owes money to itself). Therefore, many economists focus instead on the debt held by the general public (i.e., anyone besides the U.S. government). This amount (shown in orange) is $_____ trillion and constitutes _____% of U.S. GDP.

20, 13, 72 The level of U.S federal debt is unprecedented in peacetime. It was higher in the aftermath of World War II, but then debt as a percent of GDP was reduced by growing the economy faster than the deficit. In our current period of slower growth, this does not seem to be an option; nevertheless, inasmuch as the interest rate being paid on government bonds is still quite low, there is little pressure on the government to reduce its deficits.

Assume a nation is starting with zero national debt. If government outlays and tax revenue are as shown, and the nation's GDP is $12 billion at the end of Year 3, what is its debt-to-GDP ratio at that time? Round to the nearest whole percent.

33% The deficit is $1 billion in Year 1, $2.5 billion in Year 2, and $0.5 billion in Year 3, for a total accumulated debt of $4 billion. That is 33% of $12 billion. The steps to follow are (1) calculate each year's deficit, (2) add the deficits to find total accumulated debt, (3) divide total by $12 billion to find the debt-to-GDP ratio, and (4) multiply by 100 to convert the fraction to percent.

In the decade between 2001 and 2010, real outlays grew by _____%. Total (nominal) outlays are now nearly $_____ trillion per year, or more than $_____ per U.S. citizen.

37, 4, 12000 There has been significant growth in U.S. federal government outlays in the twenty-first century, especially between 2001 and 2010. Federal spending in 2017 was about 17% of GDP, which is about $12,000 per capita.

Select the two wedges that represent individual income and social insurance tax revenue as a share of total U.S. federal government tax revenue in 2017.

Click on 48% and 35% Taxes on individual incomes make up just under half of the total. Social Security and Medicare taxes combined are more than one-third of the total.

Select the time frame during which there was a significant budget surplus. Y-Axis: Percentage of GDP X-Axis: Year(s)

Click on area above "2000" where blue line "Revenue" is higher than orange line "Outlays" This is the only significant period in which the government had a budget surplus since 1965. The U.S. federal government has almost always run budget deficits in the past century.

Select the time interval in this period when mandatory spending was at its highest level as a percentage of the U.S. federal budget. Y-Axis: Percentage of the federal budget X-Axis: Years

Click on the farthest right area with the years 2010 & 2017 inside During this period, mandatory spending was considerably more than half of the total. Due to expansion in Medicare, an aging population, and people generally living longer, mandatory spending is projected to become an even larger proportion of the federal budget, unless changes are made to these programs.

What is a government budget?

Example(s) of a Government Budget: - It is a plan for spending government funds. - It is a plan for raising funds for the government. Not an Example of a Government Budget: - It is the difference between nominal GDP and real GDP. The difference between real and nominal GDP is determined by inflation. - It is the record of the amount of currency in circulation. The currency in circulation is part of what is called the money supply.

A 2003 change to Medicare eliminated reimbursement for prescription drugs as one of its benefits.

False Adding the prescription drug benefit for all retirees exacerbated Medicare's funding problem.

Drag the countries' names into their proper locations on the chart, which shows debt-to-GDP ratios (in percentages) for the year 2017.

From top to bottom: Japan Greece Italy United States Canada Mexico Chile

The table below lists some fictional countries. Calculate the debt-to-GDP ratio for each of them, then put them in order of their fiscal condition, worst to best. Numbers are in billions of dollars. Country Debt Annual GDP Colambas 11,800 16,200 Grazia 400 250 Nopomo 150 500 Okonanda 1,400 1,700 Solregia 2,200 2,500

Grazia, Solregia, Okonanda, Colambas, Nopomo Grazia's ratio is a worrisome 160%. Solregia's ratio is 88%. Okananda's ratio is about 82%. Colambas's ratio is about 73%. Nopomo's ratio is a very modest 30%. Divide each country's debt by its annual GDP, then multiply by 100 to obtain that country's debt-to-GDP ratio as a percentage. The country with the highest percentage comes first on the list.

