PFL for Math Teachers Part 1 Income and Taxes

7/31/2019 PFL for Math Teachers Part 1 Income and Taxes

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The Economic Big

PicturePart 1: Income and Taxes

Dr. Katie Sauer

Metropolitan State College of Denver

([email protected])

Colorado Council for Economic Education4/28/2012


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income spending

saving & investing

borrowing

economy

human capital

taxes

insurance

human capital

pay back debt


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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 LaborMarket

IV. Taxes Individuals Pay


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I. Intro to Income

How much income does the average US householdearn in a year?

- statistics will be found formedian or meanincome

Median Income:- rank all households by income- household in the middle of distribution

Mean Income:- add up all household income- divide by number of households


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How much are US median income and meanincome?

median income = $49,777mean income = $67,976

How much is Colorados median income?

$55,930

(This was 2009 data)

For recent data: US Census Bureauwww.census.govFor occupation / industry data: Bureau of LaborStatistics
http://www.census.gov/http://www.bls.gov/http://www.census.gov/


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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 disbursements2,452.9 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' income341.6 627.8 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 18.5Personal interest income 639.5 933.3 1,208.5 2,194.9 15.0 12.6 10.0 11.5Personal 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 15.7Federal social benefits 377.5 716.8 1,378.6 2,196.5 8.9 9.7 11.4 11.5

State & local social benefits98.5 235.8 455.8 757.5 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 0.3Less: 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

Income comes from other sources thanworking.


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Table 4.4 Personal income, 1988, 1998, 2008 and projected 2018

CategoryBillions 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 consumption3,353.6 5,879.5 10,057.9 15,293.5 78.8 79.2 83.1 79.9Personal 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 0.5

To 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 LaborStatistics

How is incomespent?


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A. Human Capital encompasses a personsknowledge, ability, and skills.

Most human capital is built through education andtraining.

Generally speaking, higher human capital iscorrelated with higher income.

II. What determines income from working?A. Human CapitalB. State of the Economy


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Educational Attainment--People 25 Years Old andOver,

by Total Money Earnings in 2008

US Census Bureau / BLS: 2009 Current Population Survey, Annual Social andEconomic (ASEC) Supplement Table from PINC-03


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Investing in human capital has an opportunity cost:When students are in class they arent beingproductive in the economy.

Increasing human capital can have benefits:- higher paycheck- better society- productive workers


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Individuals, firms and governments are willing to paythe costof investing in building human capitalbecause they expect to see benefitsin the future.

Governments fund public education because a bettereducated population contributes to faster andsustainable

development.

Firms invest in employee training because theyexpect to

cover the costs through higher profits from higherworkerproductivity.

Individuals spend time and money on higher


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A degree or certification can signalthat someone has

likelybuilt their human capital.


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There may *not* be a return on education if

- it is of low quality

- the knowledge/skills learned dont match marketdemand

- there is slow economic growth (low demand fornew workers)

- workers are paid the same regardless of skill(centrally planned economies, bureaucraticsystems)


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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 changeover time as the structure of the economy changes.

If you are skilled in a sector that becomes obsolete,you will need to acquire new skills to work in adifferent sector or you will be unemployed for a longtime.


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Data source: Bureau of Economic Analysis bea.gov

The US Business Cycle


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Economic growth is calculated as:

%RGDP = RGDP2 RGDP1 x 100RGDP1

where RGDP is Real Gross Domestic Product dollar value of economic activity inflation adjusted


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2005 RGDP 2006 RGDPChina: 7,898.742 b 8,743.908 bUS: $11,048.625 b $11,413.625 b

Calculate each countrys growth rate from 2005 to2006.

Chinas growth rate2006 = 8743.908b 7898.742bx 1007898.742b

= 10.7%

USs growth rate2006 = 11413.625b 11048.625bx 100

11048.625b


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III. A Simple Model of the Labor Market

The market wage is determined by the supply anddemand for labor.

A. The Supply of Labor (workers)Because time is limited, many individuals face atradeoffbetween 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 timespent not working.


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WeeklyHours of Leisure

Income Earned

168$0

theoretical

maximumincome

0 78

$ from 90hours of work

$ from 40hours of work

128

Represents allpossible income-leisure tradeoffs fora given wage rate.


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For a given wage, individuals have differentpreferences over income and leisure.

Income Income

Hours of

Leisure

Hours of

Leisure

PreferenceCurve

PreferenceCurve

Person who prefers more

income and sacrificesleisure.

Person who prefers more

leisure and sacrificesincome.


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When the wage increases, people typically respondin two ways:

1. As the wage increases, the opportunity cost ofleisure also increases so people work more.

- for every hour you are *not* working, you areforgoing more money

2. As the wage increases high enough, the individualhas more money and begins to value leisure moreand thus works less.

We can illustrate this effect with a labor supplycurve.


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The Labor Supply Curve

As the wage rate increases, first people choose towork more hours, then they choose to work fewer

hours.

http://en.wikipedia.org/wiki/Labour_economic

s


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B. The Demand for Labor (firms)

The demand for labor is known as a derived demand

because labor is not needed unless there is demandfor 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 workerproduces times the price the firm can sell that

output for

Ideally, a firm would pay a worker a wage that isequal to the value of the workers output.


