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Principles of economics 2nd by mankiw chapter 12

The Design of the
Tax System
Chapter 12
Copyright © 2001 by Harcourt, Inc.
All rights reserved.   Requests for permission to make copies of any part of the
work should be mailed to:
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“In this world nothing is certain but
death and taxes.”
. . . Benjamin Franklin
100
80

Taxes paid in Ben
Franklin’s time
accounted for 5

percent of the
average
American’s
income.

60
40
20
0

1789
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“In this world nothing is certain but
death and taxes.”
. . . Benjamin Franklin
100
80

Today, taxes
account for up
to a third of
the average
American’s
income.

60
40
20
0

1789

Today

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Government Revenue as a


Percentage of GDP

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Central Government Tax Revenue
as a Percent of GDP
France
United Kingdom
Germany
Brazil
United States
Canada
Russia
I ndonesia
Pakistan
Mexico
I ndia
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38.8
33.7
29.4
19.7
19.3
18.5
17.4
14.7
15.3
12.8
10.3


The Federal Government
The U.S. federal government
collects about two-thirds of the
taxes in our economy.

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The Federal Government
The largest source of revenue
for the federal government is
the individual income tax.

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Tax Liability
With respect to paying income taxes, an
individual’s tax liability (how much
he/she owes) is based on total income.

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Individual Income Taxes
◆The

marginal tax rate is the tax
rate applied to each additional
dollar of income.
◆Higher-income

families pay a
larger percentage of their income in
taxes.

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Federal Income Tax Rates: 1999
On Taxable Income…
Up to $25,750
From $25,750 to $62,450
From $62,450 to $130,250
From $130,250 to $283,150
Over $283,150

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The Tax Rate Is . . .

15.0 %
28.0
31.0
36.0
39.6


The Federal Government and
Taxes
◆Payroll

Taxes: tax on the wages
that a firm pays its workers.
◆Social Insurance Taxes: revenue
from these taxes is earmarked to pay
for Social Security and Medicare.
◆Excise Taxes: taxes on specific
goods like gasoline, cigarettes, and
alcoholic beverages.

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Receipts of the Federal
Government: 1999
Tax
I ndividual income taxes
Social insurance taxes
Corporate income taxes
Other
Total

Amount
Amount
Percent
(billions) (per person) of Receipts
$869
$3,194
48%
609
2,239
34
182
669
10
146
537
8
$1,806

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$6,639

100%


Receipts of the Federal
Government...
Individual Income
Tax, 48%
Social Insurance
Tax, 34%
Corporate Tax,
10%
Excise Tax, 4%
Other, 4%

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Federal Government Spending


Government spending includes transfer
payments and the purchase of public
goods and services.
◆Transfer payments are government
payments not made in exchange for a good
or a service.
◆Transfer payments are the largest of the
government’s expenditures.

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Federal Government Spending
Expense Category:








Social Security
National Defense
Net Interest
Income Security
Medicare
Health
Other

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Federal Government Spending:
1999
Category

Amount Amount per Percent of
(billions)
Person
Spending

Social security
$ 393
National defense
277
Net interest
243
Income security
227
Medicare
205
Health
143
Other
239
Total
$1,727
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$1,445
1,018
893
837
754
526
879
$6,350

23%
16
14
13
12
8
14
100%


Federal Government Spending:
1999...
Social Security,
23%
Defense, 16%
Net Interest, 13%
Income security,
14%
Medicare, 12%
Health, 8%
Other, 14%,

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Financial Conditions of the
Federal Budget
◆A budget

deficit occurs when there is
an excess of government spending over
government receipts.
◆Government

finances the deficit by
borrowing from the public.

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Financial Conditions of the
Federal Budget
◆A budget

surplus occurs when
government receipts are greater than
government spending.
◆A budget

surplus may be used to reduce
the government’s outstanding debts.

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State and Local Governments
State and local governments
collect about 40 percent of taxes
paid.

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State and Local Government
Receipts
◆ Sales

Taxes
◆ Property Taxes
◆ Individual Income Taxes
◆ Corporate Income Taxes
◆ Other

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Taxes

$


State and Local Government
Spending
◆ Education
◆ Public

Welfare
◆ Highways
◆ Other

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Receipts of State and Local
Governments: 1996
Tax
Sales taxes
Property taxes
I ndividual income taxes
Corporate income taxes
From federal government
Other
Total

Amount
(billions)
$249
209
147
32
235
351
$1,223

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Amount
Percent
per person of Receipts
$940
20%
789
17
554
12
121
3
887
19
1,324
29
$4,615
100%


Spending of State and Local
Governments: 1996
Category
Education
Public welfare
Highways
Other
Total

Amount Amount per Percent of
(billions)
Person
Spending
$ 399
197
79
518
$1,193

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$1,506
743
298
1,955
$4,502

33%
17
7
43
100%


Policymakers have two objectives
in designing a tax system...



Efficiency
Equity

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