Fiscal Policy Influence on the Economy Government Taxing and Spending Policies

Fiscal Policy Overview The health of a nation’s economy is influenced by governmental policy (fiscal policy) Fiscal policy can be used to spur economic growth Economic policy decision made by government result in both intended and unintended consequences

Government Taxing Personal Income Tax – a percentage of gross income Sales Tax – on items purchased Property Tax – a percentage value of your land/house Tariffs – placed on imports

Tax Brackets

Joking about Taxes What is the intended purpose of this cartoon?

Effects of Fiscal Policy Intended Results Unintended Results What the government MEANT to happen Spur economic growth Increase consumer spending Increase employment What the government DID NOT MEAN to happen Unforeseen problems Backlash against programs/spending

Government Programs PermanentShort Term Social Security – retirement/disability ◦Overview of InformationOverview of Information Medicare – government funded health care coverage Entitlements – items above, plus salaries and benefits for employees Government Stimulus Checks – one time payments intended to spur spending CARS – aka – “Cash for Clunkers” – intended to promote growth in struggling auto industry

Unintended Effects of Programs Social Security – Medicare – Stimulus Checks – CARS -

Policy Example - CARS Intended Purpose – to encourage consumer spending on new vehicles ◦Boost the struggling American automobile industry  Production and Sales Unintended Results – 6/10 top 10 cars sold were foreign models Top Ten SalesTop Ten Sales ◦Still promotes American economy growth ◦Many people who wanted to participate were ineligible ◦Unknown long-term effects – especially on employment ◦Increased government spending – incentive to buyers (discount financed by the federal government)

Tax Example – Hawley-Smoot Tariff 1930: increased taxes on agricultural and industrial imports to record high Intended EffectsUnintended Effects Regulate commerce with foreign countries Protects American jobs and farmers Encourage American industry and production Trading partners retaliate: reduce American exports by ½ (23 official protests) Spike in unemployment World trade decreased 66% between 1929 and 1934