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If the wage were less than the value of outputafirm could get from hiring another worker, the firmwould want to hire anotherworker.

If the wage were more than the value of outputafirm could get from its workers, the firm would wantto fire a worker.

In general, the lower the wage, the more workers afirm could hire.


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Labor

Demand

Number of Workers

Wage Rate

As the wage ratefalls, a firm can hiremore 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.

LaborDemand

Number of Workers

Wage RateLaborSupply

marketwage

actual workershired


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Ex: The demand for dental services has remainedpretty stable while many new dental hygienists aregraduating.

LaborDemand

Number of Workers


marketwage

actual workershired

New LaborSupply

Two potentialoutcomes:

1. the wagefalls, the newworkers arehirednew

wage

more workers hired


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2. dental officesare already

hiring thenumber ofhygienists thatare needed,

new hygienistsare unemployed

The wage mayor may not fall.LaborDemand

Number of Workers


marketwage

actual workershired

New LaborSupply

hygienists who

want to work


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Ex: Professional Engineer vs Bartender

LaborDemand

Number of Workers

Wage Rate LaborSupply

LaborDemand

Number of

Wage Rate

Labor

Supply


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Often times firms will pay a wage that is above themarket wage.

- attract better workers

- reduce turnover

Sometimes workers unionize and collectivelybargain for wages that are higher than the market

wage.


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IV. Taxes Individuals Pay

1. Federal Taxes Income Tax

Payroll Taxes

The Social Security tax (FICA) 6.2%

The Medicare Tax 1.45%

Estate Tax Gift Tax Gasoline Tax 18.4cents per gallon


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Calculating your Federal Income Tax

1. compute gross income- wages, salaries- interest, dividends, rental income


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2. compute adjusted gross incomesubtract off:

- retirement savings contributions- alimony- educator expenses- contributions to HSAs

- job-related moves expenses- interest paid on student loans

- if self-employed:

- health insurance premiums- 50% of paid payroll taxes


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3. Subtract any exemptions- fixed amount of money that is deducted for thetaxpayer, spouse, dependents

- indexed for inflation2011: $3,700 per person


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4. Decide on deduction type

Standard Deduction:$11,600 for married couples filing jointly

$5,800 for singles$5,800 for married individuals filing separately$8,500 for heads of household


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Itemized Deduction:

- medical and dental expenses exceeding7.5%

of AGI

- other taxes paid (state, local income tax)

- interest on mortgage

- charitable donations

- casualty and theft losses

- union dues and job travel expenses


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5. Compute Federal Income Tax Owed

Here are the tax brackets for a single person for2011:

Marginal Tax Tax Bracket

Rate over but not over10% $0 $8,50015% $8,500 $34,50025% $34,500 $83,600

28% $83,600 $174,40033% $174,400 $379,15035% $379,150


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Suppose you are single in 2011 and your AGI is$50,000.

Marginal Tax Tax BracketRate over but not over 10% $0 $8,50015% $8,500 $34,50025% $34,500 $83,60028% $83,600 $174,40033% $174,400 $379,150

35% $379,150

On the first $8500, you pay 10% in taxes.8500 x 0.10 = 850


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Rate over but not over 10% $0 $8,50015% $8,500 $34,50025% $34,500 $83,60028% $83,600 $174,40033% $174,400 $379,15035% $379,150

On the next portion of income, you pay 15% intaxes.

34500 8500 = 26000

26000 x 0.15 = 3900


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Rate over but not over 10% $0 $8,50015% $8,500 $34,50025% $34,500 $83,60028% $83,600 $174,40033% $174,400 $379,15035% $379,150

On the next portion of income, you pay 25% intaxes.

50000 34500 = 15500

15500 x 0.25 = 3875


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The total amount you pay in taxes is:

= (0.10)(8500) + (0.15)(34500-8500) + (0.25)(50000-34500)

= 850 + 3900 + 3875= 8625


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The marginal tax rate is the tax rate paid on an

additional dollar of income.

If your AGI is $50,000 and then you earn one

extra dollar of income, that dollar is taxed at a rateof25%.

Your current marginal tax rate is 25%.


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

= 8625 / gross income x 100

Suppose your gross income is $60,000.

= 8625 / 60000 x 100

= 14.4% is your average tax rate


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2. Colorado State Taxes for Individuals

Income Tax (4.63%)

Sales Tax (2.9%)

Consumer Use Tax (purchases that did notinclude Colorado sales tax internet, mail order,phone) (2.9%)

Estate and Trust Income Tax (4.63%)


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Gasoline Tax (22cents per gallon)

Cigarette Tax (4.2cents per cigarette, 2.9% perpack, 40% on other tobacco products)

Alcohol Tax (8cents per gallon beer/cider,7.33cents per liter wine, 60.26cents per liter ofspirits)


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3. Local Taxes and Fees

Motor Vehicle RegistrationProperty TaxCity 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 a0.1% sales/use tax.

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


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How your taxes are spent http://www.whitehouse.gov/taxreceipt1. Federal


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

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PFL for Math Teachers Part 1 Income and Taxes

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