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CHAPTER 5 - GOVERNMENT SPENDING AND TAXATION Govt. Taxation and Gov spending are the most direct way that the Gov influences the economy. We look at Gov spending and taxation in this chapter to get an idea about the size and characteristics of Government. See page 111. Government spending over time. Growth has been in Fed spending. Breakdown in Federal spending. Defense 22% Transfer Payments 36% (SS, unemployment, AFDC, general assistance, etc.) Housing subsidies, Food stamps and Medicaid/Medicare 17% Less than 10% on education, ag programs, energy Net interest - 15% Total spending $1.5T State and Local Spending - $1T, page 113. Education, Public Welfare, and General Admin - 71% Distinguish between spending on: 1. Government purchases of goods and services (government buys military equipment, employs FBI, ATF, Dept of AG, Dept of Commerce, etc., Smithsonian, FDA, Highways, Research, etc) 2. Transfer Payments - transferring money from one group of people to another group who are not providing goods and services. Four Measures of Size of Government (Federal, State and Local) 1. Government Purchase of Consumption and Investment Goods (19% of GDP) 2. Government Employment (17% of Labor Force) 3. Total Gov Exp, Including Transfer Pmts (32% of GDP) 4. Total Taxes and Other Revenues (31%) (Ignores deficit) Defense spending and govt purchases has remained fairly constant as a % of GDP, see p. 116. Growth has been in Transfer Payments. Tax Freedom Day - May 6 Tax Spending Day - May 16 COGD - July 3, 1997 (total federal, state and local govt spending, federal regulatory costs) FINANCING GOVERNMENT SPENDING Personal Income Taxes - Largest source of revenue at Fed level. Required a Constitutional Amendment. 16th amendment to the Constitution.
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1. Progressive tax system - higher the income, the higher the rate. Now indexed for inflation. See page 119. See page 125 - Capital gains NOT indexed for inflation. 2. Proportional tax (flat tax) 3. Regressive. Average tax rate = tax liability/taxable income Marginal tax rate - tax rate on the last dollar of income. Payroll Taxes - social security, Medicare, unemployment. 37% of Fed revenue comes from Payroll. Look at your payroll check. Almost as much goes to SS as to Fed Taxes. Payroll taxes are said to be regressive. For example, SS maxes out at $61,200. Employee pays 7.65% and Employer pays 7.65% for a total of 15.3%. At the max of
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This note was uploaded on 11/18/2011 for the course ECON 101 taught by Professor Gottlieb during the Fall '08 term at Rutgers.

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