PFL- Elementary Income

8/6/2019 PFL- Elementary Income

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All About Income

Dr. Katie Sauer

Metropolitan State College of Denver

([email protected])

Presented at

Junior Achievements Elementary School Personal Financial Literacy Workshop

in collaboration with

the Colorado Council for Economic Education


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money income

What is money?spend

save

charity

wants

needs

allowancegifts

borrowing

pay back loan

adults skills & education

economy

taxes


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Session Overview

I. Intro to Income

II. Two Main Determinants of Income

- human capital

- state of the economy

III. A Simple Model of the Labor Market

IV. Taxes


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I. Intro to Income

How much income does the average US household earn in a year?

- statistics will be found for median or mean income

Median Income:

- rank all households by income

lowest

household

income

highest

household

income

household in

middle = median

household


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Mean Income:

- add up all household income- divide by number of households

3


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How much are US median income and mean income?

median income = $49,777

mean income = $67,976

How much is Colorados median income?

$55,930

2009 data: US Census Bureau http://www.census.gov


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Median Income vs Mean Income Exercise Handout


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How to find recent data on income and occupations:

From the Bureau of Labor Statistics website: http://bls.gov/
http://bls.gov/http://bls.gov/


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From the Subject Area tab:- click on Pay and Benefits

- the Wages by Area and Occupation link will lead you

to information to update the wage game data

- click on Employment

- the Employment Projections link will lead you to

information on employment trends


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Table 4.4 Personal income, 1988, 1998, 2008 and projected 2018: Sources of Personal Income

Category Billions of current dollars Percent distribution1988 1998 2008 2018 1988 1998 2008 2018

Personal income $ 4,253.7 $ 7,423.0 $ 12,100.7 $ 19,129.6 100.0 100.0 100.0 100.0

Compensation of employees 2,967.2 5,020.1 8,052.8 12,404.8 69.8 67.6 66.5 64.8

Wage & salary disbursements 2,452.9 4,183.4 6,548.0 10,043.1 57.7 56.4 54.1 52.5

Supplements to wages &salary

514.3 836.7 1,504.8 2,361.8 12.1 11.3 12.4 12.3

Proprietors' income 341.6 627.8 1,072.4 1,647.7 8.0 8.5 8.9 8.6

Rental income 40.6 137.5 64.4 146.2 1.0 1.9 0.5 0.8

Personal income on assets 769.3 1,283.2 2,037.6 3,543.3 18.1 17.3 16.8 18.5

Personal interest income 639.5 933.3 1,208.5 2,194.9 15.0 12.6 10.0 11.5

Personal dividend income 129.7 350.0 829.1 1,348.3 3.0 4.7 6.9 7.0

Personal current transferreceipts

496.6 978.6 1,869.1 3,005.2 11.7 13.2 15.4 15.7

Federal social benefits 377.5 716.8 1,378.6 2,196.5 8.9 9.7 11.4 11.5

State & local social benefits 98.5 235.8 455.8 757.5 2.3 3.2 3.8 4.0

Other, from business (net) 20.6 26.0 34.7 51.2 0.5 0.3 0.3 0.3

Less: Social insurance

contribution

361.5 624.2 995.7 1,617.6 8.5 8.4 8.2 8.5

Employment Projections Program, U.S. Department of Labor, U.S. Bureau of Labor Statistics

Income comes from other sources than working.


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Table 4.4 Personal income, 1988, 1998, 2008 and projected 2018Category Billions of current dollars Percent distribution

1988 1998 2008 2018 1988 1998 2008 2018

Use:

Personal income 4,253.7 7,423.0 12,100.7 19,129.6 100.0 100.0 100.0 100.0

Personal consumption 3,353.6 5,879.5 10,057.9 15,293.5 78.8 79.2 83.1 79.9

Personal taxes 505.0 1,027.1 1,457.3 2,596.6 11.9 13.8 12.0 13.6

Personal interest payments 96.8 174.5 248.2 375.9 2.3 2.4 2.1 2.0

Personal transfer payments 25.4 65.2 144.6 212.8 0.6 0.9 1.2 1.1

To government: 14.8 40.5 84.5 124.8 0.3 0.5 0.7 0.7

Federal 2.8 8.6 18.0 27.4 0.1 0.1 0.1 0.1

State & local 12.0 31.9 66.5 97.4 0.3 0.4 0.5 0.5To the rest of the world (net) 10.6 24.6 60.1 88.1 0.2 0.3 0.5 0.5

Personal savings 272.9 276.8 192.6 650.9 6.4 3.7 1.6 3.4

Employment Projections Program, U.S. Department of Labor, U.S. Bureau of Labor Statistics

How is that income spent?


