DSSC108 – Economics and Society | My Assignment Tutor

4/01/20211Diploma of BusinessWUCB162/DSSC108 – Economics and SocietyWeek 10Taxes, Borrowing, and the National Debt1Emailing your Lecturers/Tutors• In the subject line always include:• Your full name (and English name)• Student number• Subject code2Assessment scheduleTask Date Due Weighting• Class Test 1 Wk 7 20%• Class Test 2 Wk 11 20%• Tutorial Preparation Weeks 1-10 10%• Final Assessment Task Wk 12 50%(Note: The tutorial preparation mark will be based on theparticipation and completion of tutorial exercises)31 2 34/01/20212Remember…• The lecture slides provide a summary• You need to• take your own notes in lectures• attempt tutorial questions• take your own notes in tutorials• To gain all the knowledge you need for thissubject you must listen, add your ownnotes, and apply by attempting thetutorials questions4Government budget• The government budget is the planned/ anticipatedrevenues and proposed spending/expenditure forthe coming financial year.• Possible government budget outcomes:• Budget deficit• Govt spending greater than tax revenue• Budget surplus• Govt spending less than tax revenue• Balanced budget• Govt spending equals tax revenue© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 5Government expenditure• Social security and welfare (largest category):• Transfer payments to the aged, disabled,unemployed, etc.• Not included in GDP because the payments arenot payments for goods or services.• Public goods and services including:• Health, education, crime prevention, agencies• Stimulus money to expand our economy byincreasing aggregate demand and GDP (i.e.economic growth)© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 64 5 64/01/20213Government revenue• Taxes (at federal level):• Income tax (on individual income earners)• Company tax (an ‘income tax’ on company profits)• Goods and Services Tax (GST)• Excise tax• Government can also source funds by borrowing– issuing government securities• At some specified point in the future, the buyerwill receive the principal back, plus interest© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 7Government borrowing• Government securities• The government borrows money buy issuing/sellinggovernment securities. Sold to (money borrowedfrom):• Banks, corporations, some foreigners, and people• Also known as Treasury securities (bonds, notes).• A financial contract specifying:• Terms of the government borrowing (interest andprincipal repayment amount and timing/maturity)© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 8Income taxes• Income tax• Placed on individual and business income• Flat company tax rate (same percentage rate oftax)• Progressive individual tax rate• a different tax rate is applied to different incrementsof income• Takes a greater percentage of income from highincome people than from low-income people• Accounts for 67% of total federal tax revenue© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 97 8 94/01/20214Individual income tax• Assessable income – income that can be taxed• Salary and wages, bonuses and overtime• Interest, dividends and other investmentincome• Rental income• Capital gains – net income received when anasset is bought at a particular price and sold ata higher price (50% discount if held for >12months)© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 10Individual income tax• Deductions – reduction of income to be taxed• Expenses directly incurred to produce assessableincome• Work related travel, work uniform cleaning, selfeducation expenses, tools and equipment• Tax offsets and rebates• Amounts that directly reduce the amount of taxpayable• Provided for dependents, medical expenses, lowincome earners, zones (remote areas), overseas (inarmed forces deployment)© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 11Individual income tax• Tax returns• Covers financial year from 1 July to 30 June• Lodged to the ATO of all taxable income andincludes all assessable income, eligible deductions,tax offsets and rebates which calculates taxableincome• May result in:• Tax refund – when the tax owed is less than theamount withheld (tax paid)• Tax payable – when the tax owed is more thanthe amount withheld (tax paid)© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 121011124/01/20215Goods and Services Tax (GST)• The goods and servi ces tax in Australia is avalue added tax of 10% on most goods andservices sales, with some exemptions andconcessions. For example basic food isexempt from GST.• GST is levied on most transactions in theproduction process, but is in many casesrefunded to all parties in the chain ofproduction other than the final consumer.© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 13Excise tax• Excise tax• Taxes on the sale of a particular good or service• Tax often captures cost of negative externalities• Results in new equilibrium in market• Lower quantity• Higher price• Influences consumer behavior• Lower equilibrium quantity means reducedconsumption© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 14© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 15Figure 16-4: Effects of an excise tax on a hypotheticalmarket for gasolineA $3 per gallon excise tax will shift backthe supply curve for gasoline. At the newequilibrium E’, the price is $6 per gallonand the quantity of gasoline is 75 gallons.The excise tax of $3 per gallon is paid bythe suppliers of gasoline to thegovernment. Because consumers paymore and suppliers keep less, bothgroups bear part of the burden of theexcise tax.1314154/01/20216Excise taxes• Burden of the excise tax• Impact of the tax—felt by producers andconsumers• Consumers—higher prices paid for the product• Producers – receive lower price, therefore lessrevenue and lower profits• Tax burden share depends on the demandelasticity of the good/service© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 16State and Local Government Taxes• State Government taxes• Payroll tax – paid by an employer when total wage bill exceedsa threshold amount (5.45% over $750,000p.a., reduced to4.85% for 20/21 and 21/22 to help businesses recover frombushfires and COVID-19) ($8.5bn 20/21 estimate)• Stamp duty – paid on certain transactions (mainly motorvehicles and real estate). ($7.9bn 20/21 estimate)• Land tax – payable on property owned with a value above thethreshold (1.6% on value over $482,000). The principal placeof residence is exempt. ($4.6bn 20/21 estimate)• November 2020 NSW government proposal to charge anannual property tax instead of stamp duty and land tax (whereapplicable)© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 17State and Local Government Taxes• Local Government taxes• Council rates – levied on property owners of localgovernment areas by the relevant council• Funds the services provided, and communityinfrastructure maintained, by the local council• Services include community, sporting and recreationservices, environmental planning and protection,waste collection, treatment and disposal• Land within a national park, or owned by a religiousbody or school are exempt.© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 181617184/01/20217© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 19Table 16-3: Total tax revenue as a share of GDP inWestern industrialized countries, 2012aAustralia 22Balanced budget• Should governments strive for balanced budgets?• Problems with the balanced budget requirement:• To implement expansionary fiscal policy (tostimulate the economy) the government canincrease government spending so G increases, ADincreases, equilibrium GDP increases.• Funds to increase government spending must comefrom increased taxes.© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 20Fiscal policy with government taxes• Effects of increasing income taxes on themacroeconomy• Increasing taxes to increase governmentexpenditure• Reduces disposable income, reducing consumption• Reduces business after tax profit, reducing investment• Overall net effect is an increase in GDP• Government spends full amount compared withconsumers spending some and saving part of theirincome• Multiplier effect© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 211920214/01/20218© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 22Expansionary fiscal policy with increased taxesExpansionary fiscal policy shifts the aggregate demand curve forward (AD1). Multiplier effectcreates around round (AD2). Higher taxes reduces consumption and investment to Adreduces to AD3. Overall result is still greater quantity equilibrium GDP.AD2AD1AD3Fiscal policy with government borrowing• Government borrowing• Alternatively to implement expansionary fiscalpolicy the government could runs a budgetdeficit, so the government borrows• Government borrowing creates crowding outeffect• Higher demand for money increases interest rates• Increased incentive to save rather than spend• Increased interest cost reduces demand to bring forwardexpenditure on consumption and investment• Overall net effect is an increase in GDP© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 23© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 24Expansionary fiscal policy with government borrowingExpansionary fiscal policy shifts the aggregate demand curve forward (AD1). Multiplier effectcreates around round (AD2). Crowding out effect increases interest rates reducingconsumption and investment. Overall result is still greater quantity equilibrium GDP.AD2AD1AD32223244/01/20219The National Debt• National debt• The total amount of money owed by thefederal government• Accumulation of all funds borrowed by thefederal government, up to the present, whichhave not been repaid• The total face value of outstanding governmentsecurities on issue© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 25The National Debt• The size of the national debt• Needs to be adjusted for inflation• Important to use an appropriate benchmark• Gross domestic product• Size of the Australian national debt relative toGDP since 1989• 42% in 2017 (all time high)• 10% in 2007 (all time low)• 21% average (1989 – 2016)© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 26The National Debt• Impact of the national debt• Negative effects• Purpose of borrowing?Current consumption vs capital spending– If expenditure is used to finance basic services• Rising interest rates (“crowding out effect”)• Potential burden passed on to future generations• Inequitable income redistribution (as bond owners areusually upper-income investors)• Interest payments made to foreign people (approx68%) – real transfer of income out of the economy© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 272526274/01/202110The National Debt• Impact of the national debt• Positive effects• Purpose of borrowing?Capital spending vs current consumption– If expenditure is used to invest which willincrease future production possibilities– Increased future national income to pay debt• Enables the government to expand the economy• Multiplier effect – resultant effect on GDP is greaterthan the initial government spending amount© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 28Crowding out effect of governmentborrowing• Crowding out• Government spending, financed by borrowing• Upward pressure on interest rates as governmentseeks to borrow funds on financial markets• Higher interest rates results in less spending bythe private economy (Investment andConsumption)• Somewhat offsets the effect of governmentspending• Overall net effect is still an increase in GDP© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 29Crowding out effect of governmentborrowing• Interest rate• Cost of borrowed funds as a percentage ofprincipal• That must be paid to the lender (or investor)• For the privilege of using the funds• Loanable funds• Money that is borrowed or lent© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 302829304/01/202111Crowding out effect of governmentborrowing• Demand curve for loanable funds• All who wish to borrow money• Business firms, individuals, government• Downward sloping• More willing and able to borrow money at lowinterest rates than at high interest rates© 2016 Cengage Learning. All Rights Reserved. May not be s canned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 31Crowding out effect of governmentborrowing• Supply curve for loanable funds• All who wish to lend money:• Commercial banks, credit unions• Individuals who place money in savingsaccounts—lending to banks• Or who purchase government securities—lending to the government• Upward sloping• More willing to lend at higher interest rates© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 32© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 33Figure 16-8: Crowding out effects of governmentborrowing on a hypothetical market for loanable fundsThe demand for loanable fundscurve D represents the demand forborrowed funds by consumers,businesses, and government. If thegovernment wishes to increase itsspending on goods and services andchooses to finance theseexpenditures by borrowing, thedemand for loanable funds willincrease to D’. This increase indemand will cause an increase inthe interest rate from 10 percent to12 percent and an increase in theamount of money borrowed andlent to Q’.3132334/01/202112• Effects of government borrowing on interestrates• More borrowing• Issuing government securities• Increased demand for loanable funds• Higher quantity of funds borrowed and lent• Higher interest rate© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 34Crowding out effect of governmentborrowingTutorials• It is essential to complete the requiredproblems and reading before your tutorial sothat you can participate fully in the discussion.• Please type and upload your tutorial workthrough the relevant Turnitin submission boxon Moodle.• Please note the submission box on Moodlecloses at 12:25pm on Wednesday for allstudents.© 2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible We b site, in whole or in part. 353435

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