Taxes, National Debt & Fiscal Policy

Taxes Types of taxes Regressive: If the rich pay a smaller proportion of their income for the tax than do the poor. Ex: Social Security Progressive: Tax whereby the rich pay a larger proportion than the poor. Example: Federal income tax (to some degree – rich can avoid taxation through tax shelters) Proportional: Same percentage rate of taxation on everyone’s income. Example: Sales tax

Taxes Purpose Raise revenue –Raise money for financing government programs and services Sales taxes, estate and gift taxes and property taxes are state revenues. Regulatory taxes –Designed to regulate or restrict business practices and raise revenues Excise tax: Levied on goods with high demand. Example: cigarettes, gasoline and imported goods.

Federal Budget Prepared annually, based on a fiscal year. –Created by the President and the Office of Management and Budget (OMB). –Reflect the President’s economic objectives Process –Government agencies and departments submit budget requests to OMB. –President and OMB prepare federal budget –When approved by House, passed to Senate which may alter the budget. –The final budget is approved by Congress and sent to the President for final approval.

Budget Expenditures Direct benefit payments for individuals –Largest expenditure is for Social Security, Medicare and other income security programs. National Defense Interest on the national debt Other –Veterans’ benefits, transportation, foreign aid, education, general science and space technology, energy research and development

National Debt When the federal government incurs a deficit. Size: increased over the last fifty years (in 2004 the national debt was $7.6 trillion)in 2004 the national debt was $7.6 trillion) Justification of debt: –Money is owned to ourselves –US can afford to carry debt –Real cost of debt is not as important as annual interest charged. US operating within means. Criticism –18% of debt held by foreign investors –Annual interest payment is large –Government spends too much money without effort to control spending.

Fiscal Policy Policy of the government regarding taxes and government expenditures, the object being to stabilize the economy Expansionary fiscal policy – how the government deals with recession –Increased government spending (or) –Lower taxes (or) –Combination of the two –If the budget is balance, the government will run a deficit in order to eliminate the recession.

Contractionary fiscal policy – how the government deals with inflation. –Decreases government spending (or) –Raises taxes (or) –Combination of the two –If the budget is balanced, the government will run a surplus to eliminate inflation.

Deficits and Surpluses Deficits – government will borrow money or create it. Surplus – government can use surplus to pay off debts or not spend them. Government Spending Government Revenues Surplus Deficit