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A. Human Capital encompasses a persons knowledge, ability, andskills.

Most human capital is built through education and training.

Generally speaking, higher human capital is correlated with higher

income.

- accountants typically make more money than bank tellers

II. What determines income from working?

A. Human CapitalB. State of the Economy


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Educational Attainment--People 25 Years Old and Over,

by Total Money Earnings in 2008

US Census Bureau / BLS: 2009 Current Population Survey, Annual Social and Economic (ASEC)

Supplement Table from PINC-03


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Investing in human capital has a high opportunity cost:

When students are in class they arent being productive

in the economy.

Increasing human capital can have large benefits:- higher paycheck

- better society

- productive workers


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Individuals, firms and governments are willing to pay the costof

investing in building human capital because they expect to see

benefits in the future.

Governments fund public education because a better

educated population contributes to faster and sustainable

development.

Firms invest in employee training because they expect to

cover the costs through higher profits from higher worker

productivity.

Individuals spend time and money on higher education

because they expect to earn higher wages.


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A degree or certification cansignalthat someone has likely built

their human capital.

There may not be a return on education if

- it is of low quality

- the knowledge/skills learned dont match market demand

- there is slow economic growth (low demand for new

workers)

- workers are paid the same regardless of skill (centrally

planned economies, bureaucratic systems)


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Unemployment Rates by Educational Attainment

(people age 25 and older)

Less than High School

High School

Some college or AA

4 year degree or higher

www.bls.gov


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B. The state of the economy affects income

When the economy is doing well, firms are hiring, people find it

relatively easy to find jobs.

The type of jobs needed in the economy change over time as thestructure of the economy changes.

If you are skilled in a sector that becomes obsolete, you will need

to acquire new skills to work in a different sector or you will beunemployed for a long time.


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Data source: Bureau of Economic Analysis

The US Business Cycle for the Past 50 Years


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III. A Simple Model of the Labor Market

The market wage is determined by the supply and demand for labor.

A. The Supply of Labor (workers)

Because time is limited, many individuals face a tradeoff between

working and not working.- all time spent not working will be called leisure

Economists call this the leisure-labor tradeoff.

We often analyze it in terms of income earned vs time spent not

working.


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Weekly

Hours of Leisure

Income Earned

168

$0

theoretical

maximumincome

0 78

$ from 90 hours

of work

$ from 40 hours

of work

128

Represents all possibleincome-leisure tradeoffs

for a given wage rate.


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For a given wage, individuals have different preferences over

income and leisure.

Income Income

Hours of

Leisure

Hours of

Leisure

Preference Curve

Preference

Curve

Person who prefers more

income and sacrifices

leisure.

Person who prefers more

leisure and sacrifices

income.


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When the wage increases, people typically respond in two ways:

1. As the wage increases, the opportunity cost of leisure also

increases so people work more.

- for every hour you are *not* working, you are forgoing

more money

2. As the wage increases high enough, the individual has more

money and begins to value leisure more and thus works less.

We can illustrate this effect with a labor supply curve.


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The Labor Supply Curve

As the wage rate increases, first people choose to work more

hours, then they choose to work fewer hours.

http://en.wikipedia.org/

wiki/Labour_economics


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B. The Demand for Labor (firms)

The demand for labor is known as a derived demandbecause labor

is not needed unless there is demand for the product being

produced.

When a firm hires a worker, the firm incurs a cost but also receives

a benefit.- the cost of the worker is the wage

- the benefit of the worker is the output the worker produces

times the price the firm can sell that output for

Ideally, a firm would pay a worker a wage that is equal to the value

of the workers output.


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If the wage were less than the value of outputa firm could getfrom hiring another worker, the firm would want to hire another

worker.

If the wage were more than the value of outputa firm could get

from its workers, the firm would want tofire a worker.

In general, the lower the wage, the more workers a firm could

hire.


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Labor

Demand

Number of Workers

Wage Rate

As the wage rate falls, a

firm can hire more

workers.


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C. Putting Supply and Demand Together

The supply and demand for labor interact to determine the market

wage for various occupations.

Labor

Demand

Number of Workers

Wage RateLabor

Supply

market wage

actual workers hired


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Ex: The demand for dental services has remained pretty stable

while many new dental hygienists are graduating.

Labor

Demand

Number of Workers

Wage RateLabor

Supply

market wage


New Labor

Supply

Two potential

outcomes:

1. the wage falls,the new workers are

hired

new wage

more workers hired


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2. dental offices are

already hiring the

number ofhygienists that are

needed, new

hygienists are

unemployed

The wage may or

may not fall.

