California State Legislature You are going to Sacramento to lobby for your cause!

Lobbyists K-12 education Science research College funding Environment Health Care for low income adults Mental illness Police Department

Lobbyists Create a statement that will persuade the CA legislature to give you money! Describe your cause Describe your arguments Defend yourself against others who will also be asking for money

Public Policy #4 Fiscal Policy

Fiscal Policy: taxing, spending and borrowing Regulated by Congress (primarily) & President It all starts with a budget: proposed spending plan for a fiscal year

Federal Revenue Sources Tariffs: tax on imports Excise taxes: aka “sin” tax, tax on alcohol, cigarettes Income taxes: from 16th amendment Tax on individual incomes Corporation taxes Tax on businesses

More Revenue Social Security / Medicare Payroll tax: comes out of paycheck SS: 4.2% up to 106,800 Med: 1.45% Gift tax: more than $13,000, 35% tax Estate tax: die w/more than $5 million pay 35% Borrowing

Who pays the most in taxes?

State Revenue Property taxes: 1% of purchase price w/local areas able to add additional fees Sales tax: 9.25%, local areas can raise to 10.75%

Types of taxes Progressive (or Graduated): taxes that go up in % as your income increases Federal Income tax: 10-35% of income depending on how much you make

How much do you owe? If Taxable Income Is The Tax Is: Not over $8,500 10% of the taxable income $8,500 - $34,500 $850 plus 15% of the excess over $8,500 $34,500 - $83,600 $4,750 plus 25% of the excess over $34,500 $83,600 - $174,400 $17,025 plus 28% of the excess over $83,600 $174,400 - $379,150 $42,449 plus 33% of the excess over $174,400 Over $379,150 $110,016.50 plus 35% of the excess over $379,150

Regressive Taxes Taxes that take out a larger % of income as income decreases Sales tax: a 10% sales tax has a much greater impact (larger % of income) on low income than high income

What!?! I make $10,000 a year and pay $100 in sales tax This is 1% of my income I make $100,000 a year and pay $100 in sales tax This is 0.1% of my income

PP#5: Budget cuts You must cut the budget by 1.345 trillion dollars

Policy #4: Expenditures Fiscal policy is A. taxing B. spending C. borrowing D. All of the above 2. An increase in taxes on cigarettes is what kind of tax? A. progressive B. excise C. corporate D. Payroll 3. Which of the following is a payroll tax? A. Social Security B. Medicare C. Unemployment D. All of the above

Expenditures Mandatory Spending: Entitlements: gov is required to pay if ppl meet requirements EX: Social Security, Medicare (programs ppl pay into) AFDC, EBT – programs you qualify for w/your income 2/3 of budget

Other Expenditures Discretionary Spending: Congress can decide how to spend - sort of  Military, education, enviro, transportation, etc 1/3 of budget Interest on debt: as debt grows, minimum payment grows

Balanced Budget Act Required a balanced budget (spend only as much as they have in revenue) by late 1990s It worked! Congress & Pres balanced budget and even had a surplus (more revenue than spending) by 99-2000 It all changes on 9/11

Where does all the money go? Debt: total amount owed Deficit: amount over spent in one year

How has mand/discr spending changed since 1965?

How does this change in spending affect Congress’ ability to change policy?

PP#8: Fiscal Policy Solutions What does the federal gov spend the majority of its money on? From what source does the federal gov get the majority of its revenue? Taxes that increase in percentage as one’s income goes up are called ….

Using Fiscal Policy to Fix the Economy Keynesian Economics: govt can stimulate economy by spending more when times are bad But, wait, if gov is broke, should we spend more $?

Maybe… Deficit spending: spending more money than one has in revenue Used by FDR during depression & Obama during Great Recession Stimulus Package: Over $1 trillion Gov builds a dam, pays workers for their labor, workers have more $ - pay taxes & spend more

Remember…. Should we increase spending when the economy is hurting? Deficit: amount over spent in one period Over 1 trillion this fiscal year Debt: total amount owed 14 trillion & growing Should we increase spending when the economy is hurting?

Another view: Supply Side Economics - “Trickle Down Theory”: Govt cuts taxes on individuals & businesses But wait, if gov is broke, should we cut taxes?

Maybe…. Ppl w/more money – spend more If a business has more money, they pay employees more, hire more ppl, etc Used by Reagan & Bush

What should we do to fix our economy today? Which is better – Keynesian or Supply Side Economics?

PP #9: Your Gov @ Work  Turn to pg. 448-49 on Representative Democracy Why don’t we have a direct democracy? Why is representative democracy better? What do elected officials try to maximize? How much does the gov spend on wool subsidies (financial aid) each year? How many ppl went to Congress to discuss this issue? Why don’t more voters challenge this issue? Why do special interests often have more power than the rest of us? How much does the wool subsidy cost per person? Explain rational ignorance. Why do consumers focus more on private decisions than on public decisions?

Balanced Budget Act Required a balanced budget (spend only as much as they have in revenue) by late 1990s It worked! Congress & Pres balanced budget and even had a surplus (more revenue than spending) by 99-2000 It all changes on 9/11

Policy #4: Monetary Policy Fiscal policy is A. taxing B. spending C. borrowing D. All of the above 2. An increase in taxes on cigarettes is what kind of tax? A. progressive B. excise C. corporate D. Payroll 3. Which of the following is a payroll tax? A. Social Security B. Medicare C. Unemployment D. All of the above

Monetary Policy: regulates amount of money in circulation Regulated by the Federal Reserve Board Bd of 7 members, appt’ed by Pres, confirmed by S, serve fixed terms (independent regulatory agency)

Imagine you each have $5…. Will you be willing to spend $5 for one soda?

Will you be willing to spend $5 Now, each of you have $20 Will you be willing to spend $5 for one soda?

You were (probably) more likely to say yes when you had $20 You were (probably) more likely to say yes when you had $20. When you only had $5 your money was more valuable to you and were less likely to spend it. But, as you get more money, you’re more likely to spend and thus increase the prices of goods. This is inflation!

How does the Fed work? Controls supply (amount) of money Too much money = inflation Inflation – increase in prices (like when your parents say I remember when it cost $3 to go to the movies – you need how much to go to the movie!!!?) Some is good & normal Too much – prices rise faster than wages = scary!

BUT, Too little money = hurts economy, deflation People aren’t spending - thus employees aren’t hiring- thus people don’t have jobs – thus can’t spend & can create a vicious cycle

How does the FED do it? Regulate interest rates Low interest rates = cheap money / loans – many ppl borrow High interest rates – stops ppl from borrowing money, curbs inflation 200,000 @ 6.5% for 30 yrs = $1550/mo 200,000 @ 4.5% for 30 yrs = $1300/mo

Reserve Requirement 2. Reserve Requirement: amount banks are required to keep on hand in bank High reserve – less money to give out in loans (curbs spending) Low reserve – more money to give out in loans (encourages spending)

Question time  Interest rates are currently very low, what does this tell us about the nature of the economy? In the early 1990s interest rates for mortgages were about 15%, what does this tell you about the economy then?