Lifeconomics and Financial Fitness For Life

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Lifeconomics and Financial Fitness For Life

• A Continuing Education Workshop for Teachers

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Outline

• Your Government
• Your Life
• Your Money
• Financial Fitness for Life Curriculum

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What is economics?

• Observing the world full of mysteries
• Why does the government tax us?
• Should you take that second job?
• Should you fix the leak or call the roofer?
• Why does a stock price fluctuate?

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What is economics?

• Trying to solve these mysteries in a manner
  consistent with human behavior.
• Sometimes, hard to solve these
• so we make assumptions, say there are only 2
  goods in the world Milk and Gasoline

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What is economics?

• Use simple models as representations of the real
  world.
• Apply this to explain our mysteries.

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Your Government

• How the government affects your everyday life

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Calculating your tax burden (Ch 20)

• Taxes Do we pay - too much?
• - just enough?
• - not enough?
• Tax Burden the portion of income paid in form of
  taxes (federal, state, local etc) ? 39 (CA
  average) 2005

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Tax Burden

• As income rises, taxes rise (both actual and
  proportion) ? Progressive taxation (pay more
  taxes and at a higher rate)

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Calculating Tax Burden

• Only count direct taxes
• Federal Tax Withheld ? Box 2 W-2
• Add/ subtract extra taxes from return
• Other federal taxes ? SS, Medicare (Boxes 4,6)
• State Tax (Box 17)
• Adjust (add/ subtract) any taxes from return
• Gas Tax (Both fed/ state taxes included in pump
  price) (p 113/ website)

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Calculating Tax Burden

• Sales Tax (on all purchases) (p113/website )
• Actual (add all taxes from all receipts)
• Estimate
• Total Amount Spent x Tax Rate
• (0.95) x Take home pay x Tax Rate
• Property Tax (Home, Vehicle) ? check bill
• Total Tax
• Total Income
• Tax Burden 7/ 8

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Tax Burden Example

• Bob wants to estimate his tax bill. In 2003 he
  made 14 000, received a tax refund of 100 and
  paid the following Medicare 214 State tax
  509 federal tax 1461 property tax 200
  social security 742. He also purchased 400
  gallons of gas and took home 10 000. What is
  his tax burden?

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Estimating Tax Burden
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Estimating Tax Burden
Tax Burden Proportion of income paid in taxes
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Now you try it

• Jack grossed 27 000 in 2003. He paid the
  following proportion of his gross income 10 for
  federal tax, 2 state tax, 0 property tax, 12
  other federal tax. Gas tax is 0.50/ gallon in
  his state. His old car consumed 3000 gallons of
  gasoline, and he managed to save 4 of his take
  home pay, 17 000. Sales tax in his state is 6.
  What is Jacks tax burden?

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Answer

• Federal 2700
• State 540
• Other 3240
• Gas 1500
• Sales 680
• Total 8660 ? 32

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Using your tax bracket (Ch 21)

• Tax burden also known as average tax rate i.e.,
  on average, the taxes you pay out of each dollar
  of income.
• Sometimes want to know how much more taxes you
  will pay if your income rises.
• Or, how much you will save if invest in a
  tax-free investment
• Here, average tax rate not all that helpful. Why?

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Tax Bracket

• Two reasons
• Some taxes stop at certain income
• eg. SS max 94,200 (2006)
• Federal tax is progressive, i.e. pay higher RATE
  at higher income
• So need to know marginal tax rate
• Marginal Rate additional tax pay for additional
  income aka tax bracket

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What to count?

• Only those taxes that one must automatically pay
  with higher income such as federal taxes (FICA
  Federal Insurance Contributions Tax SS
  Medicare 7.65 ), state income taxes.
• Not count property taxes, sales tax and gasoline
  tax (unless change spending)

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Government and Money

• Then and Now

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Government spending elsewhere
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Deficit as a of GDP
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Why the difference?

• Governments in different countries vary
  expenditures (G) because priorities are different
  ? choice made by society.
• US spends more on military
• Others spend more on social services
• Even within a given country where the money goes
  can change over time.

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Components of the federal budget
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Where do Federal Dollars go?

• During Vietnam war, almost half of govt spending
  on military. Today, again increase in defense
  spending.
• After end of cold war, big decrease in military
  spending.
• Where did the savings end up? SS and Medicare
• As population ages, this will increase.
• Much borrowing (deficit spending) during 80s.
• Interest payments will continue to make larger
  portion of govt spending

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Where the government dollars go
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Who suffers?