Match each U.S. president to the action he took regarding federal income tax rates. I. pushed for a temporary reduction in the top marginal rate, to 35% II. pressed Congress to increase top marginal rates, which rose to 80% III. pushed for increases to the top marginal rate, which then rose to just under 40% IV. pushed for reductions in the top marginal rate, which eventually dropped all the way to 28% V. pushed for a reduction of the top marginal rate, which then dropped to 70%

I. George W. Bush The temporary drop expired in 2013, at which time the top rate reverted to its previous level. II. Franklin D. Roosevelt Before Roosevelt, Herbert Hoover had also pushed successfully for a higher top rate. III. Bill Clinton IV. Ronald Reagan V. John F. Kennedy Although the Republicans are now the party of tax cuts, it was a Democrat, Kennedy, who started the recent generally downward trend of the top rate.

Match each major factor responsible for recent changes in federal spending to the correct description of the trend as a proportion of federal spending. I. significant spending growth over the last three decades II. some ups and downs, but generally well down from the 1960s as a percentage of the federal budget III. huge spending growth after 2007

I. Social Security and Medicare Longer life expectancies have lowered the ratio of workers paying into the programs to retirees drawing benefits. II. defense Defense spending has gone from over 40% of the federal budget in the 1960s to around 15% today. III. anti-recession measures These measures affect a number of categories, but collectively they are a major reason for the total budget increasing by 25% just from 2007 to 2009. No one factor is solely responsible for the growth in government spending. It is a combination of many factors, but high among them is the provision of income security and health care for retired Americans and national security.

Match each term to its definition. I. a situation in which revenue exceeds outlays II. the total of all accumulated and unpaid deficits III. a situation in which outlays exceed revenue IV. the fee that borrowers pay to debt holders

I. Surplus Surplus funds can be used to reduce debt. Most recently, the United States held a budget surplus in 2001. II. debt The total amount of U.S. debt has grown to nearly $20 trillion in recent years. III. deficit A deficit requires borrowing to finance the difference between revenue and outlays. IV. interest Dividing the interest by both the amount borrowed and the time over which the interest is paid gives an interest rate. U.S. federal debt as a percentage of GDP is high by historic standards, but it is still smaller than several other developed nations.

Label each scenario on the right with the type of taxes it is subject to. More than one label might match a scenario. I. Brianna purchases a pack of cigarettes. II. Justin receives his first paycheck for his new job as a sales manager. III. John inherits 10 acres of land from a deceased relative. IV. Melissa's art supply store made $500,000 in profit this year. V. Melanie orders a TV that must be imported from overseas.

I. excise Excise taxes target specific goods, often with the purpose of discouraging consumption. II. income, social insurance Tax on personal income is the federal government's single biggest source of tax revenue. Justin is paying for social insurance while working, as part of the deal that will allow him to receive benefits if and when he needs them. III. estate and gift Opponents of the estate tax call it "the death tax." IV. corporate income Many businesses (even sole proprietors) form corporations for tax and liability reasons. V. customs Customs are taxes on goods imported from other nations.

Match each proposed solution to the problems of Social Security/Medicare funding with the rationale behind it. I. People are living longer and therefore spending more years taking money out. II. Average wages have historically risen faster than the cost of living has. III. People with ample savings need the post-retirement help less than people with no savings.

I. raising the retirement age Delaying eligibility would increase the number of people working and paying into the programs, and decrease the number of people receiving benefits. II. using the consumer price index to adjust for inflation Lowering the inflation adjustment would slow the rate of payment increases while still keeping up with the cost of living. III. means-testing It would save money if payouts were given only to those who really needed them. All three of these measures could help alleviate the funding problems, but they would involve significant changes to the existing law. When Social Security was created in 1935, average longevity in the United States was 61 years, and so the majority of workers were likely to have died before they could use the benefits; in 2019, average U.S. longevity is about 79 years.

Identify the major factors of the significant increase in government spending from 2001 to 2009.

