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Continuing taxesDeficit financing
Today: More on the US revenue system, including the corporate tax; Deficit financing
Today
4 “mini-lectures” Other issues with personal income taxes
The marriage penalty International income
Changes in personal behavior due to taxation Number of hours worked Saving
Corporate taxation (briefly) Deficits and debts
Marriage penalty/Int’l income Previously…
Rate structure showed that there are different tax rates for married people than for single people
In this “mini-lecture…” We examine the marriage issue further Income earned by Americans in other countries is
also looked at
The marriage penalty
There are many reasons that people in the United States decide not to marry Costly to divorce if the marriage does not work out
well Many low-income people may lose benefits
People receiving public assistance may lose qualification for these programs if they marry someone who is working
Tax burden may increase as a married couple than as if they lived together unmarried
Example of the marriage penalty: Taxes Suppose a simple case
Only taxable income determines taxes that have to be paid
See what happens to tax burden when some couples get married
Recall marginal tax rates, 2007
Official Statutory Tax Rate Schedule (2007)
Single Returns Joint ReturnsTaxable Income Marginal
Tax RateTaxable Income Marginal
Tax Rate
$0-$7,825 10% $0-$15,650 10%
$7,825-$31,850 15 $15,650-$63,700 15
$31,850-$77,100 25 $63,700-$128,500 25
$77,100-$160,850 28 $128,500-$195,850 28
$160,850-$349,700 33 $195,850-$349,700 33
$349,700 and over 35 $349,700 and over 35
Source: http://www.irs.gov/formspubs/article/0,,id=164272,00.html
Example 1, single
Cameron has $80,000 in taxable income Tax burden: $16,510.75 total
10% of $7,825 15% of $24,025 25% of $45,250 28% of $2,900
Erin has $80,000 in taxable income Tax burden: $16,510.75 total
10% of $7,825 15% of $24,025 25% of $45,250 28% of $2,900
Official Statutory Tax Rate Schedule (2007)
Single Returns Joint Returns
Taxable Income
Marginal Tax Rate
Taxable Income
Marginal Tax Rate
$0-$7,825 10% $0-$15,650 10%
$7,825-$31,850
15 $15,650-$63,700
15
$31,850-$77,100
25 $63,700-$128,500
25
$77,100-$160,850
28 $128,500-$195,850
28
$160,850-$349,700
33 $195,850-$349,700
33
$349,700 and over
35 $349,700 and over
35
As single people, Cameron and Erin pay a total of $33,021.50 in taxes
Example 1, married
Cameron and Erin get married
Total taxable income is $160,000 Tax burden: $33,792.50
total 10% of $15,650 15% of $48,050 25% of $64,800 28% of $31,500 $771 more than the total
paid if they are single
Official Statutory Tax Rate Schedule (2007)
Single Returns Joint Returns
Taxable Income
Marginal Tax Rate
Taxable Income
Marginal Tax Rate
$0-$7,825 10% $0-$15,650 10%
$7,825-$31,850
15 $15,650-$63,700
15
$31,850-$77,100
25 $63,700-$128,500
25
$77,100-$160,850
28 $128,500-$195,850
28
$160,850-$349,700
33 $195,850-$349,700
33
$349,700 and over
35 $349,700 and over
35
Example 2, single
Pat has $30,000 in taxable income Tax burden: $4,108.75 total
10% of $7,825 15% of $22,175
Shannon has $200,000 in taxable income Tax burden: $52,068.25
total 10% of $7,825 15% of $24,025 25% of $45,250 28% of $83,750 33% of $39,150
Official Statutory Tax Rate Schedule (2007)
Single Returns Joint Returns
Taxable Income
Marginal Tax Rate
Taxable Income
Marginal Tax Rate
$0-$7,825 10% $0-$15,650 10%
$7,825-$31,850
15 $15,650-$63,700
15
$31,850-$77,100
25 $63,700-$128,500
25
$77,100-$160,850
28 $128,500-$195,850
28
$160,850-$349,700
33 $195,850-$349,700
33
$349,700 and over
35 $349,700 and over
35
As single people, Pat and Shannon pay a total of $56,177 in taxes
Example 2, married
Pat and Shannon get married
Total taxable income is $230,000 Tax burden: $55,100 total
10% of $15,650 15% of $48,050 25% of $64,800 28% of $67,350 33% of $34,150 $1,077 less than the total
paid if they are single
Official Statutory Tax Rate Schedule (2007)
Single Returns Joint Returns
Taxable Income
Marginal Tax Rate
Taxable Income
Marginal Tax Rate
$0-$7,825 10% $0-$15,650 10%
$7,825-$31,850
15 $15,650-$63,700
15
$31,850-$77,100
25 $63,700-$128,500
25
$77,100-$160,850
28 $128,500-$195,850
28
$160,850-$349,700
33 $195,850-$349,700
33
$349,700 and over
35 $349,700 and over
35
Example 1: Cameron/Erin, $80K each
Official Statutory Tax Rate Schedule (2007)
Single Returns Joint ReturnsTaxable Income Marginal
Tax RateTaxable Income Marginal
Tax Rate
$0-$7,825 10% $0-$15,650 10%
$7,825-$31,850 15 $15,650-$63,700 15
$31,850-$77,100 25 $63,700-$128,500 25
$77,100-$160,850 28 $128,500-$195,850 28
$160,850-$349,700 33 $195,850-$349,700 33
$349,700 and over 35 $349,700 and over 35
More income is taxed in the 28% bracket after they get married
Example 2: Pat $30K/Shannon $200K
Official Statutory Tax Rate Schedule (2007)
Single Returns Joint ReturnsTaxable Income Marginal
Tax RateTaxable Income Marginal
