Budget, Taxing, and Spending

 Government has a major influence in macro- economic policy.  2010= $2.1 Trillion received (Revenue)  2010= $3.5 Trillion spent (Expenditures)  Fiscal Policy is the method of taxing and spending used by the Government to help reach our macroeconomic goals.  Fiscal Policy Tools: 1) Spending 2) Taxing

 How does the Government spend $3.5 Trillion?

How does the Government collect its revenue?

 Federal- Income Tax, Corporate Income Tax, Estate Tax, Gift Tax, Tariffs  State- Sales Tax, Income Tax, State Fees and Registrations, State Lottery  Local- Property Taxes, Local (City, County, or Township) Fees

 Progressive Taxes- Tax structure where the percentage paid in taxes increases as income increases.  Ex. Income Tax  Regressive Taxes- Tax structure where the percentage paid in taxes decreases as income increases.  Ex. Sales Tax  Proportional Tax- Tax structure where the percentage paid in taxes is the same for all income levels.  Ex. Flat Tax Tax Structures

 April 15  Report income from employers (1040 form), the 1040 form helps taxpayers find out their taxable income.  Taxable income= Gross income- exemptions and deductions  IRS determines how much you have paid in taxes and how much you owe, or overpaid.  The amount that an individual owes is dependent upon their taxable income.

Budget Process- Surplus, Deficit, or Balanced 1.Office of Management and Budget (OMB) i.Works with the President to put together a draft of the budget. 2.Congress i.Reviews the budget draft and makes changes 3.President i.Signs the budget or Veto’s the budget

 Discretionary vs. Mandatory  Discretionary- Money that policymakers get to decide on how or how much to spend.  Ex. Defense, Education, Environmental Research, Foreign Aid  Mandatory- Money that is determined by law to fund certain programs or Government functions.  Ex. Social Security, Medicare, Medicaid, Interest on Debt

 Expansionary vs. Contractionary  Expansionary Policy- Increase Spending, Decrease Taxes, Increase in Government Transfers  Used to Stimulate the economy during a recession  Contractionary Policy- Decrease Spending, Increase Taxes, Decrease in Government Transfers  Used to slow growth during an inflationary BOOM

 Government Spending Multiplier= 1/mps, this gives us the max that an increase in spending can boost GDP.  Tax Multiplier= mpc/mps, this gives us the max that a decrease in taxes can boost GDP.  Why is the Tax Multiplier smaller than the Spending Multiplier?

 a. Draw a correctly labeled graph showing an economy experiencing a recessionary gap.  b. What type of fiscal policy is appropriate in this situation?  c. Give an example of what the government could do to implement the type of policy you listed in part b.  d. GDP is $200 billion below potential output, how much would the Government have to cut taxes with a MPC=.8, to bring the economy to full-employment?

 Programs that automatically help to counter- act cyclical change in the economy without any legislative action.  Unemployment Compensation  Corporate Profit Tax  Progressive Income Tax  What is happening with these programs during a recessionary gap or inflationary gap?

 As GDP Changes:  The automatic stabilizers change…  Progressive Income Tax- decreases as GDP decreases…  And increases as GDP increases  The Effects:  This automatic change will slow down an economy in expansion, and stimulate an economy in recession.

 No legislative action… enough said!  Timing is everything:  Policy lag is the delay that it takes for a policy to start impacting the economy.  Forecasting lag is the delay that it takes for policymakers to figure out what policy to implement.

 Fiscal Policy that is changed by policymakers when the business cycles change.  What can policymakers change?  Education, Military, Agriculture, Transportation  When would discretionary fiscal policy be used?

 Proper Timing of discretionary spending is both difficult to achieve and crucially important.  Good Timing= Properly stabilized business cycle change  Bad Timing= Unnecessary business cycle fluctuation  Automatic Stabilizers help to balance the economy without legislative action, but they lack any potency to rectify a severely struggling economy.  Fiscal policy doesn’t impact the economy as much as initially presumed.  Lessened Multiplier Effect

 Political Considerations of Fiscal Policy:  Fiscal policy is created in a political arena  What problems could this cause?  Politicians have an agenda that doesn’t always match the need of the economy.  Politicians are worried about getting elected, and certain fiscal policy options are not popular with the public.

 Budget Surplus vs. Budget Deficit  Surplus= Contractionary Policy  Deficit= Expansionary Policy  Should the budget be balanced?  Problems of prolonged deficits:  Increased Public or National Debt  Problems with a forced balanced budget:  Lessens impact of fiscal policy ability

 Problems with the rising National Debt:  Crowding Out Effect:  As the Gov. borrows money, it pushes up interest rates and discourages or crowds out business investment.  Show Loanable Funds Market Graph  Also, as our public debt increases more of our government spending is needed to pay back interest on our debt.  The payments on the interest limit the gov.’ s ability to spend on other needed areas.