Chapter 11 Government Expenditures and Revenue Economics 11 June 2013

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 Governments influence the economy in four major ways:  By spending  By taxing  By regulating  And by directing Crown Corporations

By spending  When government increases its spending on schools and hospitals, then more schools and hospitals are built

By taxing  Through taxation, government raises the money it needs to function  Governments may also use taxes to discourage the consumption of certain goods or services  as a result, the prices of these goods and services will increase and less will be consumed.

By regulating  Government regulations influence the economy through laws.  For example, the law that requires all young Canadians to go to school means that schools must be built, teachers must be paid and teaching resources provided.

By directing Crown corporations  For example the CBC (Canadian Broadcasting Corporation) has a policy of favouring Canadian content  This results in more Canadian performers and technicians finding work

Reasons for Government Involvement in the Economy 1. Public Goods 2. Externalities 3. Harmful and Beneficial Goods 4. Distribution 5. Economic Stability

1. Public Goods  A public good is a good where the benefits go to the public and not to the individual who purchases it.  Public goods are provided by the government.  Public goods are provided by the government.  An example of a public good is National Defence.  Government can make sure that the general public pays for the production of these goods.

2. Externalities  An externality is a good or bad side effect of production or consumption.  For example, an externality is produced when a factory pollutes the air or water, this is obviously a negative externality.

2. Externalities  Another example is if owners of a golf club decide not to sell their land to developers.  A positive externality of this decision is that people around the club will breathe cleaner air and enjoy a more beautiful view than if the land were developed.

3. Harmful and beneficial goods  Harmful goods include such products as addictive drugs – cocaine, heroine, cigarettes  Government reaction to such products may include outright prohibition (cocaine) or warnings about the dangers of using it (cigarettes)

3. Harmful and beneficial goods  A beneficial good is education, governments provide free education in elementary and secondary schools and cover some of the cost of post-secondary education.

4. Distribution  The market distribution of goods and services does not always agree with our view of economic justice.  Therefore government is involved in the distribution of goods and services to the economically disadvantaged.

5. Economic Stability  Government works to promote stable prices and full employment.

Growth in Government Spending Federal government: Defence, international trade and foreign affairs that affect the nation as a whole Defence, international trade and foreign affairs that affect the nation as a whole Provincial/municipal government: Police, fire protection, schools, roads, education (affairs that affect the individual citizen more directly) Police, fire protection, schools, roads, education (affairs that affect the individual citizen more directly)

Municipal Government Expenditures  Building and maintenance of local roads, sewers, sidewalks, streetlights, and the services of the local police, garbage collection, and fire departments

Provincial Government Expenditures  Interest payments on the provincial debt  Salaries for government employees  education

Federal Government Expenditures  National defence  International trade and commerce  Foreign relations  Construction of railways  Federal court system  Highway construction  Income security programs  Retirement and disability programs

Government Revenues - taxes taxes – obligatory payments made by individuals and corporations to government direct tax – one that is levied on a person that cannot pass the tax along to someone else Provincial Sales Tax (PST) is an example of a direct taxProvincial Sales Tax (PST) is an example of a direct tax

Government Revenues - taxes indirect tax – a tax that can be passed on to other people For example: anyone who imports Japanese cars into Canada for sale to Canadians has to pay the federal import tax. The import tax is an indirect tax that can simply be added to the final cost of the car so that the consumer, not the importer, ultimately pays the tax.

Government Revenues - taxes In Canada, personal income taxes are progressive. In Canada, personal income taxes are progressive. With a progressive tax, as income increases the tax rate also increases With a progressive tax, as income increases the tax rate also increases With a proportional tax, the tax rate remains unchanged as income increases With a proportional tax, the tax rate remains unchanged as income increases With a regressive tax, the tax rate diminishes as income increases. With a regressive tax, the tax rate diminishes as income increases.

Municipal Government Revenues  Local property taxes provide approximately 90% of the tax revenue of municipalities These taxes are based on the assessed value of the propertyThese taxes are based on the assessed value of the property  Grants from provincial governments provide local governments with their other major source of revenue  A relatively small amount of revenue comes from fines, parking meters, parking tickets, and building permits.

Provincial Government Revenues  The bulk of provincial government revenues comes from direct taxes from persons (about 1/3), indirect taxes (about ¼), and federal government transfers (about 1/5)

Federal Government Revenues  The federal government has a much wider range of taxes than the provincial government  The federal government has five major sources of revenues: 1. Federal income tax1. Federal income tax 2. Corporate income tax2. Corporate income tax 3. EI contributions3. EI contributions 4. GST4. GST 5. Excise taxes5. Excise taxes

Federal Government Revenues 1. Federal income tax  The most important source of federal government revenues

Federal Government Revenues 1. Federal income tax  The amount of income tax paid by an individual is a complicated process but here is the simplified version:, total income from all sources (wages, interest, rent, dividends, profits) from all places inside and outside of Canada is calculated. First, total income from all sources (wages, interest, rent, dividends, profits) from all places inside and outside of Canada is calculated.

Federal Government Revenues 1. Federal income tax Second, allowable deductions are subtracted from total income to get taxable income. Second, allowable deductions are subtracted from total income to get taxable income. Examples of allowable deductions would be charitable donations, expenses connected with employment like union dues or professional association fees.Examples of allowable deductions would be charitable donations, expenses connected with employment like union dues or professional association fees.

Federal Government Revenues 1. Federal income tax Third, taxes payable are calculated from a schedule or table that shows the different tax rates based on the different income ranges Third, taxes payable are calculated from a schedule or table that shows the different tax rates based on the different income ranges

Federal Government Revenues 2. Corporate income tax  The tax is paid on the profits of the corporation

Federal Government Revenues 3. Employment Insurance Contributions  Contributions are made by employees and employers  Exceptions include the self – employed, some part-time workers, and workers over the age of 65

Federal Government Revenues 4. Goods and Services Tax (GST)  In 1991, the GST replaced the FST (Federal Sales Tax)  The tax base of the FST was much narrower than that of the GST – services for example were excluded

Federal Government Revenues 5. Excise taxes and duties  Imposed on the sale of many luxury or non-essential items, such as tobacco, liquor, and playing cards.  Customs duties are collected on goods that are brought into the country

Controlling the debt  There are several ways the federal government can try to control the deficit: Cut federal government expendituresCut federal government expenditures Increase revenuesIncrease revenues Rely on economic growth and rising incomesRely on economic growth and rising incomes

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