Chapter 12 Notes

Question 1

Define: Federal Debt

Answer 1

Total amount the state owes

Question 2

Define: Federal Deficit

Answer 2

Spending minus taxes in a single year (when positive)

Question 3

Why is the federal debt not equal to the net public debt?

Answer 3

Because the government owes itself money

Question 4

Why do we often discuss debt as a percentage of GDP?

Answer 4

Because in order to understand how big a debt is, it is important to compare it to the entire economy.

Question 5

True, false, explain: If a politician says, “My proposal would cut spending by $100 billion next year,” that means that under the proposal the government spending will be $100 billion less than in the current year.

Answer 5

False. It means that the politician proposes to spend $100 Billion less than the previously planned amount. Since previous plans may have been to increase spending my more than $100 billion, the new proposal may actually increase spending.

Question 6

If a politician says, “We will cut the debt by $1 trillion,” does that mean that under the plan, next year’s debt will be $1 trillion less than this year’s debt? Explain.

Answer 6

No. First, this is a cut in planned spending. Second, if no time period is given, the politician probably means “over a 10 year period.”

Question 7

What is “static scoring?”

Answer 7

Static scoring forecasts spending and taxes, assuming that individuals do not change their behavior in response to policy changes.

Question 8

If Americans now spend $5 billion/year on diapers, how much will it likely cost if government decides to buy all diapers and give them to those who request them? Explain, assuming that the number of births per year stays constant.

Answer 8

It will likely cost more than $5 billion because consumers will use more diapers if they do not have to pay the marginal cost.

Question 9

How much does the U. S. government spend per day, in dollars?

Answer 9

About $10 billion.

Question 10

What percentage of GDP is the net public debt?

Answer 10

About 80%

Question 11

True, false, explain: The national debt has increased greatly since 2007–about half of the increase coming from lower tax revenues and the other half coming from higher spending.

Answer 11

Yes, the national debt has greatly increased. But tax revenues rose by $150 billion and spending rose by about $1 trillion.

Question 12

Give examples of recent proposals for tax increases and spending cuts, along with about how big the change is, in terms of the time it takes the government to spend the money.

Answer 12

Buffet rule-2 days. Oil and gas taxation changes/private jet tax changes–about 30 seconds. Bush tax cuts for the wealthy–8 days. The sequester cut–8 days. Republicans’ planned cuts–10 days. R negotiated cuts–3 days. Acutal cuts–34 seconds.

Question 13

True, false, fully explain: Overall, government debt, as a percentage of GDP has been stable.

Answer 13

False. It rose greatly during WWII, fell until the early 80s, rose until the mid 90s, began to rise rapidly in 2008.

Question 14

True, false, fully explain: Spending as a percentage of GDP has generally risen since the end of WWII.

Answer 14

Mostly true. Except for the 1990s, when it fell for a time.

Question 15

True, false, explain: The largest share of the government’s budget has always been devoted to the military.

Answer 15

False. This was true for much of our history. But Social Security, Medicare,Medicaid, Unemployment, and other welfare programs now make up most of spending.

Question 16

True, false, explain: For purposes of paying Social Security benefits, the Social Security Trust Fund has $2.7 trillion.

Answer 16

False. For purposes of paying benefits, the SSTF has $0. It does have $2.7 trillion worth of bonds.

Question 17

Which two factors delayed the demise of Social Security for a few decades?

Answer 17

The baby boom. The entry of women in the workforce.

Question 18

What is the combined unfunded long term debt of social security, medicare, and medicaid?

Answer 18

$110 trillion

Question 19

True, false, explain: The existence of Medicare and Medicaid makes health care more expensive, overall.

Answer 19

True. Consumers use more services when they pass the cost to others. In addition, government is not an efficient provider of insurance services.

Question 20

True, false, explain: The Social Security and Medicare Trustees ignore the problems in the programs.

Answer 20

False. They clearly state that the programs have great problem. They are bound, however, to use faulty assumptions in their estimates.

Question 21

True, false, explain: The highest income tax rates in US history were about 50%.

Answer 21

False. They were over 90%.

Question 22

True, false, explain: John Kennedy raised income taxes.

Answer 22

False. He cut rates from 70% to 50%.

Question 23

True, false, explain: When one examines a graph of taxes as a percent of GDP, one can clearly see where lawmakers have changed tax rates.

Answer 23

False. One can see economic activity rise and fall, but cannot see changes in tax rates, possibly due to the Laffer Curve effect.

Question 24

State Hauser’s Law

Answer 24

Though tax rates rise and fall, tax revenues are about 17-18% of GDP

Question 25

Give an example of a regressive tax. Explain.

Answer 25

Sales taxes–rich people save more. Since sales taxes are on consumption, they are a smaller portion of higher incomes. Cigarette taxes–rich people could not smoke enough to pay the same percentage of income that others pay in cigarette taxes. In addition, the more wealthy one is the less likely they are to smoke.

Question 26

Of all income tax revenues, what percentage of those dollars are paid by those in the lowest half of the income distribution?

Answer 26

2%

Question 27

True, false, explain: Though the income tax, alone, is progressive, when one considers all federal taxes, including Social Security tax and the like, federal taxes are regressive.

Answer 27

False. Taxpayers in the bottom 20% of the income distribution pay 1% of their incomes to federal taxes, while those in the top 20% pay approximately 23% of their incomes in federal taxes, with the rate increasing as income rises.

Question 28

What did Friedman worry most about: high taxes, high spending, or high deficits? Explain.

Answer 28

Friedman worried most about spending, since it makes the economy so inefficient and the long term tax rate is related to current spending.