Economics Unit 5 Fiscal Policy and Taxes Answer the first question on your guided notes sheet on your own!

Tax Principles  Principles of American Democracy demand that each taxpayer should be created equally under the law  This does not mean that all taxpayers should pay the same amount of tax. Principles of taxation suggest that some should pay more than others.

Answer the 4 questions regarding the pie chart shown in your notes.

2 Basic Types of Tax Principles  Benefits received principle Definition – Those who receive more benefits from government program funded by a tax should pay more of that taxDefinition – Those who receive more benefits from government program funded by a tax should pay more of that tax Example: toll roads and bridges – those who use them pay the toll, those who don’t have to payExample: toll roads and bridges – those who use them pay the toll, those who don’t have to pay

Tax principle con’t  Ability to pay principle Definition – Those with a greater ability to pay, such as those with a higher income, should pay more of a taxDefinition – Those with a greater ability to pay, such as those with a higher income, should pay more of a tax Example – Federal income taxes, the rate varies from 10% to 38.6% depending on your level of income.Example – Federal income taxes, the rate varies from 10% to 38.6% depending on your level of income.

Question?  Why isn’t it logical for the government to try to pay for a welfare program with a benefits received principle?

Types of funding for each level of government  Federal – rely primarily on Federal Income Tax  State –rely primarily on State Income Tax and sales taxes  Local – Reply on property taxes  Other Revenue Sources – Aid from higher levels of government, user fees like tolls, fines like speeding tickets, monopoly profits such as lottery tickets

Look at the picture below and answer the question in your notes

3 Tax Classifications  Progressive Taxation Definition – tax as a percentage of income, increases as income increasesDefinition – tax as a percentage of income, increases as income increases Example – Federal Income TaxesExample – Federal Income Taxes  Proportional taxation Definition – Tax as a percentage of income, remains constant as income increases, also called a flat taxDefinition – Tax as a percentage of income, remains constant as income increases, also called a flat tax Example – No perfect example exists but if everyone paid 10% of income to tax that would be an exampleExample – No perfect example exists but if everyone paid 10% of income to tax that would be an example

Tax Classifications  Regressive taxation Tax as a percentage of income decreases as income increasesTax as a percentage of income decreases as income increases Example – State sales taxExample – State sales tax

Tax Collection  Direct taxes are paid directly to the government like property taxes  Indirect taxes are included in the cost of a good or service like rent payments  Pay as you earn – taxes are paid as you receive each paycheck and the government takes a cut

Types of Taxes  Income Taxes – Includes FICA, State, Local and Federal taxes withheld from your paycheck  Sales Taxes – includes taxes added to the price of goods and services at the time of purchases  Property Taxes – Taxes assessed on the value of real estate property  Excise Taxes – Taxes collected on sales of specific goods, such as firearms, air travel and gasoline

Types of Taxes con’t  Estate Taxes – Taxes on property that was received by those legally entitled to the estate  Gift Taxes – Taxes gift givers may pay  Business or License Taxes – taxes paid to receive certification or permit like a license to practice medicine  Custom Duties or tariffs – taxes imposed on imports  “Sin” Taxes – taxes used to discourage sales of certain products like alcohol

Work with a neighbor  George has 2 job offers, basing his decision only on financial benefits to George which job should he take? Why?

The Birth of Fiscal Policy  Fiscal policy Definition- Government decisions on taxing and spendingDefinition- Government decisions on taxing and spending 2 Main thoughts2 Main thoughts  Classical Economists – believe that free markets work best without any government intervention  Keynesian Economists – Believe that the government needs to use fiscal policy to control free markets when they are failing to perform. Developed during the Great Depression

Fiscal Policy Tools  2 categories Discretionary Fiscal PolicyDiscretionary Fiscal Policy  Definition – Congressional changes in spending and taxing to promote Economic Goals Automatic StabilizersAutomatic Stabilizers  Definition – Government spending and taxing programs that year after year automatically reduce fluctuations in the business cycle

Fiscal Policy Video  Fiscal Policy explained with Aggregated Supply and Demand

How Fiscal Policy Works Economy Declines Government reduces taxes to stimulate growth and encourage spending Economy Declines Government increases spending which creates government jobs and buys from businesses Economy Expands Government increases taxes to stimulate contraction and discourage spending Economy Expands Government decreases spending which shrinks the overall market