FISCAL POLICY AND THE FEDERAL BUDGET

Key Concept: Government influences the economy by: Collecting Spending and Borrowing money

WHAT ARE TAXES?

Taxes = Required payment to local, state, or national government

TAXES ARE USED FOR……

Revenue = Income received by a government from taxes & nontax sources

WHAT ARE 3 TYPES OF TAX STRUCTURES?

Tax Structures Proportional Progressive Regressive

Proportional Percentage of income paid for tax is the same for all income levels

Property Taxes = Millage rate = same rate for all property Ad Valorum – At value = license tag = same rate for all cars Ranch or trailer ; Cadillac or Chevy

A Flat 20% Income Tax Rate IncomeTax___ $10,000$2,000 $20,000$4,000

Progressive Percentage of income paid increases as income increases The more you make, the more they take

Example: Income tax is a type of progressive tax A tax on a person’s earnings

Percentage of income paid on the tax decreases as income increases Regressive People with lower incomes, pay a greater percentage of incomes = Example:sales tax

Sales tax - regressive A tax on the dollar value of a good or service being sold We all pay the same amount regardless of income

VIDEO BREAK While you watch: 1.One fact that you know. 2.One fact that is new to you 3.Question?

Incidence of a tax means: “Who bears the tax burden?” ie “who pays it?”

It can be either CONSUMER OR PRODUCER

Elastic demand: If price changes there is a large change in quantity demanded Inelastic Demand: If price changes there is only a small change in quantity demanded

DEMAND ELASTICITY AND THE INCIDENCE OF A TAX How elastic a good or service is affects who will pay the tax

If the demand is elastic, the incidence of the tax falls on the producer

WHY? Because it is less likely the burden can be shifted from the producer to consumer - people do not need it and there is a substitute

Inelastic demand: Incidence, or burden, falls on the consumer

WHY? Because producers can make consumers pay it. The good or service is a necessity and there is no close substitute YOU HAVE TO BUY IT

Federal Taxes

Individual Income Taxes FICA Corporate Income Taxes

Individual Income Tax Tax on earnings Withholding from your paycheck

FICA taxes fund Social Security & Medicare FICA

FICA Taxes 2 nd major source of federal tax revenue Federal Insurance Contributions Act Retirement benefits to workers

A national health insurance program that helps pay for health care for people over 65 and people with specific disabilities

The tax a corporation pays on its profits Corporate Income Taxes 3 rd largest source

OTHER TAXES Find and define on your worksheet 1.Excise Tax 2.Estate Tax 3.Gift Tax 4.Tariff 5.Tax incentive 6.Tax Credit

WHAT TAXES DO YOU OR YOUR FAMILY PAY?

FISCAL POLICY

Fiscal policy The use of government spending & revenue collection to influence the economy

The Government has 2 tools it can use to stabilize the economy…… 1. Fiscal Policy- Actions by Congress to stabilize the economy. 2. Monetary Policy- Actions by the Federal Reserve Bank to stabilize the economy. 36

For now we will only focus on Fiscal Policy. 37 Copyright ACDC Leadership 2015

What are goals of fiscal policy? The same as macroeconomic goals…remember them? 1.Economic growth 2.Full employment 3.Low inflation

BASIC TERMS OF FISCAL POLICY

Expenditure = Spending

Revenue = Income received by a government from taxes & nontax sources

Government spending (expenditure) Per capita = Per person Turn and talk: What is the other Per capita number We have studied?

Public sector Refers to the federal, state, and local governments They usually buy things from the…

Private sector Refers to individuals and businesses

Federal budget Written document detailing government revenues & expenditures for a certain fiscal year

Fiscal Year 12 month financial period Govt: October 1 – September 30 Prepare for upcoming year

Balanced Budget Surplus Budget Deficit

A budget in which revenues are equal to spending Balanced Budget

A situation in which the government takes in more than it spends Budget Surplus

A situation in which the government spends more than it takes in Budget Deficit

Sequence for the approval of the federal budget is: President to Congress back to President

Vote is YES: The President signs the budget. The President can VETO the budget. Vote is NO: It does not pass.

Appropriations bill A bill that sets money aside for specific spending

Deficit spending Government spends more than it collects

Question: How can the federal government pay for things if they have a budget deficit?

Print more money? Remember this causes inflation!

Borrow money by selling bonds

BONDS ARE LOANS TO THE GOVERNMENT

National Debt The total amount of money the federal government owes

NATIONAL DEBT The national debt will INCREASE each year that there is a budget deficit and the federal government borrows money to cover it.

Fiscal policy The use of government spending & revenue collection to influence the economy

COPY THIS: FISCAL POLICY TAXESSPENDING EXPANSIONARY – GROW ECONOMY CONTRACTIONARY – SHRINK ECONOMY

Expansionary Policy Contractionary Policy

A fiscal policy that encourages economic growth = higher spending and tax cuts Expansionary Policy

Overall goal is to increase aggregate demand and output

Used when the economy is in a recession or the government is trying to prevent one.

If the federal government increases spending… Expansionary Policy

…it is buying more goods & services. Expansionary Policy

This increases demand which causes prices to increase Expansionary Policy

Higher prices causes supply to increase. Expansionary Policy

An increase in supply causes companies to need more workers (less unemployment) Expansionary Policy

Workers will spend their money on goods & services Expansionary Policy

If the federal government cuts taxes… Expansionary Policy

…people & businesses will have more money to spend & invest. Expansionary Policy

Expansionary Policy Contractionary Policy

A fiscal policy that reduces economic growth = lower spending and higher taxes Contractionary Policy

When the federal government increases taxes people & businesses have less to spend on goods and services Contractionary Policy

Decreasing government spending & raising taxes Contractionary Policy

Try to avoid inflation A decrease in government spending leads to a decrease in demand Contractionary Policy

A decrease in demand drives prices down. Lower prices reduce supply. Contractionary Policy