Tax Rate
$0-$7,825 10% $0-$15,650 10%
$7,825-$31,850 15 $15,650-$63,700 15
$31,850-$77,100 25 $63,700-$128,500 25
$77,100-$160,850 28 $128,500-$195,850 28
$160,850-$349,700 33 $195,850-$349,700 33
$349,700 and over 35 $349,700 and over 35
As a married couple, less income is taxed in the 28% and 33% brackets; more in the 25% bracket
Two reasons that this happens When there is one person
that earns almost all of the income, more money is usually subject to the lower marginal rates Notice that the two lowest
brackets vary by a factor of two
At the higher brackets, the income ranges converge Notice that the 35% bracket
is the same whether or not you are married
Official Statutory Tax Rate Schedule (2007)
Single Returns Joint Returns
Taxable Income
Marginal Tax Rate
Taxable Income
Marginal Tax Rate
$0-$7,825 10% $0-$15,650 10%
$7,825-$31,850
15 $15,650-$63,700
15
$31,850-$77,100
25 $63,700-$128,500
25
$77,100-$160,850
28 $128,500-$195,850
28
$160,850-$349,700
33 $195,850-$349,700
33
$349,700 and over
35 $349,700 and over
35
For more on the marriage penalty… Read p. 406-409
Three principles, including marriage neutrality Changes to the marriage penalty over the years Is the marriage tax equitable? Is the marriage tax
efficient? Argument in favor of family as taxable unit:
“Bedchamber transfers of property” from high-earning spouse to low-earning spouse could be a risky strategy
Argument in favor of individual as taxable unit: Elasticity of labor supply differs between men and women
What is a family?
International income
The United States uses a global taxation system Income is taxed no matter where it is earned Credit is given for taxes paid to other countries, up
to the total tax liability Most other countries use a territorial system
Someone earning income outside of her home country only pays taxes to the country where the money was earned
Summary: Marriage penalty/int’l income When two single people marry, the combined
tax burden typically changes Example 1: Equal incomes by both spouses
Tax burden goes up Example 2: Big differences in income between
the two spouses Tax burden goes down
International income is taxed differently depending on the country you are a citizen in
Changes in behavior due to taxation Although taxation typically is on income, it is
indirectly based on other types of decisions Labor decisions Saving decisions
Labor decisions
Taxes reduce the marginal wage that a person receives
How do taxes alter people’s behavior? See Figure 18.1, p. 416 See Figure 18.2, p. 417 See Figure 18.3. p. 418 See Figure 18.4, p. 418
Empirical literature
Who responds to changes in tax rates? Women
Example: Tax Reform Act of 1986 (TRA86) Marginal tax rates for high incomes were decreased
significantly Women with husbands earning a lot increased their work
by a lot (on average) Women with husbands earning moderate amounts
increased their work by a smaller amount (on average) For more, see Eissa (2001)
The Laffer curve
Is there a limit to the amount of tax revenue that the government can get through a labor tax? Yes
As tax rates increase, people have less of an incentive to work Look at a simple example
See Figure 18.5, p. 422
The Laffer curve
Eventually, increasing the tax rate will lower tax revenue collected This leads to the question: What is the tax rate
that maximizes labor taxes that are collected? This idea was popularized by Arthur Laffer
See Figure 18.6, p. 423
Changes in saving
How does saving change when interest is taxed and interest payments are deductible See Figure 18.7, p. 426 See Figure 18.8, p. 427 See Figure 18.9, p. 427
Empirical literature
There appears to be very little change in saving due to the tax system Not much research has been done to conclusively
answer this question, however
Summary: Changes in behavior Theory is unclear as to how people change
their labor and saving decisions when taxes change Empirical evidence shows that women with high-
earning husbands increase their labor supply significantly when marginal tax rates decrease
Saving does not seem to be affected by tax laws The Laffer curve predicts that there is a tax
rate that maximizes total tax revenue collected
Corporate taxation
Corporations are businesses that usually determine ownership through stocks Limited stockholder liability Legal entities
Corporations provide about 10% of federal taxes collected
Corporate taxation
Reasons supporting corporate taxation Corporations are distinct financial entities Limited liability gives corporations a big advantage
over non-corporate businesses Without the corporate tax, no tax money is
collected if profits are retained by the corporation Reason against supporting corporate taxation
Double taxation Taxation occurs at the corporate and individual levels
Corporate taxation
Structure of the corporate tax Graduated Most corporate taxes paid are at the highest
bracket: 35% What can be deducted?
