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)
Explain where revenues come from, and the largest sources of revenue.
-Individual income tax
-Social Security and Medicare taxes
-Corporate income tax
-Excise taxes, estate and gift taxes, custom duties,
miscellaneous

Largest sources:
-Individual income tax
-Social Security and Medicare taxes
Explain individual income tax. (types of tax rates and which is important for working; calculate income tax burden from brackets given to you (DO NOT memorize tax brackets); what prevents all income from being taxed; income taxes on interest, dividends and capital gains.)
Rates:
-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
Explain alternative minimum tax. (what it is, how it was originally designed)
•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
Explain Social Security and Medicare taxes. (rates, how much they reduce your take-home pay.)
•Federal Insurance Contributions Act (FICA) taxes are 6.2% on first $106,800 of earnings (4.2% in 2012) that fund Social Security payments and 1.45% on all earnings to fund part of Medicare (MP A)
•Your employer also pays 7.65% in FICA taxes for a total of 15.3% of income (13.3% in 2012)
Explain corporate income tax. (how much corporations actually pay, who ultimately pays.)
-Corporate income tax rate is 35%
-No corporations pay this high a rate by taking
advantage of deductions and credits
-Corporate taxes are ultimately paid by people such as shareholders, consumers and workers
Explain the distribution of taxes. (progressive, regressive, flat taxes; state and local taxes; who pays most taxes (DO NOT memorize percentages).)
-US has a progressive tax system; higher earners pay a higher percentage of their income in taxes
-A regressive tax has higher rates on lower earners
-A flat tax would have a constant tax rate
-State and local taxes are less progressive due to the use of sales taxes
Explain federal spending. (programs with most spending)
-Four programs account for almost 3/5 of federal spending
-Social Security
-Defense
-Medicare
-Medicaid

Interest of the debt, unemployment insurance and welfare account for 20.2%

Everything else (discretionary spending) is 20.9%
Explain Social Security, and who benefits.
-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 Medicare and Medicaid.
•Both are health insurance programs
•Medicare is for elderly
-Automatically enrolled at 65
-Still have copayments and deductibles
•Medicaid is for poor and disabled
-Run by states -
Funded by states and the federal government
What are some other spending items in the federal budget?
•Unemployment and welfare payments
-Unemployment insurance -Direct payments to the poor -Earned income tax credit (EITC) -Section 8 vouchers

•Everything else
-Foreign aid - $25 - $30 billion
-NIH, FDA, SBA, farm subsidies, courts, border security, FBI, NSF, federal employees, etc.
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