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FISCAL POLICY
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MACROECONOMIC STANDARDS
SSEMA3 Explain how the government uses fiscal policy to promote price stability, full employment, and economic growth. Define fiscal policy. Explain the effect on the economy of the government’s taxing and spending decisions in promoting price stability, full employment, and economic growth. Explain how government budget deficits or surpluses impact national debt.
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FISCAL POLICY AND THE FEDERAL BUDGET
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Key Concept: Government influences the economy by:
Collecting Spending and Borrowing money
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The use of taxes and government spending to influence the economy.
What is fiscal policy? The use of taxes and government spending to influence the economy.
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What are goals of Fiscal and Monetary Policy?
The same as macroeconomic goals…remember them? Economic growth Full employment Low inflation
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WHAT ARE TAXES?
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Taxes = Required payment to local, state, or national government
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TAXES ARE USED FOR……
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Revenue = Income received by a government from taxes & nontax sources
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WHAT ARE 3 TYPES OF TAX STRUCTURES?
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Tax Structures Proportional Regressive Progressive
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Percentag e of income paid for tax is the same for all income levels
Proportional
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Property Taxes = Millage rate = same rate for all property
Ad Valorum – At value = license tag = same rate for all cars Ranch or trailer ; Cadillac or Chevy
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A Flat 20% Income Tax Rate Income Tax___ $10,000 $2,000 $20,000 $4,000
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Percentage of income paid increases as income increases
Progressive Percentage of income paid increases as income increases The more you make, the more they take
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Example: Income tax is a type of progressive tax
A tax on a person’s earnings
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People with lower incomes, pay a greater percentage
Tax where the percentage of income paid on the tax decreases as income increases People with lower incomes, pay a greater percentage of incomes = Example:sales tax Regressive
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Sales tax - regressive A tax on the dollar value of a good or service being sold We all pay the same amount regardless of income
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One fact that is new to you Question?
VIDEO BREAK While you watch: One fact that you know. One fact that is new to you Question?
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Who bears the tax burden?
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The incidence of a tax = Who bears the burden?
When an item is taxed, who pays it? Consumer or Producer
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DEMAND ELASTICITY AND THE INCIDENCE OF A TAX
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Do you remember elasticity?
Elastic demand: If price changes there is a large change in quantity demanded Inelastic Demand: If price changes there is only a small change in quantity demanded
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ELASTIC DEMAND Less likely the burden can be shifted from the producer to consumer People do not need it and there is a substitute
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INELASTIC DEMAND Incidence, or burden, falls on the consumer
The good or service is a necessity and there is no close substitute You have to buy it
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Federal Taxes
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Individual Income Taxes FICA Corporate Income Taxes
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Individual Income Tax Tax on earnings Withholding from your paycheck
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FICA taxes fund Social Security & Medicare
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FICA Taxes Taken out of your paycheck
2nd major source of federal tax revenue Federal Insurance Contributions Act Retirement benefits to workers
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A national health insurance program that helps pay for health care for people over 65 and people with specific disabilities
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The tax a corporation pays on its profits
Corporate Income Taxes The tax a corporation pays on its profits 3rd largest source of revenue for government
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OTHER TAXES Find and define
Excise Tax Estate Tax Gift Tax Tariff Tax incentive Tax Credit
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YOU WILL NEED YOUR OWN PAPER……
Take notes as we go through expansionary and contractionary fiscal policy. Do you remember those 2 words from business cycle? Expand and contract?
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BRAIN BREAK Find a student whose FIRST letter of their LAST name is the same as the FIRST letter of your FIRST name. Example: Sallie Manning – needs to find someone whose last name starts with :”S” Sit next to that person for the rest of this week.
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WHAT TAXES DO YOU OR YOUR FAMILY PAY?
