Initially, we'll look at taxes today, and then we'll take two cracks at figuring out the "big picture" of the economy.
Here's a much more extensive set of debt (and other) clocks than the one I showed you yesterday.
There's an old saying that, "there's nothing certain but death and
taxes." Today, we'll spend some time looking at the less depressing
half of that adage... Hopefully, you've been convinced by now of the
economic necessity of some form of taxation. (If not, contemplate life
without roads, schools, police, and national defense for a while...)
So, if we work from the common assumption that taxes are a necessity, there remain several questions:
- Who should be taxed?
- What should be taxed?
- How (at what rate) should the tax be levied?
- What should happen to the money collected from the tax?
Let's start our look at some internet resources with this... Taxpolicy.com
invites you to "Build Your Own Tax Policy." It asks you a series of
questions and then sketches out your broad views on taxes as derived
from those answers.
The history of taxation: Of course, the history of taxation is long. If you want more information than you can ever use, consult "The History of Taxation" at the "Taxworld" website.
Types of taxes:
There are several broad categories of taxes. Economists generally
classify taxes as progressive, regressive, or proportional. (Another
type of tax is called a "head" tax. Everyone pays the same amount.)
Let's make sure we understand the differences.
Discuss: Which type of tax do you think is most fair? Are there any that you strongly oppose? Is the sales tax regressive?
The Federal Income Tax:
This, of course, is the "big one". It has been in place since 1913, and
it is the single largest source of governmental revenue.
One of the legacies of the Reagan years was a period of tax reform.
Now, there are six federal income tax rates: 10 percent, 15 percent, 25
percent, 28 percent, 33 percent, and 35 percent.
(As of 2011, these specific numbers were correct.) For married couples, the 15 percent rate currently applies to
taxable income up to $69,000, whereas the 25 percent rate applies to
taxable income between $69,000 and $139,500. Here is the Internal Revenue Service website.
Do you think it is fair to tax higher levels of income at a higher
rate? Would you like to see a more or less progressive income tax?
Of course, Minnesota gets its share of income as well. You can learn more about that at the "Minnesota Department of Revenue Home Page." You can also browse around here to find a copy of the tax forms you would need to file as well.
For comparisons, here's some data on State Income Taxes for the rest of the nation.
Looks like we missed it. For the purposes of federal income taxes, "Tax Freedom Day" came on April 18th. However, if you were living in Canada, it would not be until June.
Next, it's time to see how this all fits together. We'll look at two versions of "how the economy works." For us, it is convenient that one focuses on "demand," while the other focuses on supply.
demand: Let's look at flows in the economy, particularly as they originate on
the demand side. We'll largely be looking at work pioneered by John Maynard
Keynes. (I think this material is as
potentially confusing as any that we will use this quarter.) We'll look
at a visual representation of this.
I have a handout for you.
Supply, supply, supply: We'll look at the competing theory to the previous "grand explanation" of the economy.
By the early 1970s, serious questions emerged about relying solely on Keynes' explanation:
- Supply "shocks", such as the OPEC oil embargo of 1973,
hit the economy, but the Keynsian model alone could not offer advice
for dealing with these crises.
- For the first time, America was
facing rising unemployment and rising inflation. The Keynsian approach
alone couldn't explain these type of departures from the "business
- This approach tended to be short-term in its
focus, and that diverted attention from longer term issues like
economic growth and standard of living.
It was out of these concerns that a new approach, supply-side
economics, emerged. It had its strongest impact during the Reagan
years. (Many called it "Reaganomics".) Although the overall approach
doesn't find as many supporters among economists today, looking at its
approach still helps fully understand macroeconomic theory.
Here it is; a brief tour of the "supply side"...
The first key idea was found in the early 1800s when a French economist named J.B. Say got a law named after him... Say's Law: "Supply
creates its own demand..." This idea held that overproduction and
underproduction would never be problems since production itself
generated enough income to purchase what is produced. "Gluts" or
shortages would lead to price adjustments until the glut or shortage
The experience of the Great Depression, and its sustained, high
unemployment, led to an acceptance of the ideas of Keynes and
discredited "Say's Law".
The key to understanding this approach is the idea of incentives.
Keynes assumed that an increase in demand automatically meant an
increase in supply unless the economy was at "full capacity".
Supply-siders disagree, saying that the production won't happen if the
costs are too high.
What could make the costs too high? Things like taxes and interest rates.
The "solution"? Incentives- particularly in the form of lower taxes.
- They argued that reducing costs will lead to more production by business.
- Also, lower taxes would encourage household savings, creating more funds for investment.
- Further, some claimed that decreasing tax rates would lead laborers to work more, furthering the cycle.
The second key difference is the effect of government deficits, or the theory of crowding-out.
Here's the argument: When spending exceeds taxes, the government
borrows money in financial markets. (States and locals also sell
revenue bonds to finance projects.) The federal government also sells
Supply-siders say these actions pull money (capital) out of the
private markets and raise interest rates. These actions "crowd out"
private investment, lowering output and employment.
You may have noted a potential contradiction here. How can you hope
to both cut taxes to stimulate the economy and avoid budget deficits
that might crowd out investment? What do you think?
Remember, although relatively few economists still hold these ideas,
the concepts of "supply-side" economics still influence public policy
decisions today.HOMEWORK for next session - Friday, April 20th
Naked Economics Blog Entry #4 is posted (Chapters 6 and 7). You should be caught up through the four of those ASAP.
You will be asked to read through Chapter 9 in Naked Economics
over the weekend. (Blog #5 will be on chapters 8 and 9, and I'll post it this weekend.)
I'll ask you to be through chapter 10 by Tuesday's class time.