Fiscal Policy: Spending & Taxing Unit 5 – Public & Private Solutions Economics Honors Edgenuity Lessons 5.1 & 5.2

Goals of Government Spending Balancing social needs and economic growth: Meeting public needs Public safety Education Health care Infrastructure Improving economic indicators Reducing unemployment Improve economic stability Improve production Encourage competition

Inefficiency exists in the budget process due to: Spending Challenges Inefficiency exists in the budget process due to: Personal motivation Special interests Heavy social needs

Balanced budget: expenditures = revenue Budget States Balanced budget: expenditures = revenue Surplus: revenue > expenditures Deficit: expenditures > revenue Gov’t takes on debt $ borrowed from citizens or other countries (BONDS) Borrowed money accumulates interest

Allocating Money – Federal Budget Categories Mandatory: required by law (entitlements) Discretionary: can be changed each year Interest: spending on interest payments for the gov’t debt

Injector Factors: Ways that sectors bring money into the economy Leakage Factors: Ways that sectors remove money from the economy

Effect of Gov’t Spending on the Economy Gov’t sector of the circular flow model Spending money injects capital into the economy Reduces unemployment Increases production In 2010, about 25% of GDP was gov’t spending Employs about 4M Americans – 2-3% of workers in U.S. Gov’t Households Firms

Direct Payments vs. Gov’t Grants Two types of direct payments: Gov’t directly pays its employees Gov’t programs provide income support to citizens Social Security; Medicare Grants: Gov’t sends funds to state & local governments Companies and universities receive special grants for projects

Reasons for Taxation Funding necessary programs & ensuring citizens contribute to meet needs in their society Article I, Section 8 of the Constitution grants this power:

Progressive Taxation Charges individuals with higher incomes a higher percentage of their total income

Proportional Taxation Charges higher and lower-income citizens equally in proportion to their income A.K.A. flat tax

Regressive Taxation Charges individuals with high incomes a lower percentage of their total income

Income Taxes 16th Amendment allows these Paid on money earned Income includes wages and profits from investments Collected by federal and many state gov’ts Federal income taxes are direct & progressive

Corporate Taxes & Property Taxes Federal and state gov’ts require businesses to pay these on their earnings annually Property taxes Paid on homes, land, other property Collected by state and local gov’ts Direct and proportional

Taxes on goods Sales Taxes: Tariffs: Excise Taxes: Taxes on purchased goods Collected by state and local gov’t (4-10%) Indirect and regressive Excise Taxes: Federal and state gov’t impose on specific products Gas, gambling, cigarettes, alcohol (“sin” taxes) Tariffs: Tax issued on imported goods Designed to protect domestic industries

Expansionary Fiscal Policy Occurs when the gov’t chooses to run a larger deficit Lowering taxes and/or increasing spending Why? In response to high unemployment Theory is that raising spending stimulates the economy Positive effects: Jobs, growth of businesses, help develop new industries, fund research/innovation Negative effects: Can lead to debt; can cause inflation/higher prices

Contractionary Fiscal Policy Gov’t chooses to reduce deficit or gain a surplus Raising taxes and/or decreasing spending Why? Because economy is growing too quickly  inflation Theory is that cutting spending improves gov’t finances Positive effects: Reduces debt; can improve inflation and lower prices Negative effects: Can increase unemployment and reduce consumer spending

Summary of impact of taxes High income taxes can lead to: Less disposable income Less spending Decreasing demand Lower inflation Lower taxes can lead to: More disposable income More spending More economic growth Increasing demand Less unemployment Taxes that are too low will result in: Less gov’t spending Lower gov’t employment Less gov’t funding for states and programs