1 Fiscal Policy SECTION 1: Defining Fiscal Policy SECTION 2: Fiscal Policy Strategies SECTION 3: Fiscal Policy and the Federal Budget CHAPTER 15

2 Objectives: What role do taxes play in fiscal policy? What kinds of tax rates do governments set? Which taxes are the most profitable? Defining Fiscal Policy SECTION 1

3 Role taxes play in fiscal policy: fund government programs influence individuals’ behavior Defining Fiscal Policy SECTION 1

4 Types of tax rates: proportional progressive regressive Defining Fiscal Policy SECTION 1

5 Most profitable taxes: individual income taxes corporate income taxes Social Security taxes property taxes sales taxes Defining Fiscal Policy SECTION 1

IRS Collections Data Number of Returns AG Income (millions) Income Taxes Paid (millions) Group's % Share of Total AGI Group's % Share of Total Taxes Group's Avg. Tax Rate (%) Income Floor for Group All Taxpayer s135,719,000$8,122,040$1,023,739100% 12.6%(NA) Top 1%1,357,000$1,791.87$408, %39.89%22.79%$388,806 Top 5%6,786,000$2,977,714$615, %60.14%20.68%$153,542 Top 10%13,571,000$3,843,144$724, %70.79%18.86%$108,904 Top 25%33,930,000$5,535,830$883, %86.27%15.95%$62,068 Top 50%67,860,000$7,105,599$993, %97.01%13.98%$30,881 Bottom 50 %67,860,000$1,016,441$30, %2.99%* 3.01%(NA) * The average tax rate for the bottom 50% is drawn from a related IRS spreadsheet.

7 Objectives: How do supply-side and demand-side theories differ? What are the chief tools of fiscal policy? What factors limit the success of fiscal policy? Fiscal Policy Strategies SECTION 2

8 Differences between supply-side and demand-side theories Supply-side economics: focuses on achieving economic growth and stability by increasing product supplies calls for limited government economic involvement Demand-side economics: focuses on achieving economic growth and stability by increasing aggregate demand calls for active government economic involvement Fiscal Policy Strategies SECTION 2

9 Tools of fiscal policy: marginal tax rates tax incentives government spending public transfer payments progressive income taxes Fiscal Policy Strategies SECTION 2

10 Limitations of fiscal policy: timing problems political pressures unpredictable economic behaviors lack of coordination among government policies Fiscal Policy Strategies SECTION 2

11 Objectives: How is the federal budget developed? What role does deficit spending play in the U.S. economy? What methods can the government use to balance the federal budget? Fiscal Policy and the Federal Budget SECTION 3

Federal Budget

13 Steps in the development of the federal budget: 1. 1.prepared by the president, who consults with the OMB, the Council of Economic Advisers, the Department of Treasury, and other presidential advisers 2. 2.analyzed, amended, and approved by Congress 3. 3.signed or vetoed by president Fiscal Policy and the Federal Budget SECTION 3

14 Role of deficit spending in the U.S. economy: provides economic support during national emergencies provides social programs stimulates the economy during recessions promotes citizens’ economic well-being Fiscal Policy and the Federal Budget SECTION 3

15 Possible methods to balance the federal budget: increase revenues decrease expenditures Fiscal Policy and the Federal Budget SECTION 3

Explain why federal, state, and local governments collect taxes, and provide an example of each of the following: proportional tax, progressive tax, regressive tax How did John Maynard Keynes influence economic thought? 3. 3.What tools do lawmakers use to enact fiscal policy? 4. 4.Describe the process of developing and approving the federal budget, 5. 5.What actions might the government take to balance the federal budget? Wrap-Up CHAPTER 15