1. Oliver Wendell Holmes Jr.
“Taxation is the price we pay for civilization.”

2. Characteristics of a Good Tax:
Convenience
Not overly complicated, predictable
Efficiency
Keep economic costs of tax system low
Certainty
Not arbitrary! (Prevents abuse)
Equity
Rich should pay more than poor
Adam Smith’s Tax Maxims from “The Wealth of Nations”

3. Come up with a list of items, services, etc
Come up with a list of items, services, etc. that should be taxed to pay for government services.
Gain revenue
Discourage/encourage behavior
Fair?
Enforceable?

4. Unit 5 Quiz 2 Notes LT 3 & 4
3) I can explain how the government generates revenue and makes spending decisions. 4) I can explain the two tools the Federal Government uses for contraction/expansion fiscal policies.

5. Make a list of all of the federal taxes you can think of, and another list of all of the state taxes you can think of.
State
Federal

6. Federal Taxes: Individual income tax Corporation income tax
Employment tax
Gift tax
Excise taxes
Estate tax

7. Minnesota State Taxes:
Alcoholic beverage tax
Cigarette and tobacco tax
Contamination tax
Controlled substance tax
Corporate franchise tax
Corporate franchise tax for nonprofit organizations (UBIT)
Dry cleaner fees
Estate and trust tax
Fur clothing tax
Hazardous waste generator tax
Individual income tax
Insurance taxes
Lawful gambling tax
Metropolitan landfill fee
Mineral taxes
Minnesota Care
Mortgage registry tax/deed tax
Partnership tax
Petroleum taxes
Property tax
REA membership tax
S Corporation tax
Sales and use tax
Solid waste management tax
Withholding tax
Use tax for individuals

9. Why are taxes collected?
What is a tax?
A required payment to a local, state, or national government
Why are taxes collected?
Taxation is the primary way that the government collects money (revenue) that is used to provide goods and services to us.

11. Why do people often DISLIKE paying taxes?
The government has a monopoly on force
Most economic transactions depend on voluntary exchange.
Government has the exclusive right to coerce individuals to pay taxes.
2. Costs are obvious; benefits are not.
diminished link between payment and individual consumption
no easily noticeable direct benefit from the goods or services received
benefits are spread thinly or delayed (cancer research, national defense)

12. Characteristics of a Good Tax:
Convenience
Not overly complicated, predictable
Efficiency
Keep economic costs of tax system low
Certainty
Not arbitrary! (Prevents abuse)
Equity
Rich should pay more than poor
Adam Smith’s Tax Maxims from “The Wealth of Nations”

13. Tax Equity
Tax equity begins with the belief that taxation should be fair to all who are taxed. Economists often cite two principles in debates over tax equity:

14. Defining taxes Tax base (Incidence of tax)
Who bears the tax (what is being taxed)
Single/married adult’s income (Income tax)
Value of good/service- buyers (sales tax)
Company profits (Corporate Income tax)
Tax Structures
How a particular tax is collected:

15. Proportional Taxes (a type of tax structure)
Tax Base: Personal Income
Definition: The percentage of income paid in taxes remains the same for all income levels.
A 6% proportional income tax
Leslie makes $350,000/yr and Tony makes $50,000/yr.
Leslie pays 6% of her $350,000 ($21,000)
Tony pays 6% of his $50,000 ($3,000)
Example: Income tax in Estonia, Slovakia, & some other European Countries

16. Proportional
Everyone pays the same percentage of their income
Income Tax Paid $ Contribution-% of Income
10, %
40, %
80, %
$2,000
$8,000
$16,000

17. Progressive Taxes (structure)
Tax Base: Personal Income
Definition: The percentage of income paid in taxes increases as income increases.
Example: U.S. federal income tax2015 Tax Brackets

18. Regressive Taxes (structure)
Tax Base: Specific good or service
Definition: A single tax rate is applied to everyone. The percentage of income paid in taxes decreases as income increases.
Although the tax rate remains constant…
Higher-income households spend a lower proportion of their incomes on taxable goods and services.
The proportion of their income spent on sales taxes is lower than that of lower-income households.
Example: Sales tax

19. Regressive Everyone pays the same dollar amount, regardless of income
Income Tax Paid $ Contribution-% of Income
$10,000 $2,000
$40,000 $2,000
$80,000 $2,000
20% 5%
2.5%

20. Which is fair? Regressive: $10,000 Proportional: $10,000
Betty: $100,000
Flo: $20,000
Regressive: $10,000
Proportional: $10,000
Progressive: $10,000
Regressive: $10,000
Proportional: $2,000
Progressive: $500

21. How to states tax differently?

22. Where do your MN tax dollars go?

23. Who plans the budget?
President and advisors set budget proposal (18 mos. in advance)
Until the final draft is due, citizens, Congress, and the President debate issues concerning money allocation
Congress approves final draft
OMB Manages budget