Labor

Demand

Number of Workers

Wage RateLabor

Supply

market wage


New Labor

Supply

hygienists who want

to work


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Ex: Professional Engineer vs Bartender

Labor

Demand

Number of Workers

Wage Rate Labor

Supply

Labor

Demand

Number of Worker

Wage Rate

Labor

Supply


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Often times firms will pay a wage that is above the market wage.

- attract better workers

- reduce turnover

Sometimes workers unionize and collectively bargain for wages

that are higher than the market wage.


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IV. Tax System

Policymakers have two considerations when it comes to taxes:efficiency and equity

A. Taxes and Efficiency

The primary goal of a tax is to raise money for the government.

There are many ways to raise a given amount of money.

Tax system A is more efficient than tax system B if it raises the sameamount of money but at a lower cost.

- minimize administrative burden, while collecting money


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B. Taxes and Equity

Equity has to do with how the tax burden is distributed.

- much disagreement!

The Benefits Principal of taxation is the idea that people should

pay taxes based on the benefits they receive from the

government.- gasoline tax

- national defense

- park fee

The Ability-to-Pay Principle of taxation is the idea that people

should pay taxes according to how well that person can shoulder

the burden.


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C. The Cost of Taxes

Taxes exert a cost on the economy. (fiscal drag)

1. taxes reduce your purchasing power

2. taxes cause people to change their behavior3. taxes can cause deadweight loss

4. taxes discourage investment

5. taxes discourage work


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D. Taxes That Individuals Pay

1. Federal Taxes

Income Tax

Payroll Tax

The Social Security tax is also called the FICA (Federal

Insurance Contributions Act) tax. (6.2%)

The Medicare tax is used to provide medical benefits for

certain individuals when they reach age 65. (1.45%)

Estate Tax

Gift Tax

Gasoline Tax (18.4cents per gallon)


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Federal Income Tax:

Here are the tax brackets for a single person for 2010:

Marginal Tax Tax Bracket

Rate over but not over

10% $0 $8,37515% $8,375 $34,000

25% $34,000 $82,400

33% $82,400 $171,850

35% $171,850 $373,65038% $373,650


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10% $0 $8,375

15% $8,375 $34,00025% $34,000 $82,400

33% $82,400 $171,850

35% $171,850 $373,650

38% $373,650

Lets suppose you are single and make $50,000 in 2010.

You pay different tax rates on different portions of your income:

- On the first $8,375 of your income you pay 10% in taxes.


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10% $0 $8,375

15% $8,375 $34,00025% $34,000 $82,400

33% $82,400 $171,850

35% $171,850 $373,650

38% $373,650

- The next bracket contains $34,000 - $8,375 = $25,625 of

income.

You pay 15% tax on $25,625 of your income.


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10% $0 $8,375

15% $8,375 $34,00025% $34,000 $82,400

33% $82,400 $171,850

35% $171,850 $373,650

38% $373,650

- The next bracket contains $50,000 - $34,000 = $16,000 of

income.

You pay 25% tax on $16,000 of your income.

$50,000


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The total amount you pay in taxes:

(0.10)(8,375) + (0.15)(34,000 8,375) + (0.25)(50,000 34,000)

= 837.5 + 3843.75 + 4000

= $8,681.25


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The marginal tax rate is the extra taxes paid on an additionaldollar of income.

If you currently earn $50,000 and then you earn one extra dollar

of income, that dollar is taxed at a rate of 25%.

Your current marginal tax rate is 25%.


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The average tax rate is the total taxes paid, divided by total

income.

8,681.25/50,000 = 0.1736 x 100% = 17.4%


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2. Colorado State Taxes for Individuals

Income Tax (4.63%)

Sales Tax (2.9%)

Consumer Use Tax (purchases that did not include Colorado

sales tax internet, mail order, phone) (2.9%)

Estate and Trust Income Tax (4.63%)

Gasoline Tax (22cents per gallon)

Cigarette Tax (4.2cents per cigarette, 2.9% per pack, 40% on othertobacco products)

Alcohol Tax (8cents per gallon beer/cider, 7.33cents per liter wine,

60.26cents per liter of spirits)


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3. Local Taxes and Fees

Motor Vehicle Registration

Property Tax

City Sales Tax

4. Special District TaxesRTD levies a sales/use tax of 1.0% .

The Football District has a 0.1% sales/use tax.

The Scientific and Cultural Facilities District has a 0.1% sales/use

tax.

E How your taxes are spent h // hi h / i


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E. How your taxes are spent http://www.whitehouse.gov/taxreceipt

1. Federal


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2. Colorado http://www.colorado.gov/taxtracks/

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