Chapter 16 Taxes & Government Spending

The Constitutional Basis for Government Involvement in the Economy The power of the federal government to intervene in the economy comes from Article 1 of the U.S. Constitution: Congress has the power to:  Lay and collect taxes  Provide for the general welfare  Borrow money  Regulate interstate and federal commerce  Establish uniform bankruptcy laws  Coin and regulate money  Fix the standard of weights and measures  To protect the writings and discoveries of authors & inventors.

Government’s Role  Protecting Private Property  Public Goods: National defense  Public-works: schools and highways.  Provide for the public well-being : Medicare- health care for the aged. Social Security-program that provides monthly payments to people who are retired or unable to work. Workers’ Compensation-program that provides payments for medical care to workers injured on the job.

WelfareWelfare-payments to individuals based on need. Medicaid-program that provides free health care for low-income and disabled persons. Three ways in which the government intervenes in economic activity include:  protecting consumers  supervising labor and management relations  promoting competition

The Governments involvement in the economy 1.Protect individuals. 2.Make markets work better. One of the most important regulatory functions concerns the side effects of the production process– called externalities. Externalities-spillover effects resulting from production or consumption. Examples: air pollution (negative) immunizations (positive).

Government ensures economic stability including protecting from:  unemployment  high inflation  recessions  depressions

The Federal Budget and the National DebtNational Debt National Debt- total amount of outstanding debt for the federal government. Budget Deficit- when the amount of government spending exceeds its receipts. Deficit Financing- government spends more money than it is able to bring in through revenues. Budget Surplus- when the amount of government receipts is larger than its expenditures during the fiscal year.

Government Spending Total Spending $6.4 trillion Pensions $1.1 trillion Health Care $1.1 trillion Education $0.9 trillion Defense $0.9 trillion Welfare $0.8 trillion

Taxes & Taxation Ability- to- pay principal-those with higher incomes pay more taxes than those with lower incomes. Benefits-received principle- those who benefit from a particular government program should pay for it. Example: those that drive pay for the highways.

Tax Structures Proportional tax- a tax that takes the same share of income at all income levels. Progressive tax-a tax that takes a larger share of income as income increases. It is justified on the basis of the ability-to-pay principle. This is the type of income tax the U.S. government uses. Regressive tax-a tax that takes a smaller share of income as income increases.