UNIT 3 MACROECONOMICS Government taxes, spending, fiscal policy, deficits, surpluses, debts

TAX STRUCTURES  Proportional tax- percentage of income paid in taxes is the same for all income levels  Progressive tax- the percentage of income paid in taxes increases as income increases  Regressive tax- percentage of income paid in taxes decreases as income increases

CHARACTERISTICS OF A GOOD TAX  Simplicity-rules should be easy to understand  Efficiency-should be able to compute easily and inexpensively  Certainty-people should know when they’re due, how much to pay, etc.  Equity-should be fair

TYPES OF TAXES  Income tax- % of income  Sales tax- % of a good’s price  FICA taxes- fund Social Security and Medicare  Property taxes- based on value of property  Corporate income tax- % of a company’s profits  Excise tax- tax on the sale or manufacture of a good

 Estate tax- tax on the total value of the money and property of a person who has died  Gift tax- tax on money or property that one living person gives to another  Tariffs- taxes on imported goods  Incentive tax- tax to encourage or discourage a certain behavior

GOVERNMENT SPENDING  Mandatory spending- government spending on programs that are required by current law Interest on the national debt Interest on the national debt Entitlement programs- if people meet requirements they receive benefits Entitlement programs- if people meet requirements they receive benefits  Discretionary spending- government planners can make choices about spending National defense National defense Education Education Foreign aid Foreign aid Scientific research Scientific research Much more Much more

FISCAL POLICY  The use of government spending and revenue collection to influence the economy  Expansionary policies- lower taxes and higher spending to promote growth  Contractionary/restrictive policies- higher taxes and lower spending to reduce economic growth

LIMITS OF FISCAL POLICY  Hard to change spending  Predicting the future  Delayed results  Political pressures  Coordinating policy with the states and the Federal Reserve’s monetary policy

DEFICITS, SURPLUSES, AND THE NATIONAL DEBT  Budget deficit- government spending exceeds tax collection  Budget surplus- tax collection exceeds spending  National debt- all the money the federal government owes to bondholders

FISCAL POLICY OPTIONS  Classical economics-the market should regulate itself  Keynesian economics- the economy is made up of three sectors: individuals, businesses, and the government The government should intervene to make up for changes in the other two to move aggregate demand in the right direction The government should intervene to make up for changes in the other two to move aggregate demand in the right direction

 Supply-side economics- focuses on moving aggregate supply to help the economy

GOVERNMENT INVOLVEMENT IN THE ECONOMY  Public good- a shared good or service for which it would be impractical to make consumers pay for individually and exclude nonpayers  free rider- someone who would not pay for a good or service but gets the benefits of it if it were provided publicly  Market failure- a situation where the market doesn’t distribute resources efficiently

EXTERNALITIES  Externality- an economic side effect that benefits or costs someone other than the one who produces or consumes the good

EXTERNALITIES AND MARKET INEFFICIENCY  Negative Externalities Automobile exhaust Automobile exhaust Cigarette smoking Cigarette smoking Barking dogs (loud pets) Barking dogs (loud pets) Loud stereos in an apartment building Loud stereos in an apartment building

EXTERNALITIES AND MARKET INEFFICIENCY  Positive Externalities Immunizations Immunizations Restored historic buildings Restored historic buildings Research into new technologies Research into new technologies

POVERTY  Poverty rate- % of people who live in households below the official poverty line  Causes of poverty Lack of education Lack of education Location Location Discrimination Discrimination Economic shifts Economic shifts Changes in family structure Changes in family structure

ANTI-POVERTY PROGRAMS  Welfare- economic aid to the poor  Cash transfers- direct payments of money to poor people Temporary Assistance for Needy Families Temporary Assistance for Needy Families Social Security Social Security Unemployment benefits Unemployment benefits Worker’s compensation Worker’s compensation  In-kind transfers- goods and services provided for free or reduced prices Food stamps Food stamps Housing Housing Legal services Legal services

FORM 1040   Fill out the info at the top-use a spouse if you want to, dream spouse, etc.  Don’t use real social security #, make it up  1-5. filing status Single Single Married jointly Married jointly Married separately Married separately Head of household: married with children Head of household: married with children Widower: spouse deceased Widower: spouse deceased

 6. exemptions Check box for you and for spouse Check box for you and for spouse List names of kids if any List names of kids if any Add up total number of exemptions and put the number in the box Add up total number of exemptions and put the number in the box

 7. make up a salary for last year  8a. Make up interest from a bank account  9a. Make up dividends from stock investments  11. if you like, write down alimony received from previous spouse(s)  12. if you ran your own business, put the income you made from that

 13. if you made money selling stocks, put it here  17. if you rented out real estate, put the amount you made here  18. if you got income from a farm, put it here  19. if you were unemployed for part of last year, put the amount you received here  22. add up lines 7-21 and put here

 23. up to $250 in teacher expenses can be put here  26. if you spent money to move, put it here  31. if you paid alimony to a former spouse, put the amount here  33. if you were paying interest on a student loan, put it here  34. if you paid tuition and fees, put the amount here  36. add lines and put here  37. line 22 minus line 36

 Turn over the form and copy the amount on line 37 to line 38  40a. Write your standard deduction from the box on the left  41. line 38 minus line 40a  42. Put $10,000  43. put line 41 on line 43 also $10,000 less  44. using your income on line 43 and the tax table on the next slide, compute your tax and write it here

 10% on income between $0 and $8,350  15% on the income between $8,350 and $33,950; plus $835  25% on the income between $33,950 and $82,250; plus $4,675  28% on the income between $82,250 and $171,550; plus $16,750  33% on the income between $171,550 and $372,950; plus $41,754  35% on the income over $372,950; plus $108,216

 61. put ½ of line 43  71. recopy from line 61  72. if 71 is bigger than 60, 71-60; 0 if not true  75. if 60 is bigger than 71, 60-71; 0 if not true