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Chapter 15 Fiscal Policy

Chapter 15 Fiscal Policy. Defining fiscal policy. Spending, taxing, & borrowing policies Government collects taxes to pay programs (Roads, education, National Defense) Taxes used to influence behavior of individuals (tobacco, etc.). Types of taxes.

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Chapter 15 Fiscal Policy

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  1. Chapter 15Fiscal Policy

  2. Defining fiscal policy • Spending, taxing, & borrowing policies • Government collects taxes to pay programs (Roads, education, National Defense) • Taxes used to influence behavior of individuals (tobacco, etc.)

  3. Types of taxes • Tax Rates – the percentage of a person’s income that goes toward taxes. • Proportional Taxes – “flat rate tax” • Takes same percentage of income from individuals at all income levels. • Has greater impact on people with lower incomes.

  4. Progressive Taxes – takes larger percentage of income from a high-income person than lower income person • 2000, $26,250 or less = 15% • $288,350 = 39.6% (highest tax bracket) • Effected those with the higher incomes more than those with lower incomes.

  5. Regressive Taxes – takes larger percentage of income from people with low incomes than from people with high incomes. • Falls more heavily on people in lower-income groups than on people who earn high incomes

  6. Collecting taxes • Individual Income Taxes – progressive (sometimes proportional) tax on a person’s income. • Collected by Federal government & most state governments • 1996, provided 38% of federal revenue & 14% of state revenues.

  7. Corporate Income Taxes • U.S. government taxes corporate profits. • Many corporations pay at a reduced rate • 1996, made up 10% of federal tax revenues & 3% of state tax revenues

  8. Social security • Money withdrawn from workers paychecks to fund (OASDI) Old-Age, Survivors, & Disability Insurance & Medicare – provides health care to older Americans regardless of income. • Both proportional & regressive • Second largest source of revenue for federal government (1999 = 33.5%)

  9. Property Taxes • Does not take a persons income into account. • 1% of state revenues (25% of local governments revenue)

  10. Sales Taxes • Regressive tax assigned to certain goods and services by state & local governments • 1996, 5% of federal revenues & 21% of state revenues.

  11. Other Taxes & Revenues • Excise tax – tax on manufacture, sale or consumption of a particular good or service (gas, tobacco, firearms, alcohol, telephone services, tires, & gambling) • Estate tax – tax placed on the assets of a person who has died • Gift tax – placed on the transfer of certain gifts of value (exceeds $10,000 annually) • Customs duty – tax on goods brought into the U.S.

  12. Fiscal Policy Strategies • Supply-Side Economics – focuses on achieving economic stability & growth by increasing the supply of goods & services throughout the economy • Governments role to provide firms with incentives to increase production (tax cuts & less spending) • Leading supporter Jean-Baptiste Say – “Supply creates its own demand” • Producers provide enough goods & services to meet their own needs – produce more in exchange to meet their wants

  13. Limitations of Supply-Side Economics • Assumption that economist can predict the economic behaviors of people • Tax cuts unfair • Spending cuts fell most heavily on social programs for the poor, unemployed, & other disadvantaged groups.

  14. Demand-Side Economics • Focuses on achieving economic growth through governments influence on aggregate demand. • John Maynard Keynes – “Father” of demand-side economics • Published “The General Theory of Employment, Interest and Money” – marketplace forces alone were not enough to increase aggregate demand during economic downturns. (government needed) • Employment Act of 1946 – pledged to promote “maximum employment, production, and purchasing power”

  15. Tools of Fiscal Policy • Tax Rates – used to regulate aggregate demand in privately owned businesses • Congress reduces taxes to help unemployment • Congress raises taxes to limit inflation • Tax Incentives – special tax break the government extends to businesses to encourage investments in new capital • Investment tax credit – permits firms to deduct from their corporate income taxes a percentage of money spent on new capital

  16. Government Spending • Decrease of government spending results in lower aggregate demand & slower business activity • Increase results in higher spending, aggregate demand & employment opportunities • Public Transfer Payments • Redistribution of tax dollars to nonproductive (goods or services that are not created in exchange for government payments) actors in the economy.“Unemployment compensation” • Progressive Income Taxes • Period of prosperity leads higher incomes into higher tax brackets • Periods of recession – taxed at lower rates

  17. Limitations on Fiscal Policy • Timing Problems • Political Pressures • Restrictive fiscal policy – increases taxes & reduces government spending • Expansionary fiscal policy – decreased taxes & increased government spending to stimulate business activity • Unpredictable economic behaviors • Lack of coordination among government policies

  18. Fiscal Policy & the Federal Budget • Federal Budget – federal governments plan for the use of government revenues • Summary of the ways in which the government uses fiscal policies.

  19. Creating the Federal Budget • Wartime spending – causes dramatic increases in the level of government expenditures • Increased corruption • Progressive Reform Movement

  20. New Budget Process • 1921, Budget and Accounting Act – created the Bureau of the Budget • Empowered the president to formulate an annual budget • OMB (Office of Management & Budget) replaced BOTB • Budget Process today • President develops it & consults with the OMB, Council of Economic Advisers, The Dept. of the Treasury • Focuses on the next fiscal year – 12-month finical period that typically does not duplicate the dates of the calendar year

  21. Federal Budget Deficits • Budget deficit – government spends more than it collects • Budget surplus – government revenues exceed government expenditures • Deficit spending – spending more money for its programs than it’s able to cover with it’s revenues. • National Debt – total amount of money the federal government has borrowed (includes all deficits from previous years)

  22. The National Debt • Growth of the National Debt • 1790 = $75 million • Civil War = $1 billion • WW1 = $3 billion (two years later $25 billion “Roaring 20’s) • 1982 = $1 trillion • 2000 = $5.6 trillion • Debt Ceilings – legislates a limit on the size of the national debt • Increased each time it was set… • Impact of the National Debt • Spending on social programs = improves quality of life • $362 billion on interest alone in 2000

  23. Balancing the Federal Budget • Increasing Revenues • Taxation? • 1993, Omnibus Budget Reconciliation Act – raised individual income tax rates for highest tax bracket & raised taxes on gasoline • Decreasing Expenditures • Closing of military bases • Reducing defense spending • Legislating a Balanced Budget • Balanced Budget & Deficit Reduction Act (1985) “GRH” • Program set-up to balance budget in 5-years • Cuts to nearly every government program

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