Major Factor of Increase in Government Spending: - defense spending After the 2001 terrorist attacks on the World Trade Center in New York, both Homeland Security and military expenditure rose. - Social Security and Medicare spending The Prescription Drug Benefit was a major expansion in Medicare. There was a large increase in Social Security spending as baby boomers retired in large numbers. - the Great Recession There was a tax rebate in 2008 as well as major stimulus programs in 2009, in the aftermath of the Great Recession. Not a Major Factor of Increase in Government Spending: - payments to undocumented immigrants Undocumented immigrants are not eligible to receive Social Security or Medicare; the main support for undocumented immigrants is for the education of their children, which is funded at a local level. - regulatory costs The cost of monitoring and regulating clean air and water, environmental protection, and industrial safety is included in the operating costs of the relevant government agencies, which have not been growing in recent years. Most costs are borne by companies in the industries. - national debt Although the national debt rose greatly during this period, financing costs did not, because of extremely low interest rates. Defense spending, Social Security/Medicare, and expenditures to mitigate the effects of the Great Recession provided most of the increase in federal spending from 2001 to 2009.

Which taxes are major taxes on income? That is, which taxes are normally paid in the form of deductions from a worker's paycheck?

Major Tax: - income tax - Medicare tax - Social Security tax Not a Major Tax: - property tax - sales tax

Identify each group of spending outlays as mandatory or discretionary.

Mandatory: - Medicare Medicare is an entitlement program mandated by law. - Social Security Social Security is an entitlement program. Spending is based on legislation and the number of retirees. - food stamps Food stamps (also known as Supplemental Nutrition Assistance Program, or SNAP) for low-income families are a benefit established by law. - unemployment compensation Unemployment compensation is established by legislation. - income assistance Welfare benefits are established by legislation. Discretionary: - defense Defense staffing and equipment decisions are part of the annual budget process. - international aid Foreign aid money is allocated annually, as part of the budget process. - funding for scientific research Grant money is allocated annually, as part of the budgetary process. - government employee salaries Government employees are subject to layoffs in times of budget cuts.

Which of the following have been proposed as solutions to the funding problem of Social Security and Medicare?

Proposed as Solution: - increasing the retirement age The retirement age is currently being increased from 67 to 70 for persons born in 1960 or later; any further increases would reduce the burden on the program. - means-testing The idea of means-testing is that people's benefits are adjusted depending on their ability to pay out of pocket. - using a different inflation adjustment for payouts It has been argued that if the consumer price index were used to adjust benefits payments, rather than an average wage index, payments would not grow as quickly. Not Proposed as a Solution: - lowering the retirement age Allowing people to retire sooner would make the funding problem worse, not better. - delaying people's payments into the program This would make the funding problem worse, not better. Minor tweaks, such as means-testing and revising the inflation adjustment, could alleviate some pressure on the federal budget, but they also introduce issues of their own. Means-testing, for example, might create a disincentive to save for retirement at a younger age.

Which of the following are demographic reasons why entitlement programs like Social Security make up a larger share of the federal budget now than when they were created?

Reason(s): - The "baby boomer" generation will retire in record numbers over the next two decades. The boomer generation is large compared with younger groups covering a similar range of years. This will lower the ratio of workers to retirees. - Life expectancy has increased approximately nine years since the creation of Social Security. Life expectancy at age 60 has risen from about 74 years in the 1930s to about 83 years today. People who live longer spend more years receiving Social Security and Medicare benefits. - The ratio of workers receiving benefits to workers paying in has grown, predictably, over time. Not a Reason: - The retirement age has been lowered from 65 to 60 years

Place the spending categories in order by their share, greatest to least, of the 2017 U.S. federal budget.

Social Security, Medicare, defense, interest on debt Social Security accounted for $939 billion, about 24% of the total. Medicare accounted for $702 billion, about 18% of the total. Defense accounted for $590 billion, about 15% of the total. Due to low interest rates in the years leading up to 2017, U.S. government debt was relatively inexpensive to service and did not take up a large share of the budget—only 7%.

Identify the solutions to reduce the cost of Social Security that have been proposed by economists.

Solution Proposed by Economists: - increase the retirement age from 67 to 70 - means-test for benefits - adjust benefits computation using the consumer price index (CPI) Not a Solution Proposed by Economists: - reduce the retirement age from 67 to 65 - separate additional accounts to reduce Social Security benefits - transfer large amounts of general government revenue to the Social Security fund

Which of the following describes a progressive income tax system?

