Students Again

The Functional Distribution of Money:

This is just total income earned in the economy and where it comes from. For example: if you earned $200 a week from savings, bonds, stocks and other investments, $600 from the rent on a piece of property you own and $700 from wages from your job – the Functional distribution of Money would separate those three sources of income. It lists the totals for the entire population – not just you. But it works the same way. Wages and Salaries (72%) happens to be the biggest source of income, followed by proprietor’s Income (the incomes of owners of small business owners – but not from corporations) which accounts for 9%, Corporate Profits (another 9%), Interest (from savings accounts, bonds and other investments) – 8%, and from rents (2%).

The Personal Distribution of Money:

The Personal distribution of Income is more a measure of who gets the income – or more correctly – how it’s spread around.

Households as Spenders

• Personal Taxes we abbreviate the taxes as either tY (an income tax multiplied by Income (Y) ) or as T (some type of tax level – not a rate, like a head tax)
• Personal Saving (abbreviated by a capital S)
• Personal Consumption Spending (abbreviated by a capital C)
• Durable Goods – goods meant to last over time
• Non-Durable Goods – goods used up rather quickly – like food
• Services – no tangible good is exchanged

The Business Sector

• Plant ~ a building, store, factory etc
• Firm ~ the company
• Industry ~ all firms making similar products
• Horizontally integrated
• Vertically Integrated
• Conglomerates

You might work at a GM factory or dealership (plant), but GM is a large company of many factories and dealerships (firm) and they compete against other auto makers (the Auto industry)

Legal Forms of Businesses

Sole Proprietorship

• Unlimited liability – if a sole proprietorship borrows money and then fails, the bank can repossess not just the items at the store/plant but also the personal wealth of the owner (house, cars, boats..etc)
• Profits are Owner’s Income (Taxed as Personal Income) – an owner of a sole proprietorship pays taxes on all the money left after costs are paid – even if he/she intends on re-investing in the business. This is what Bush was referring to in the debates when he said Kerry’s tax proposal would hurt small businesses.)
• Lack of Expertise – the same person who plans for the future takes out the trash and mops the floor
• Lack of Specialization – few workers, mean that they do all different types of jobs through the day. There no such phrase as “that’s not in my job description” (in fact, there may be no job descriptions anyway)
• Limited Profitability – the growth of the company is limited by the personal value of it’s owner. A bank might be willing to lend GM a million dollars but would it lend it to you?

Partnership – more than one owner who own a company together

• Unlimited liability – personal and joint: The owners of a partnership both all liable for all debts (they could lose their boats, houses etc) but they are also responsible for all the debts – not just their share. - Profits are Owners’ Incomes (Taxed as Personal Income) – again, the owners of a partnership pays taxes on all the money left after costs are paid – even if they intend on re-investing in the business. This is what Bush was referring to in the debates when he said Kerry’s tax proposal would hurt small businesses.)
• More Expertise – partners (a legal firm, a dentists office, a medical clinic) might hire a office manager
• More Specialization
• Still has Limited Profitability

Corporation

• Limited liability – If a firm borrows and then fails, the banks can not go after the personal wealth of the owners of the corporation – just the wealth of the corporation
• Ownership:
  • Stocks - each stock is a ownership voucher.
  • Stockholders
  • Share of Ownership - If there are 100 stocks and you own all of them, you own 100% of the corporation. If you only own 100 of them, you own 10% of the corporation.
  • Bonds – are not ownership – these are loans to a company made by the person who bought the bond. They are treated as any other debt (a bank loan) and are not ownership.
• Profits are Corporation’s Income (Taxed as Corporate Income)
  • Double Taxation
  • Dividends
  • Retained Earnings
• Professional Expertise
• Specialization
• Profitability

HyBrid Structures (like corporations in some ways and like Sole Proprietorship's or Partnerships in other ways)

• S Corp
  • Limited Liability/Single Taxation
  • Limited number of stockholders
  • Why allow this?
• L.L.C.
  • Limited Liability/Single Taxation
  • Limited Life
  • Why allow this?

The Public Sector: Government:

1. Providing Legal Structure – protecting private property rights is the most important one (police, courts, jails etc all are parts of the protection of private property rights)
2. Maintaining Competition
   
   • Monopoly – one dominant seller/producer in the industry (or close to it).
   • There are other terms for industries with competitive issues:
   • OLIGOPOLY - only a few very large buyers (in terms of market share)
   • MONOPSONY - industries with only one dominant seller/producer
   • OLIGOPSONY - only a few large buyers in the market
   • Anti-trust – laws to allow government to break up Monopolies or other firms in non-competitive industries
3. Redistributing Income
   
   • Public Transfer Payments – Government moving money from one group to another
   • Pure transfer payments: requires you to have paid into the system in order to receive benefits
   • Welfare: does not require you to have paid into the system to derive benefits
4. Market interventions
   
   • Price floors – a minimum price for a good (like a minimum wage is a minimum price for any type of labor) * there is another minimum wage for people who also earned tips – allowing the firm to transfer part of the cost of employment to the tips an  employee receives rather than paying them directly the entire minimum wage
   • Price Ceilings – a maximum price for a good – like rent control in New York City or electrical rates in California
5. Taxation – using the tax system to make the distribution of income different than it was (does not have to be to make it fairer – it could be to make it less fair as well).
   
   • Progressive Tax system – take more from the rich than from the poor (kind of like Robin Hood)
   • Regressive Tax system – Take more from the poor than the rich (I guess that makes this Prince John’s Tax System)
   • Proportional Tax System – everyone pays the same tax rate – regardless of income (like Church tithing)
6. Reallocating Resources
   
   • Spillovers / Externalities
   • Spillover Benefits / Positive Externalities
   • Spillover Costs / Negative Externalities
   • Correcting for Spillover Costs
   • tax producers
   • regulation
   • tax consumers
   • Correcting for Spillover Benefits
   • subsidize consumers
   • subsidize suppliers
   • provide goods via government
7. Public Goods
   
   • Non-rival / Non-Congestible
   • Non-Excludable
   • Free-Rider Problem
   • Quasi-Public Goods
8. The Reallocation Process
9. Promoting Stability

Government Role: A Qualification (Circular Flow Revisited):

Government Finance
Government Purchases and Transfers

• Government Purchases
• Public Transfer Payments

Federal Finance
Expenditures
Revenues

State Finance
Expenditures
Revenues

Local Finance – local includes cities, townships, villages, as well as counties and school districts
Expenditures
Revenues