Taxes, spending, fiscal policy, deficits, surpluses, national debt UNIT 3 MACROECONOMICS Taxes, spending, fiscal policy, deficits, surpluses, national debt

TAX STRUCTURES Proportional tax- % of income paid is the same for all income levels Progressive tax- % of income paid increases as income increases https://www.youtube.com/watch?v=S6HEH23W_bM Regressive tax- % of income paid decreases as income increases

CHARACTERISTICS OF A GOOD TAX Simplicity-easy to understand Efficiency-computed easily and inexpensively Certainty-people know when they’re due, how much to pay, etc. Equity-should be fair

TYPES OF TAXES Income tax- % of income Sales tax- % of a good’s price FICA taxes- fund Social Security and Medicare Property taxes- based on property value Corporate income tax- % of a company’s profits Excise tax- tax on the sale/manufacture of a good

Gift tax- tax on money or property that one person gives to another Estate tax- tax on the value of the money and property of a person who has died Gift tax- tax on money or property that one person gives to another Tariffs- taxes on imported goods https://www.youtube.com/watch?v=a7f6Z26w0yY

FEDERAL GOVT SPENDING Mandatory spending- spending on programs required by current law Interest on the national debt Entitlement programs- if people meet requirements they receive benefits Discretionary spending- choices made about spending National defense Education Foreign aid Scientific research Much more

Flat Tax https://www.youtube.com/watch?v=dGnFcmHH7t4

Use of govt spending and taxes to influence the economy Fiscal Policy https://www.youtube.com/watch?v=1qhJPqyJRo8&list=PLZK5AkRL8ITsA6rJ-1Th6BieCCRwuxbY8 Use of govt spending and taxes to influence the economy The federal budget is developed by Congress and the president for a fiscal year: Sept 30-next Oct 1 The president develops his budget with the OMB (Office of Management and Budget) Congress develops its budget with the help of the CBO (Congressional Budget Office) In addition to funding govt agencies, the budget is used to move the economy in the desired direction

Expansionary policies- lower taxes and higher spending to promote growth More govt. spending increases AD This pushes up prices Gives producers incentive to make more output More workers are hired Tax cuts work in similar fashion

Contractionary/restrictive policies- higher taxes and lower spending to reduce economic growth Less govt. spending decreases AD This pushes down prices Gives producers incentive to make less output Workers may be laid off Inflation comes under control Higher taxes work in similar fashion

LIMITS OF FISCAL POLICY Hard to change spending Predicting the future Delayed results Political pressures Coordinating policy with the states and the Federal Reserve’s monetary policy

FISCAL POLICY OPTIONS Classical economics-the market should regulate itself In the long run downturns will end Great Depression questioned this thinking

Keynesian (demand side) economics- the economy is made up of three sectors: individuals, businesses, and govt The government should track spending to be sure it’s enough for the economy to run at full capacity Govt should intervene by adjusting spending/ taxes to deal with/prevent recession/ unemployment and inflation by influencing AD Multiplier effect-every dollar of govt spending creates > than a dollar in economic activity

Supply-side economics- focuses on moving AS by lowering taxes to help the economy Argues that tax cuts will increase employment so much that the govt will collect more revenue than with higher taxes

Automatic stabilizers-govt programs that change automatically depending on GDP and personal income When income is high, tax revenues rise and govt spends less on transfer payments-helps keep the economy from overheating When income is low, tax revenues fall and govt spending on transfer payments rise stimulating the economy

DEFICITS, SURPLUSES, AND THE NATIONAL DEBT Budget deficit- government spending exceeds tax collection Budget surplus- tax collection exceeds spending National debt- all the money the federal government owes to bondholders

IS THE DEBT A PROBLEM? Govt borrowing “crowds out” private borrowing Govt must pay the interest on the debt that might be spent elsewhere Some argue increasing the debt is worth it to increase output and employment

POVERTY Poverty rate- % of people who live in households below the official poverty line Causes of poverty Lack of education Location Discrimination Economic shifts Changes in family structure