Archive for April, 2009

Apr 21 2009

AP Economics and IB Economics Review Materials Online NOW!

Visit my new site, The Economics Classroom, for review videos, an Economics glossary, worksheets and practice activities and countless other resources to help you prepare for your exams in Introductory, AP or IB Economics. Or go straight to the Economics Exam Review page.

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Apr 14 2009

Welker’s daily links 04/13/2009

Published by under Daily Links

  • The 19th-century Englishman who mused that, if every Chinese lengthened his shirttail by a foot, textile mills would spin year-round, has been replaced by 21st-century westerners hoping that Chinese will step in to buy their sedans and insurance products. But can they?

    The picture is not easy to decipher. By some measures, Chinese consumers have in fact become relatively less important. In the 1980s, household consumption averaged slightly more than half China’s gross domestic product. That proportion fell in the 1990s to 46 per cent, reached 38 per cent by 2005 and is about 35 per cent today. By comparison, in 2007 US household consumption was running at what we now know was an unsustainable 72 per cent of GDP.

    …Consumption rates tend to be higher in poorer countries than China where people spend a large part of their income to survive, and richer ones where discretionary spending takes hold.

    Jonathan Garner, emerging markets strategist at Morgan Stanley, is another believer. In his 2005 The Rise of the Chinese Consumer, he predicted that by 2014 Chinese consumption would have risen from 9 per cent of US and 3 per cent of world consumption in 2004 to 37 per cent and 10.5 per cent respectively. By then, he forecast, the Chinese shopper would have displaced the US consumer “as the engine of world growth”. He says his prediction is still on track…

    There are several factors holding back the Chinese consumer. First, people have for years witnessed the destruction of the “iron rice bowl”, as once-free health and education systems have been dismantled. Now the government is committed rhetorically – and, increasingly, in practice – to rebuilding the social safety net. But it will be years before people trust the state to look after them, and run down their precautionary savings.

    Second, most Chinese are what Dragonomics, a research firm, calls “survivors”, whose purchases of basic food and clothing are meaningless for multinationals or global demand. Only about 150m are part of “consuming China”, although this

    tags: economics

Posted from Diigo. The rest of my favorite links are here.

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Apr 13 2009

Understanding the difference between progressive and regressive taxes

Barack Obama and Joe Biden: The Change We Need | Taxes

The following was published in the Chicago Tribune’s “Voice of the People” page on October 29, 2008 in the midst of the US presidential race:

Redistributing wealth
On my way to lunch recently, I passed a homeless guy with a sign that read “Vote Obama; I need the money.” I laughed. In a restaurant my server had on an “Obama 08″ tie. Again I laughed. Just imagine the coincidence. When the bill came, I decided not to tip the server and explained to him that I was exploring the Barack-Obama-redistribution-of-wealth concept. He stood there in disbelief while I told him that I was going to redistribute his tip to someone who I deemed more in need—the homeless guy outside. The server angrily stormed from my sight. I went outside, gave the homeless guy $10 and told him to thank the server inside as I’ve decided he could use the money more. The homeless guy was grateful. At the end of my rather unscientific redistribution experiment, I realized the homeless guy was grateful for the money he did not earn, but the waiter was pretty angry that I gave away the money he did earn even though the actual recipient deserved money more. I guess redistribution of wealth is an easier thing to swallow in concept than in practical application.

—A. Hart, Forest Park

The comment reflects a general contempt for the concept of taxation, specifically progressive taxes, or those that tax high income earners at a higher rate than those who earn low incomes. The idea behind a progressive tax, of course, is that higher income earners have income left over after they have provided themselves with the necessities of life, therefore should bear a larger burden of the nation’s tax revenue, which thereby enables the government to “re-distribute” wealth from the nation’s higher income earners across all levels of society through the provision of public goods.

The federal income tax in the United States is progressive in that the higher one’s income, the higher the percentage he or she pays to the US government. As seen in the table below, America’s poor will pay as little as 0-10% in income tax, while the nation’s richest households can pay up to 35%.

projected-2009-income-tax-brackets

Opponents of progressive income taxes, which are also known as direct taxes because they are taken directly from a person’s income, argue that such a tax system creates a disincentive to work among American households. They argue that progressive income taxes penalize hard work and innovation, since the higher a worker’s productivity, the more of his income he must relinquish to the government.

