Government Budget

I. Context

• Focus on U.S. federal budget but applicable to other governments.

II. Types of Taxes

1. Progressive Taxes

   • Higher rates for higher incomes (e.g., U.S. tax brackets).

   • Marginal tax rates mean only income within a bracket is taxed at that rate.

   • Incentives: Prevent disincentives for working more (avoiding higher taxes on all income).

2. Flat Taxes

   • Constant tax rate for everyone, simpler but shifts the burden to non-rich.

3. Regressive Taxes

   • Lower rates for higher incomes (e.g., sales tax).

   • Sales tax is regressive because poorer households spend a higher proportion of their income.

III. Tax Revenue

1. Income Tax

   • Progressive, tax on individual income.

   • High-income households contribute most of the income tax collected.

2. Payroll Taxes

   • Fund Social Security and Medicare.

   • Split between employee and employer.

3. Corporate Taxes

   • Flat tax (21%), but deductions can reduce actual taxes owed.

   • Example: Amazon paid zero federal taxes due to deductions allowed by the tax code.

IV. Outlays (Spending)

1. Mandatory Spending

   • Entitlements, like Social Security, Medicare, welfare.

2. Discretionary Spending

   • Spending decided by Congress (e.g., defense, nondefense).

   • Includes transfers (e.g., unemployment benefits, farm subsidies).

3. Transfers

   • Government spending without direct returns (e.g., Medicare, food stamps).

V. Debt and Deficits

1. Deficit: When spending exceeds revenue in a year.

2. Debt: The total accumulated amount owed due to deficits.

3. Interest: Paid on accumulated debt.

   • Example: 2022 deficit was about $1.4 trillion, with mandatory spending at 65% of the budget.

VI. On Balance

1. Deficit Trends: The U.S. has run deficits since the late 1990s.

2. Unfunded Liabilities: Future payments like Social Security and Medicare are not included in the current deficit.

3. Debt-to-GDP Ratio: Changes are often due to GDP growth, not debt reduction.

VII. The Laffer Curve

1. Laffer Curve Concept:

   • Shows the trade-off between tax rates and tax revenue.

   • At 0% and 100% tax rates, no revenue is generated.

   • The "optimal" tax rate is unclear but likely exists somewhere below 100%.

2. Impact of High Tax Rates:

   • High rates (e.g., 70-90%) lead to tax avoidance or reduced work, limiting revenue.