L6 - Government Expenditure, Taxes, and Debts Part of...

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Government Expenditure, Taxes, and Debts Part of Chapter 12 of textbook 1: Background Chapter 6 of textbook 2 The government budget constraint Finance the public services provided by the government Finance social security Distortionary taxes Discussions (tax cut, social security) 1
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Background Government expenditure is used for Purchases of goods and services (to maintain military, build highways and bridges, support schools, etc. .) Interest payments Transfer payments (given to households and businesses) Social security (as a transfer program in the U.S.) OASDI (Old age and survivors’ insurance, Disability insurance) Medicare 2
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Two ways to finance social security Pay-as-you-go system: benefits to elderly people are financed by taxes on the currently young (this is the U.S system and this is why social security is a transfer program in the U.S.) Fully funded system: young peoples payments accumulate in a trust fund, which later provides for retirement benefits. Types of taxes Taxes fall on forms of income: individual income taxes, corporate profits taxes, and contributions for Social Security and Medicare. Taxes based on expenditures: sales taxes, excise taxes, and customs duties. 3
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Marginal and average tax rates The marginal tax rate is the additional tax paid on an additional dollar of income. The average tax rate is the ratio of total taxes paid to total income. The U.S. federal individual income tax: the marginal tax rate rises with income. Lump sum and non lump sum taxes Lump sum: A fixed amount of tax imposed on everyone, regardless of individual’s income/wealth level. Examples of non lump sum taxes: tax of labor income, tax of capital income. 4
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Budget deficit, government bonds, and government debt A budget deficit at t : the government expenditure exceeds its tax revenue at t (a budget surplus; a balanced budget). Bonds: When there is a budget deficit, the government borrows from the private sector by issuing bonds. Government debt: the accumulated deficit. National Saving Private Saving Public Saving by the government 5
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G t : the real government expenditure at t . (Recall: no money and every item is in terms of units of the good.) Z t : the real government tax revenue at t . B t : the amount of government bonds in held by the public at the start of t (which are issued by the government at t - 1 and shall be paid by at the end of t ). (Since date 0 is the first date of the model, B 0 shall equal zero.) r t : as before, the real rental rate; also as before, since there is no depreciation, the real rental rate equals the real interest rate. 6
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L6 - Government Expenditure, Taxes, and Debts Part of...

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