Tax as a percentage of income rises with increasing income. This scheme is called progressive because the percentage gets progressively higher. This is in contrast to a flat-tax system, where the percentage in principle remains constant.

Use the following table of marginal tax rates to calculate the average income tax rate, as a percentage of total income, paid by someone earning $500,000.

The total tax is: 0.10($8,700)+0.15($26,650)+0.25($50,300)+0.28($93,000)+0.33($209,700)+0.35($111,650)=$151,7610.10($8,700)+0.15($26,650)+0.25($50,300)+0.28($93,000)+0.33($209,700)+0.35($111,650)=$151,761. The average tax rate, then, is: $151,761/$500,000 = 0.304 = 30.4%

In the United States, a person's marginal tax rate is generally higher than the same person's average tax rate.

True In a progressive income tax system (like in the United States), higher incomes are taxed at higher marginal rates. In other words, the marginal tax rate is generally greater than the average tax rate.

The largest U.S. budget deficit in any year since 1960 occurred as a consequence of the Great Recession of 2008-2009.

True The deficit was about $1.4 trillion in 2009.

During the period from 1970 to 2017, when was the U.S. federal budget in surplus?

Years in Surplus: - 1998-2001 Years Not in Surplus: - 1970-1974 - 1980-1988 - every year before 2009

Select the correct definition of publicly held national debt.

debt held by anyone besides the federal government A significant share of U.S. national debt is internal: one agency owing money to another. Publicly held national debt includes everything except for this "internal" debt.

Corporate tax rates _____ as a result of the Tax Cuts and Jobs Act of 2017 (TCJA) from _____% to _____%. Most economists agree that the TCJA decreased government revenue in 2018 and was part of the reason why the federal budget deficit _____ substantially that year.

decreased, 35, 21, increased The TCJA lowered federal corporate taxes in the United States. These reduced taxes led to the stronger effect of decreasing revenue to the federal government than increasing revenue from increased business activity. As a result, the federal deficit increased.

Both Social Security and Medicare are government programs concentrated on the _____ population. Social Security is focused on providing _____, while Medicare provides _____ for retired persons. For people to receive Social Security and Medicare payments, they must have _____ the program when they were _____. Upon _____, they become eligible for payouts.

elderly, retirement income, health care, paid money into, working, reaching retirement age The basic problem with Social Security and Medicare is that fewer and fewer workers are paying into these programs while more and more people are drawing out.

When the federal government has more _____ than _____, it has to borrow money to make up the difference. The borrowing is accomplished by selling _____ to investors. The federal government borrows from both domestic and foreign investors, though most national debt is held _____.

outlays, revenue, Treasury bonds, domestically Financial experts keep a close watch on the interest rates being paid on U.S. Treasury bonds at any given time.

As the figure illustrates, the ratio of U.S. workers _____ Social Security to former workers _____ it has dropped since 1960 and is projected to drop further. This trend will make it _____ to sustain Social Security in its present form.

paying into, receiving benefits from, harder

Mandatory outlays constitute _____ portion of the three groups of the U.S. federal budget. They are mandated by _____ and not subject to adjustment during the budget process. This group includes _____ and Medicare.

the largest, law, Social Security The other two broad categories in the budget are discretionary outlays and interest on the federal debt.

Interest payments are payments made _____ current owners of _____. Because these payments are determined by the level of government _____ and the interest rate and therefore are _____ adjustable, they can be considered a type of _____ payment.

to, U.S. Treasury bonds, debt, not readily, mandatory

What kind of government expenditure is defined as payments made to groups or individuals when no good or service is received in return?

transfer payments Transfer payments include income assistance to the poor and payments to the retired and disabled.

The percentage of the U.S. federal government's debt owned by foreign entities went _____ from about _____ in 1990 to about _____ in 2018. It is important to remember, however, that foreign supply in the loanable funds market helps keep interest rates _____, which benefits domestic _____. It is also worth noting that demand for U.S. Treasuries is a sign that other economies beside the United States' are _____.

up, 15%, 30%, down, borrowers, prospering China is the largest single foreign holder of U.S. debt.