One commonly misunderstood fact about the US income tax, however, is that it is a marginal tax system, meaning that when a person goes from, say the 25% to the 28% bracket, he does not pay 28% on ALL of his income, only on the marginal income above  $82,250 (according to the 2009 column above).  The implication is, therefore, that the average tax paid by an American will at any level of income be lower than the marginal tax. Below is a graphical representation of this concept. [source: http://aufrecht.org/pictures/images/858554/tax400.png]

tax400

It is the re-distributive intentions and effect of a progressive income tax system such as America’s (and every other country, click here to see tax rates from around the world) that has led to such intense opposition to the US tax system. Many in America’s government have proposed a “fair tax” that does away with America’s current direct tax system in favor of a nation-wide indirect, or sales tax on most goods and services. Watch the video below:

[youtube]http://www.youtube.com/watch?v=di2em2S25qM[/youtube]

The fair tax is a indirect tax, meaning it is levied not directly on peoples’ income but indirectly on the purchase of goods and services in the economy, and is described as follows:

The sales tax rate, as defined in the legislation, is 23 percent of the total payment including the tax ($23 of every $100 spent in total—calculated similar to income taxes). This would be equivalent to a 30 percent traditional U.S. sales tax ($23 on top of every $77 spent before taxes).[4] The effective tax rate for any household would be variable due to the fixed monthly tax rebates that are used to “untax” purchases up to the poverty level.[3] The tax would be levied on all U.S. retail sales for personal consumption on new goods and services.

The two guests argue that the fair tax “is the only tax that totally untaxes the poor; the poor get a free ride totally across the board at the federal level under this plan.”

However, a national sales tax is a “regressive tax” meaning that as a percentage of income, the fair tax places a larger burden on lower income earners than higher income earners. An example is useful:

  • Two shoppers walk into a computer store. One earns $50,000 a year, the other $100,000 a year.
  • Both are looking at a computer that costs $2,000. Under the fair tax, $460 of the purchase price of this computer will go to the government as tax.
  • $460 represents .92% of the income of the shopper who earns $50,000 per year.
  • $460 represents .46% of the income of the shopper who earns $100,000 per year.
  • The higher income earner pays a lower percentage of his income to the government in tax than the low income earner, making this a regressive tax.

One of the four macroeconomic goals governments aim to achieve in their policy making is more equal distribution of income. The fair tax, despite the arguments its advocates make, does not achieve a more equal distribution of income in America. It does place a smaller tax burden on the rich than the current system, but on the other hand America’s lower income earners bear a relatively larger burden of tax.

Discussion Questions:

  1. Are taxes necessary? Why? What are some of the “public goods” tax revenues are used to provide in America and your country?
  2. Discuss the claim that a progressive tax system stifles innovation, entrepreneurship and incentive to work.
  3. On whom does the largest burden of a sales tax (like the fair tax) fall? Is a sales tax “fair”? Why or why not?

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Apr 13 2009

Welker’s daily links 04/12/2009

Published by under Daily Links

Posted from Diigo. The rest of my favorite links are here.

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Apr 03 2009

Global fiscal stimulus and the plight of Africa: what’s really needed, more aid or more trade?

allAfrica.com: Africa: G20 Leaders Promise Billions for Low-Income Nations

While the G20 leaders meet in England to formulate their plan for increasing aid to Africa, the message from the continent seems to be that not aid, bur more trade, foreign direct investment and the establishment of free markets is the key to achieving meaningful economic growth and development. Dambisa Moyo explains the problem with aid on Colbert Nation on April 1:

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What, exactly do the G20 leaders have planned for the less economically developed nations of Africa in the $1.1 trillion global stimulus package?

The leaders of the world’s 20 biggest economies, recognizing that the global financial crisis has “a disproportionate impact” on vulnerable people in poor countries, have promised to make hundreds of billions of United States dollars available to these countries as part of a $1.1 trillion plan to rescue the world economy.

In a communiqué released by the Group of 20’s London Summit on Thursday, the leaders announced what they called “a global plan for recovery on an unprecedented scale.”

They said the rescue package would include resources totalling $850 billion, to be channelled through global financial institutions, “to support growth in emerging market and developing countries by helping to finance counter-cyclical spending, bank recapitalisation, infrastructure, trade finance, balance of payments support, debt rollover, and social support.”