Employee compensation Interest Direct costs of doing business
Note that depreciation of capital occurs over time
Basic structure
Revenue - Expenses incurred earning revenues Taxable Income* Tax rate (15% - 35%) Tax- Credits Total Tax
More on corporate taxation
If you are interested in corporate taxation, you can read other topics in Chapter 19 Corporate behavior Corporate finance State corporation taxes Taxing multinational corporations Reform
You are only responsible for knowing pages 438-443
Summary: Corporate taxation Corporations are independent legal entities Stockholders of corporations have limited
legal liability Corporate earnings are taxed
Different system than for individual taxes
Debts and deficits in the US Debt by the US government has been a
significant percentage of GDP for decades “Official” government debt at the end of 2005
$4.6 trillion, or $4,600,000,000,000 A better way of seeing this is that this is about
37% of yearly national GDP See Figure 20.2, p. 464
Some terminology
Two “flow” terms Deficit
“The excess of expenditures over revenues during a period of time” (R/G p. 462)
Surplus “The excess of revenues over spending during a period
of time” (R/G p. 462)
One “stock” term Debt
“The total amount owed at a given point in time; the sum of all past deficits” (R/G p. 462)
Some terminology
On-budget versus off-budget deficit Some revenues and expenditures are considered
“on-budget” Some programs, like Social Security, are
considered “off-budget”
The US federal deficit
Over the last 40, the US federal government has incurred a deficit almost every year On-budget deficit in 2005: $493.6 billion Off-budget surplus in 2005: $175.3 billion Total deficit in 2005: $318.3 billion
See Figure 20.1, p. 463, for deficits and surpluses since 1965
Two other factors
Not all “promises” made by the US government are calculated in the official debt numbers Social Security (SS) Medicare However, SS and Medicare policies can be
revised by the federal government as it pleases The US government has many assets,
including land, gold, and buildings
For more factors, see p. 464-466
What are the effects of public debt? Lerner’s view
When debt is held by its own citizens, there is no burden for future generations Note that Lerner views a generation as anyone alive at
the same time When future debt is paid off, bondholders are paid
off by other people in the same generation Reality
In the US, about 53% of privately held federal debt is held by foreigners
What are the effects of public debt? Overlapping generations model
Think of each generation as being 20 years long There is no private saving The old do not lend to the government, since they
will die before the debt is repaid
Overlapping Generations Model The Period 2007-2027
Young Middle-Aged Old
(1) Income $12,000 $12,000 12,000
(2) Government Borrowing -6,000 -6,000
(3) Government- provided consumption
4,000 4,000 4,000
The Year 2027
Young Middle-Aged Old
(4) Government raises taxes to pay back debt
-4,000 -4,000 -4,000
(5) Government pays back debt +6,000 +6,000
What are the effects of public debt? Other factors are important in determining the
effects of public debt Crowding out hypothesis
Public debt decreases private investment Market interest rate increases
Bequest effect comes into play if the oldest generation care about future generations
Summary: Debts and deficits in the US US debt has been about 30-50% of GDP
since the early 1980s On-budget deficits and debts calculated by
the US government do not account for all assets and liabilities
Many factors affect the outcomes of public debt