24. Three possible budget outcomes:
BALANCED BUDGET: total revenue = total spending BUDGET SURPLUS: total spending < total revenue BUDGET DEFICIT: total spending > total revenue …sometimes the President plans for one of these conditions…

25. How can government spend money it does not have?
Borrow money by selling government securities (bonds, T-bills, etc)
increases gov. spending (cash available to cover expenses)
But…adds to National Debt (the total amt. of money owed to bondholders)
Right now the estimated national debt is:
Debt Clock

27. Government Spending Expenditures Mandatory: required/fixed by law
Social security, interest to pay national debt
Discretionary: Lawmakers can choose where money should go, fluctuates year to year
Education, defense, research, etc
All government expenditures require a budget that must be planned annually
Altering expenditures and revenue (taxes) is called Fiscal Policy

28. Federal Spending
Mandatory (60%): Money that lawmakers are required by existing laws to spend on certain programs or to use for interest payments on the national debt
Discretionary (40%): Spending about which government planners can make choices

29. Mandatory Spending

30. Discretionary Spending

31. Unit 5 Quiz 2 Notes LT 3 & 4
3) I can explain how the government generates revenue and makes spending decisions. 4) I can explain the two tools the Federal Government uses for contractionary/expansionary fiscal policies.

32. Consider this situation:
Output (GDP) is down
Many people are getting laid off from their jobs
People have less discretionary income, so aggregate demand (spending) is down
Businesses continue to suffer and are forced to lay off more and more workers
WHAT SHOULD THE GOVERNMENT DO?

33. Encourage Economic Growth!
Increase aggregate demand!!!
Prices will rise
Suppliers will want to produce more
People will get hired back to their jobs
People will feel comfortable spending money again
The economy will expand 

34. The use of taxation and government spending to control the economy.
Fiscal Policy
The use of taxation and government spending to control the economy.

35. Role of government in the economy
Classical
Keynesian (John Maynard Keynes)
Recessions caused by events outside market
Wars
Crop failures
Time heals wounds
Market will adjust, return to equilibrium
Gov’t role should be minimal
Gov’t intervention in the economy is the best way to ensure economic stability
Government leaders use fiscal policy to increase overall demand
Cut taxes (more $ for people to spend
Increase gov’t spending (borrow $ to do this, deficit spending)

36. EXPANSIONARY FISCAL POLICY
We call this…
EXPANSIONARY FISCAL POLICY
Tool #1:
Tool #2:
INCREASE
GOVERNMENT SPENDING
CUT
TAXES
Government buys more goods & services
Companies that sell goods to the government earn profits, which they use to pay their workers more & hire new workers
Workers have more money & spend more in shops & restaurants
Shops & restaurants buy more goods and hire more workers to meet their needs
In the short term, government spending leads to more jobs and more output
When tax rates go down, individuals have more money to spend and businesses keep more of their profits
Consumers now have more money to spend on goods and services
Businesses now have more money to spend on land, labor and capital
These actions will increase demand, prices, and output

37. Government Spending and the Multiplier Effect

38. Who gets the tax cut? Keynesian Supporters
Supply-Side Economists
Demand-Side Economists
Keynesian Supporters
Best way to expand economy (Stimulate demand)
Cut individual income tax
Consumers spend tax savings on goods & services
Business will improve
Economy will begin to grow?
“Reaganomics” (Trickle Down)
Best way to expand economy (Stimulate supply)
Cut taxes on businesses & wealthy
Invest tax savings to expand production
Supply of goods increases
Economy will begin to grow?

39. Now, consider this situation:
Fast-growing demand is exceeding supply
Producers who cannot increase output levels are forced to increase their prices
Inflation occurs, cutting into consumers’ purchasing power & discouraging economic growth and stability
WHAT SHOULD THE GOVERNMENT DO?

40. Slow Down Economic Growth!
Decrease aggregate demand!!!
Keep prices low
Suppliers will cut production/lay off workers
Lower production will slow the rate
of growth of the economy
Inflation will not occur
GDP may even decline

41. CONTRACTIONARY FISCAL POLICY
We call this…
CONTRACTIONARY FISCAL POLICY
Tool #1:
Tool #2:
DECREASE
GOVERNMENT SPENDING
INCREASE
TAXES
Government buys less goods & services
There is a decrease in aggregate demand because the government is buying less than before
Prices of goods and services drop
Suppliers produce less & possibly fire workers
Lower production slows down the rate of growth of the economy
Individuals have less money to spend on goods & service, or to save for the future
Businesses keep less of their profits and decrease their spending on land, labor, and capital
As demand decreases, prices fall
Suppliers produce less & possibly fire workers
Lower production slows down the rate of growth of the economy

42. What are the limits of Fiscal Policy?
increasing/decreasing federal spending not easy
Lawmakers argue validity of statistics a rationale
The results of fiscal policy are often delayed, is it working or not?
The President/Lawmakers want to get re- elected and may cut taxes/increase government spending even when it’s not the best thing for the economy!
Coordination between all levels of government is difficult.