Outlining allocations for materially poor nations, they promised:

  • An increase in lending of at least $100 billion by multilateral development banks, including loans to low-income countries;
  • An amount of $50 billion for social protection, to promote trade and to safeguard development in low-income countries; and
  • The selling of gold reserves to help the International Monetary Fund (IMF) provide $6 billion for the world’s poorest countries over the next two to three years.

The increase in aid from the rich world to sub-Saharan Africa comes mostly in the form of loans from the IMF and the World Bank. Development aid such as this is meant to help poor countries improve their human capital through investments in education, health and infrastructure. Historically, loans from the “multilateral development banks” have been made on the condition that the recipient nations adopt certain “structural adjustment policies”:

Some of the conditions for structural adjustment can include:

Critics of such SAPs, which developing countries are forced to adopt as conditions of receiving loans from the IMF and World Bank, say that they limit the extent to which the poor country can direct the loan money towards combating poverty, reducing inequality, and thereby achieving meaningful economic development for the poor.

Recently TIME magazine had an article in which the efficacy of such financial aid from the rich world to the poor world is challenged.

Africa is hopeless, a place of war and famine seemingly populated almost entirely by tyrants and children with flies in their eyes. According to this view, if Africa generates any kind of growth, it is in suffering — and in the overseas aid sent to address that, now a $40-billion-a-year industry. Naturally, with a new appeal every year and a new disaster every other, some people have begun to wonder if all that money is doing any good. They argue that aid creates dependence, fuels corruption, undermines democracy and stifles development.

Aid in any form, at a fundamental level, positions Africa as a dependent child, and the “rich world” as the paternalistic benefactor. Aid, despite the good intentions of the west, does little to do promote meaningful economic development in poor countries:

Though it rarely occurs to Westerners who’ve been instructed that Africa needs their help, charity is humiliating. Not emergency charity, of course: when disaster strikes, emergency aid is always welcome, whether in New Orleans or Papua New Guinea. But long-term charity, living life as a beggar, is degrading. Andrew Rugasira, 40, runs Good African Coffee, a Ugandan company he set up in 2004 to supply British supermarkets under the motto “Trade, not aid.” He is emblematic of a new generation of African antiaid, antistate entrepreneurs. For Rugasira, aid not only “undermines the creativity to lift yourself out of poverty” but also “undermines the integrity and dignity of the people. It says, These are people who cannot figure out how to develop.” Aid even manages to silence those it is meant to help. “African governments become accountable to Western donors,” says Rugasira, “and Africa finds itself represented not by Africans but by Bono and Bob Geldof. I mean, how would America react if Amy Winehouse dropped in to advise them on the credit crisis?”

The G20 nations should keep this view of aid in mind as they further develop their plans to help the poor nations of the world achieve economic growth and development. Trade, not aid, is what Africa needs to achieve meaningful progress towards economic development, defined as an improvement in the quality of life, health, education, and incomes of the people of a nation. Despite over $40 billion a year of aid that has flowed into Africa over the last decade, it is foreign investment and trade that has only recently led to sustained economic growth for the continent.

In 2006, according to the Organization for Economic Cooperation and Development, foreign investment in Africa reached $48 billion, overtaking foreign aid for the first time. That gap has only widened, reflecting a quadrupling of foreign investment since 2000. As the senior adviser in Africa for the International Monetary Fund (IMF), David Nellor, noted in a report last September, sub-Saharan Africa today resembles Asia in the 1980s. “The private sector is the key driver,” wrote Nellor, “and financial markets are opening up.” War is down. Democracy is up. Inflation and interest rates are in single digits. Terms of trade have improved. Crucially, said Nellor, “growth is taking off.” The IMF puts Africa’s average annual growth for 2004 to ’08 at more than 6% — better than any developed economy — and predicts the continent will buck the global recessionary trend to grow nearly 3.3% this year.

Despite the platitudes from Barack Obama, Gordon Brown and Ban Ki Moon about the “disproportionate impact” of the financial crisis on the poor nations of the world, it is Africa that is likely to achieve economic growth this year, even while the rich nations of the world enter recession. It is little thanks to aid that the people of Africa are finally experiencing meaningful growth; rather, the economic ties between the continent and, not the West, but China, have fueled this movement towards higher incomes and quality of life. Perhaps it’s more and fairer trade, not aid, that Africa needs now. And maybe that’s what we in the West need too in this time of economic chaos.

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