Transcript Ch 4 presentation 3- Taxes (Chapter 4 Presentation 3

Macro Chapter 4
Presentation 3
Government Purchases
• The products directly use up
resources and are part of
domestic output
• Ex- missile production uses
scientists, machines, engineers
etc.
Transfer Payments
• Do not directly use resources or
create output
• Recipients make no current
contribution for them
• Ex- Welfare, Social Security
The Circular Flow Revisited
Resource
Market
Expenditures
Resources
Goods &
Services
Businesses
Goods &
Services
Government
Net Taxes
Households
Net Taxes
Expenditures
Goods &
Services
Product
Market
Average Tax Rate
• Total tax paid divided by total
taxable income
Personal Income Tax
• Tax collected on taxable
income (after deductions such
as mortgage interest,
charitable donations,
education expenses) from
households and businesses
• Fed. govt’s main revenue
Personal Income Tax Contd.
• The Federal income tax is
considered progressive- the
average tax rate increases as
your income goes up
Marginal Tax Rate
• The rate at which a tax is paid
on each additional unit of
taxable income
• Rate on your next dollar
earned
Key Question
Suppose in Fiscalville there is no tax on the
first $10,000 of income, but a 20 percent
tax on earnings between $10,000-20,000
and a 30 percent tax on income between
$20,000 and $30,000. Any income above
$30,000 is taxed at 40 percent. If your
income is $50,000, how much in taxes will
you pay? Determine your marginal and
average tax rates.
Key Question Solutions
•
•
•
•
$0-10,000 = no taxes paid
10,000-20,000 = (10,000 x .20= $2,000)
20,000-30,000 = (10,000 x .30 = $3,000)
30,000-50,000 = (20,000 x .4 = $8,000)
• Total Tax = $13,000
Key Question Solutions Contd
• Average Tax Rate = total tax / taxable
income
= $13,000/$50,000
=26%
Key Question Solutions Contd.
• Marginal tax rate = tax rate on next
unit of income
• = 40% (all income above $30,000 @
.40)
Payroll Taxes
• Federal taxes based on wages
and salaries
• Fund Social Security and
Medicaid
• Both workers and employers
pay equally
Sales and Excise Taxes
• Sales tax cover a wide range of
products that are taxed
• Excise taxes target specific goods
such as alcohol, tobacco, and
gasoline
State and Local Taxes
• States’ main revenue comes through
excise and sales taxes----education is the
highest expense
• Local governments’ highest revenue
comes from property taxes---education is
also the highest expense