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FISCAL POLICY FISCAL POLICY
The use of government spending & revenue collection to influence the economy
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The Government has 2 tools it can use to stabilize the economy……
1. Fiscal Policy- Actions by Congress to stabilize the economy. 2. Monetary Policy- Actions by the Federal Reserve Bank to stabilize the economy.
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For now we will only focus on Fiscal Policy.
Copyright ACDC Leadership 2015
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What are goals of fiscal policy?
The same as macroeconomic goals…remember them? Economic growth Full employment Low inflation
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BASIC TERMS OF FISCAL POLICY
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Expenditure = Spending
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Revenue = Income received by a government from taxes & nontax sources
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Government spending (expenditure)
Per capita = Per person Turn and talk: What is the other Per capita number We have studied?
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Public sector Refers to the federal, state, and local governments
They usually buy things from the…
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Refers to individuals and businesses
Private sector Refers to individuals and businesses
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Federal budget Written document detailing government revenues & expenditures for a certain fiscal year
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Fiscal Year 12 month financial period Govt: October 1 – September 30 Prepare for upcoming year
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A budget where revenues are equal to spending
Balanced Budget A budget where revenues are equal to spending
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A situation in which the government takes in more than it spends
Budget Surplus A situation in which the government takes in more than it spends
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A situation in which the government spends more than it takes in
Budget Deficit A situation in which the government spends more than it takes in
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Sequence for the approval of the federal budget is:
President to Congress back to President
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Vote is NO: It does not pass.
Vote is YES: The President signs the budget. The President can VETO the budget. Vote is NO: It does not pass.
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Appropriations bill A bill that sets money aside for specific spending
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Government spends more than it collects
Deficit spending Government spends more than it collects
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Question: How can the federal government pay for things if they have a budget deficit?
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Remember this causes inflation!... It taxes to raise money or…
Print more money? Remember this causes inflation!... It taxes to raise money or…
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Borrow money by selling bonds
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BONDS ARE LOANS TO THE GOVERNMENT
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National Debt The total amount of money the federal government owes
The national debt will INCREASE each year that there is a budget deficit and the federal government borrows money to cover it.
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COPY THIS: FISCAL POLICY EXPANSIONARY – GROW ECONOMY
TAXES SPENDING EXPANSIONARY – GROW ECONOMY CONTRACTIONARY – SHRINK ECONOMY
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Expansionary Policy Contractionary Policy
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A fiscal policy that encourages economic growth = higher spending and tax cuts
Expansionary Policy
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Overall goal is to increase aggregate demand and output
Used when the economy is in a recession or the government is trying to prevent one.
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If the federal government increases spending…
Expansionary Policy If the federal government increases spending…
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…it is buying more goods & services.
Expansionary Policy …it is buying more goods & services.
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This increases demand which causes prices to increase
Expansionary Policy This increases demand which causes prices to increase
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Higher prices causes supply to increase.
Expansionary Policy Higher prices causes supply to increase.
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Expansionary Policy An increase in supply causes companies to need more workers (less unemployment)
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Workers will spend their money on goods & services
Expansionary Policy Workers will spend their money on goods & services
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If the federal government cuts taxes…
Expansionary Policy If the federal government cuts taxes…
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…people & businesses will have more money to spend & invest.
Expansionary Policy …people & businesses will have more money to spend & invest.
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Expansionary Policy Contractionary Policy
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A fiscal policy that reduces economic growth = lower spending and higher taxes
Contractionary Policy
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Contractionary Policy When the federal government increases taxes people & businesses have less to spend on goods and services
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Decreasing government spending & raising taxes
Contractionary Policy Decreasing government spending & raising taxes
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Contractionary Policy Try to avoid inflation A decrease in government spending leads to a decrease in demand
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A decrease in demand drives prices down. Lower prices reduce supply.
Contractionary Policy A decrease in demand drives prices down. Lower prices reduce supply.
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CONGRATULATIONS… we finished today.
I know this is hard stuff but hang in and hang on. You have to know it for the Milestone…….and I know you can do it.
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