• As deficit keeps rising, either need to tax more
  or cut spending.
• Generally taxes fallen over the last few years.
• So spending cuts.
• Which programs get cut?
• Natural Resources and Environment (NRE)
  Education and other training (Edu) Housing, food
  and unemployment assistance (Hou)
• Where has spending increased? Health ? rising
  costs

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Social programs as of G
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Who pays the taxes?

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Sources of Government Revenue
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Who pays the taxes?

• Individual Income Taxes Unchanged over 4 decades
• Corporate taxes Fell by large amount (especially
  during the 80s)
• SS Increased as more people entered workforce
  (women, baby boomers)
• Excise Taxes Tax on gasoline, alcohol and
  cigarettes, also fell

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Declining Democracy

• How does society change its priorities?
• In a democracy, through elections.
• People vote for those who best represent their
  interests.
• Voter apathy increased over last 40 years.
• Who votes most often?
• How to influence?

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Declining Democracy
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How do others compare?

• 1996 Italy 87 Japan 60 India 60
  Guatemala 31 Cameroon 41 Canada 55
• Other ways to influence govt lobby groups
• 1998 1.42 B industry ? 2.7 M/ member of
  Congress

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Will the real deficit and debt stand up (Ch 23)

• Today, national debt approx 8.4 trillion 1995
  5 T 1929 17 B
• Does this mean that it increased 49312 since
  1929 and 68 since 1995?
• Two problems
• Not adjusted for purchasing power (that dollars
  are worth different in various periods).
• Does not count for the changing size of the
  economy

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Realistically Speaking

• If your debt is 10 000, would not worry much if
  income was 100 000. But would if income was 20
  000.
• Similarly debt as a percent of GDP (national
  income) is what matters rather than the actual
  debt.

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The surReal Deficit

• Similar true of federal deficit
• As indicated by graph, high deficit during war
  years
• Looking at these figures, both annual deficit and
  total debt have increased as a percent of GDP.

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Dollar values over different time periods (Ch 1)

• Earned 30 000 in 1985 earned 50 000 in 2005.
  Did you really earn more in 2005 than in 1985?
• Depends, things tend to cost more over time
  (purchasing power declines or cost-of-living
  rises) so later years buy less than prior years
• How do you calculate how much money is worth over
  time, i.e., how do you compare prices from
  different time periods? Purchasing power
  converter (PPC) p 4
• Multiply from any year by the PPC
• (based on say 2005 ) ? value in terms of 2005

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Example using PPC

• 1985 30 000 2005 50 000
• PPC1985 1.80
• (1985) x PPC(1985) (2005)
• 30000 x 1.80 54 000 in 2005
• So it would take 54 000 in 2005 to buy what 30
  000 bought in 1985. Actual salary in 2005 is 50
  000, in terms of purchasing power, you are worse
  off in 2005 than in 1985.

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PPC for selected years 1950 - 2005
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Another example

• Govt spent 3M for a program in 1965, in 1995
  same program spent 10 M. In which year was the
  govt program spending more in terms of purchasing
  power?
• PPC1965 6.15 PPC1990 1.48
• (1965) x PPC (1965) (2005)
• 3 M x 6.15 18.5 M
• (1990) x PPC (1990) (2005)
• 10 M x 1.48 14.8 M
• So 14.8M was spent in 1995 (2005 ) vs 18.5 M
  spent in 1965 (2005 ). So more was spent in
  1965 in terms of purchasing power.

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Now you try it!

• In 1983 gasoline cost 1.20 per gallon. Today
  (2005) it costs 2.70. Are the prices really
  higher today?

• PPC1983 1.95 (2005 )

• (1983) x PPC (1983) (2005)
• 1.20 x 1.95 2.34
• So gas prices are actually cheaper compared to
  1983 in terms of 2005 purchasing power.

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Caveats about PPC

• When comparing prices over years, must make sure
  product is essentially the same in both years.
• If different features or better technology, then
  can not use PPC.
• When comparing salaries need to make sure that
  no major changes in working conditions. Use
  take-home salary. PPC only accounts for higher
  prices, not higher taxes (or lower).

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All Time US Box Office Receipts
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The Most Popular Movies of All Time, Inflation
Adjusted