Chapter 11: Government Expenditures and Revenues

Group discussion  How do you think the government is involved in our economy?

Reasons for Gov’t Involvement in the Economy 1. Public Goods – good or service that everyone benefits from regardless if they have paid for it or not (e.g. national defence) 2. Externalities - good or bad side effects of production.  Governments thus regulate to prevent negative externalities, and promote positive ones. 3. Harmful and beneficial goods - cigarettes vs. education

Reasons for Government Involvement in the Economy 4. Distribution - help make it a fairer world by taking from the rich and giving to the poor 5. Economic stability - stable prices and full employment (you will learn this more in later chapters)

Growth in Government Spending  Government spending has increased greatly since the Great Depression of the 1930s  Canadians have come to expect gov’ts to take care of them to prevent another economic depression from ever occurring again

Government Expenditures  What goods and services do we receive for the taxes we pay and what level of gov’t supplies them?  Municipal government  Provincial government  Federal government

Government Expenditures Municipal Gov’t Expenditures:  Provide us with the local services  E.g. building and maintenance of local roads, sewers, sidewalks, streetlights, local police, garbage collection, and fire departments Provincial Gov’t Expenditures:  Fed Gov’t transfers money to pay for goods & services such as health & education

Federal Government Expenditures Federal government expenditures have continued to increase There are 8 major components of federal gov’t expenditures: 1. Transfer to persons – unemployment insurance 2. Transfers to other levels of government – health care & education 3. Subsidies – natives, farmers, international aid 4. Payments to crown corporations – CBC, Via Rail, etc.

Federal Gov’t Expenditures 5. Defence – military funding 6. Government operations – judicial, government departments 7. Other – Veterans allowances 8. Public debt charges – money owed by federal gov’t to Canadians and foreigners in forms of bonds

Group Discussion  Refer to page 232, and define the following:  Taxes  Direct Tax (Provide an example)  Indirect Tax (Provide an example)

Government Revenues Taxes are the key source of government revenue and come in many different forms  Direct – e.g. HST, person is well aware of the amount of tax  Indirect – tax is hidden in the price, and is passed on to the consumer. E.g. fuel How does the gov’t make $$$?

Group Discussion  Refer to page 232 again, and define the following:  Progressive Tax  Proportional Tax  Regressive Tax

Government Revenues  Progressive – as income increases, the tax rate also increase Tax payers are broken down into categories. The more they earn, the more taxes they would pay  Proportional – tax rate remains unchanged as income increases Lower, middle, and upper class citizens have the same tax rates  Regressive – tax rate diminishes as income increases. For example, if a person has $10 of income and must pay $1 of tax on a package of cigarettes, this represents 10% of the person's income. However, if the person has $20 of income, this $1 tax only represents 5% of that person's income.

Government Revenues  Municipal – property taxes contribute 90%  Provincial – direct taxes (33%), indirect taxes (25%), federal transfers (20%)  Federal – income tax, corporate income tax, Unemployment Insurance, excise (luxury) tax and duties, government investment

Tax Simulation  Refer to the following sheet on Moodle: Tax Simulation