Module six: economies of households and economic functions of the government

Sources of household income (2019)

• Larges: Salaries and wages 62%

• Second: transfer payments, interest income, and proprietor’s income 9%

• Interest income rose from 5% in 2007 to 9%

• corporate profits accounted for 7%

• rental income was the smallest 4%

Personal Distribution of national income

• measures how the nation’s money income was divided among individuals and households in the united states

• households are divided into five numerically equal groups or quintiles showing the poorest group, the middle, the rich, and the wealthy

Households as spenders

• personal taxes

  • households spent 12% of their total income on taxes in 2019

• personal savings

  • savings are defined by economists as theat part of after-tax income that is not spent

    • typically, households save about 3% of their net income each year

    • in 2007, however, households had a savings rate of 1% due mainly to heavy harrowing to purchase houses, to tap into their home equity, or to finance purchases of imported goods

    • in 2019, savings accounted for 7% of income

• Personal consumption expeditures0 - these accounted for 81% of total spending in 2019

  • durable goods (3+ years expected life) accounted for 11% of spending

  • non-durable goods accounted for 20%

  • purchases of services accounted for 69% of consumer spending

providing a legal and social framework

• legal framework

  • provide for the legal status of business

  • define rights of private ownership

  • provide for the enforcement of contracts

• social framework

  • police to maintain order

  • standards for weight and product quality

  • monetary system to facilitate exchange

Maintain competition

• competition is the basic regulatory mechanism in a capitalist economy

  • monopoly

  • natural monopoly

Redistribution of income and wealth

• this attempt to control the inequities inherent in the market system

  • transfer payments

    • T.A.N.F.

    • Unemployment Benefits

    • Social Security Payments

    • Medicaid Payments

    • Medicare Payments

    • Disability Payments 60 Minutes Disability

    • Affordable Care Act (Obamacare)

    • Supplemental Nutrition Assistance Program (SNAP)

• Market intervention

  • minimum wage legislation

  • rent control

  • farm subsidies

• taxation

  • you tax the things that you want less of; you subsidize the things that you want more of

    
    

reallocation of resources

• spillover if externalities

  • spillover costs

    • correcting for spillover costs:

      • legislation

      • specific taxes

  • spillover benefits

    • increasing spillover benefits

      • subsidize consumers

      • subsidize suppliers

      • direct government spending

government provides public goods and services

• private goods

  • divisible

  • exclusion principle

• public goods

  • indivisible

  • exclusion principle does not apply

  • free rider problem

economic stabilization

• control unemployment

• control inflation

Government finance

1. federal finance

• Personal Income Tax 50%

  • Progressive

    • People with higher incomes pay a larger percentage of their incomes on taxes than those with lower incomes

  • Proportional

    • The tax rate remains the same regardless of the person’s income

  • Regressive

    • People with higher incomes pay a lower percentage of their income on these taxes than those with lower incomes

government finance

1. federal finance

   • federal tax revenues

   • payroll taxes

   • corporate income taxes

   • all other taxes

state finance

• Sources of State Revenue 2007

  • Sales and Excise Taxes 47%

  • State Personal Income Taxes 35%

  • Corp. Income Taxes and Licenses 18%

• State Expenditures

  • Education 36%

  • Public Welfare 28%

  • Health and Hospitals 7%

  • Highways 7%

  • Public Safety 4%

  • Other Spending 18%

• State Lotteries and Gambling

• Federal Grants

• State Business Tax Climate Index

Local finance

Sources of Local Revenue

• Property Taxes 72%

• Sales and Excise Taxes 16%

• Local Expenditures

  • Education 44%

  • Public Welfare, Health and Hospitals 12%

  • Public Safety 11%

  • Housing, Parks, and Sewage 8%

  • Streets and Highways 4%

• state and federal grants

• propriety income (municipally owned utilities