Chapter 13: Government Spending, Taxing, and National Debt

1
Chapter 13 Government Spending, Taxing, and
National Debt
2
Size of Government

• Government expenditures as a percentage of GDP
  have grown from 23 in 1960 to in 199
• Expenditures of Federal government have risen
  from 17 to of the GDP between 1960 and 199

3
Components of Government Expenditures

• Government purchases of goods and services have
  remained stable at about 20 of the GDP in
  1960-97
• Transfer payments have grown from 6 to 1 of the
  GDP over this period

4
Taxes

• Tax revenues as a percentage of the GDP increased
  from 26 in 1960 to 30 in 1999
• Federal tax receipts rose from 18 to 20 of the
  GDP over this period

5
Role of Government Public Goods

• Non-rival in consumption use by one person will
  not require loss of consumption by another person
• Non-exclusive no one can be excluded from
  consumption once it is produced
• Free-rider problem everyone uses regardless of
  tax payments

6
Role of Government Externalities

• Benefits and costs of ones consumption and
  production to third parties
• Positive externalities require government
  subsidies (college education)
• Negative externalities require government taxes
  or regulations (pollution)

7
Positive Externalities MSBgtMPB
Price
MPCMSC
B
P
A
P
MSB
MPB
Quantity
Q
Q
8
Negative Externalities MSCgtMPC
Price
MSC
MPC
B
P
P
A
MSBMPB
Quantity
Q
Q
9
Role of Government Income Distribution

• Progressive taxation and transfer payments to
  bridge income gap between the rich poor
• Horizontal equity people with equal income pay
  equal amount of tax regardless the source of
  income
• Vertical equity people with higher income pay
  larger taxes

10
Incidence of Tax Inelastic Demand
Price
S
D
S
P2
Tax
P1
Tax is paid by consumer Forward shifting
S
D
S
Q1
Quantity
11
Incidence of Tax Elastic Demand
Price
S
S
D
D
P
Tax
Tax paid by producer Backward shifting
S
P1
S
Q1
Q
Quantity
12
Comparative Data

• U.S. tax share of the GDP is 31.5
• It is the smallest among industrial nations
• The highest share belongs to Denmark, 60

13
Composition of Tax Receipts 1950-2000

• Individual income tax share rose from 39.9 to
  47.8
• Corporate income tax share fell from 26.5 to 10
• Social security tax share rose from 11 to 33.8
• Excise tax share fell from 19.1 to 3.7

14
Effective Federal Income Tax Rates, 1996
Income bracket, Tax rate,
Less than 10,000 8.0
10,000 20,000 8.8
20,000 30,000 13.3
30,000 50,000 17.5
50,000 70,000 19.5
70,000 100,000 21.1
100,000 200,000 22.0
More than 200,000 23.7
15
Federal Budget Account ( billions)
Year Receipts Spending Balance
1993 1,154 1,409 -255
1994 1,259 1,462 -201
1995 1,352 1,516 -114
1996 1,453 1,561 -108
1997 1,579 1,601 -22
1998 1,658 1,668 -10
1999 1,743 1,802 69
16
Public Debt

• Government borrows money from investors through
  the issuance and sale of government securities or
  bonds
• Investors hold the bonds for a certain time
  period to make interest income

17
Government Securities

• Non-marketable securities
• U.S. Savings Bonds Notes redeemable in cash
  for the face value after maturity
• Marketable securities
• Treasury bills (lt 1 year low interest rate)
• Treasury notes (1-5 years)
• Treasury bonds (gt 5 years, high interest rate)

18
National Debt

• Government borrowing to cover budget deficit
• Debt id owed to
• Private investors
• Banks and financial institutions
• Insurance companies
• State local governments
• Foreign governments and private investors

19
Budget Debt
Year Budget Surplus National Debt Debt Repayment
In billions
1998 69 5,479 51
1999 79 5,615 50
2000 117 5,712 98
2001 134 5,781 117
2002 187 5,818 170
Estimates
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Economic Effects of Federal Debt

• Primary burden opportunity cost of servicing the
  debt in terms of reduced public investment
• Inflationary effect higher interest rates and
  prices

21
Economic Effects of Federal Debt

• Income distribution effect income transfer from
  government to high income investors
• Output effect higher taxes and opportunity cost
  of productive investment