ECON110 Final Review (The Federal Budget)

Explain where revenues come from, and the largest sources of revenue.
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Terms in this set (13)
-Marginal tax rate: tax rate paid on an additional dollar of income
-Average tax rate: Total tax payment divided by total income

-Marginal tax rate is what is important as it is what affects incentives to work

Prevents all income from being taxed
-Get exemptions for each dependent in your household ($3800 per each for 2012)
-Standard deduction ($5950 for single, $11,900 for married couple, $8700 for head of household)
-Itemized deductions - in lieu of standard deduction, you can add up certain items such as mortgage interest, property taxes, high medical bills, charitable giving, etc. and deduct that from your income
-Other exemptions as well - IRA, 401 (k) and many others

-Interest is taxed like labor income
-Dividends and capital gains taxes are 15% for most people
•Alternative minimum tax (AMT) - separate tax that must be computed for higher earners
•The AMT allows many fewer deductions and is based on a flat rate of 26% or 28%
•A taxpayer must pay the higher of the AMT or his tax under the regular tax code
•Originally designed for very few (155) taxpayers, but now affects 3.5 million Americans
-Largest government program in the world
-Social Security is pay as you go - money that comes in is sent out to beneficiaries and is not set aside in a personal account
-Average retiree receives $1000 per month
-Social Security redistributes wealth
-From higher income classes to lower income classes
-From young to old
-Social Security benefits married couples (higher payments if you're married) and people that live longer (women)
Explain federal debt. (what we use to mean national debt, how quickly is it rising, national deficit.)-National debt: held by the public (all federal debt held outside the US government) -Currently is $11.4 trillion or 72% of GDP -Debt is rising quickly in actual dollars and as a percentage of GDP -National deficit: annual difference between federal spending and revenuesExplain -Factors that drive large future debt -Three programs most spending will be -Two things that can potentially change to reduce future debtDriven by: -Increasing average age of the US population -Increasing health care costs -Social Security, Medicare and Medicaid will be 65% - 70% in 2060 under current projections -Higher taxes, less spendingExplain the future of the budget. (difficulty, programs someone must say they will reform if they are serious about reducing the debt)•Tough to predict the future •Programs today will have much different costs than we project -In 1966, Medicare was projected to cost $12 billion for 1990; it cost $107 billion in 1990 •If anyone discusses reducing the debt and deficit and does not want to reform Medicare, Medicaid and Social Security, they should not be taken seriously