1. Taxes, Fiscal Policy, and Macroeconomic Concepts

2. TAXES
“Our new Constitution is now established, and has an appearance that promises permanency; but in the world nothing can be said to be certain except death and taxes.” – Ben Franklin

3. What are taxes?
Tax  Required payment to a local, state, or national government
Primary source of revenue for government
Two limitations
Common defense and general welfare
Federal taxes must be the same in every state

4. Tax bases and tax structures
Tax base  income, property, good, or service that is subject to tax
Individual or corporate Income tax, sales tax, property tax
Proportional taxes  % of income remains the same for all income levels
Ex. “Flat tax”  15%
Progressive taxes  % of income paid in taxes increases as income increases
Ex. Income Tax
Regressive taxes  % of income paid in taxes decreases as income increases
Ex. Sales Tax

5. Characteristics of a Tax
Simple, efficient, certain, fair
Benefits-received principle
People pay based on level of benefit
Ability-to-pay
Pay according to ability
Tax Incidence
If a product is inelastic, a tax will be paid by the consumer
If a product is elastic, a tax will be paid by the producer
Eventually paid by workers

6. Six types of taxes Individual income tax Corporate income tax
Social insurance tax
Excise tax
Estate and gift taxes
Import tax

7. Individual and Corporate Income Tax
Individual  Amount each person owes to the federal government each year
45% of government revenue
Corporate  less than 10%
Pay-as-you-earn
Pay weekly/monthly from check
Employers withhold money from your pay
Estimate of how much you will owe the government
Tax return  form used to file income taxes
Deductions and exemptions
May owe the government, or they may owe you
Income tax is progressive  tax brackets
Rate schedule published each year

8. Taxable income is between
The tax is:
$0 - $9,275
10%
$9,276 - $37,650
15%
$37,651 - $91,150
25%
$91,151 - $190,150
28%
$190,151 - $413,350
33%
$413,351 – $415,050
35%
$415,051 or greater
39.6%

9. Social insurance taxes
FICA  taxes that fund Social Security and Medicare
Majority to Social Security
$780 billion annually
Social security  benefits to people over 65 and disabled
Medicare  national health insurance program for people over 65 and disabled
Unemployment tax
Paid for by employer

10. Other taxes
Excise Tax  general revenue tax on the sale or manufacture of a good
Estate Tax  tax on the estate or value of money and property of a person who had died
Less than $1.5 mil not taxed
Gift Tax  Keep people from avoided estate tax
Import Tax  Tax on imported goods (Tariff)
Tax incentive  Tax on goods to discourage purchase

12. Government Spending

15. Types of spending Mandatory Spending Discretionary Spending
Money that is required by law to be spent on certain programs & interest on debt
Most goes to “entitlement programs”
Continue to rise
Ex. Social Security and Medicare
Discretionary Spending
Spending that government planners can make choices on its use
Ex. Defense and Education

19. Discretionary Spending
Defense spending  dropped since Cold War (20%)
Troops and civilian workers
Everything else
Education
Scientific research
Student loans
Technology
National Parks
Housing
Environment clean-up
Disaster relief
Foreign aid

21. Defense spending

23. Federal Aid to State and Local Governments
State and federal governments share costs of:
some social programs
highway construction
Education
housing,

24. State Government Revenue and Spending
Money from federal and local governments are main source of revenue for state government
Sales tax and Individual income taxes also large contributor
The Georgia (GA) state sales tax rate is currently 4.0%. Depending on local municipalities, the total tax rate can be as high as 8%.
No federal sales tax
Where the money goes:
Education (majority), Public Safety, Highways, Public welfare, Arts and recreation, Administration

25. State Budgets Operating Budget  Budget for day-to-day expenses
Salaries for state employees, office supplies, maintenance
Capital Budget  Budget for major capital, or investment
New facilities, highways
Borrowing
All states but Alaska require a balanced budget
Take in as much as they spend
Revenue = Spending

27. Local Government revenue and spending
Local governments earn revenue from federal and state governments
Also collect from property taxes to pay for schools and road construction and maintenance
Local governments pay for:
Public schools (majority), Law enforcement and fire protection, Libraries, airports, hospitals, Parks and beaches, Public health & transportation, Elections

28. Fiscal Policy

29. Classical Economics
Classical Economics  free markets can regulate themselves
Adam Smith, Friedrich Hayek, Thomas Malthus
Challenged by the Great Depression
Prices fell  demand fell
Classical economics didn’t address length of time for market to reach equilibrium
Led to new thinking  Keynesian Economics

30. Keynesian Economics John Maynard Keynes (pronounced Canes)
Demand-side economics  government spending and tax cuts help an economy by raising demand
Keynesian Economics  demand-side economics that encourages government action to change demand and output

31. New Role for Government
Three parts to an economy
Business, consumers, and government
If consumers and businesses aren’t spending, then the third part needs to spend (government)
Government spending  encourage production  increase employment  spend wages  more production
Continuous cycle
Government would eventually reduce spending

32. Epic Rap Battle of EconomicsVS
John Maynard Keynes
Friedrich Hayek

34. Supply-Side Economics
Supply-side economics  tax cuts can help the economy by raising supply
Laffer Curve  shows effects of taxes
Governments earn no revenue with 0% or 100% taxation
Reducing taxes may encourage workers to work more and may bring in more revenue than with higher taxes

38. Fiscal Policy
Fiscal Policy  use of government spending and revenue (taxing) to influence the economy
Government spends about $400 million per hour, and $3.5 trillion (2013)
Reasons for spending:
Stimulate demand, increase production, create jobs, increase GDP, avoid recessions, control inflation, stabilize economic growth

39. Federal Budget
Federal Budget  plan for federal government’s spending and revenues for a year
Fiscal year  October 1 – Sept. 30
Office of Management and Budget (OMB)  manages federal budget
Appropriations bills  bill that sets money aside for specific spending
President can sign or veto

40. Expansionary Fiscal Policies
Expansionary policies  encourage economic growth
Higher spending and tax cuts
Spending
Buy more goods and services  cause prices to rise  increases production  creates jobs
Lower Taxes
Individuals have more money to spend  businesses earn more profit  more $ to invest in capital  create jobs

41. Contractionary Fiscal Policies
Contractionary Fiscal Policies  Reduce economic growth
Less Spending and higher taxes
Goal is to decrease inflation
Less Spending
Decrease in spending  decrease in demand  lower prices  less production  lay off workers
Higher taxes
Individuals have less money to spend  prices fall and firms have less to spend on capital  less jobs

43. Budget Deficit and National Debt

44. Federal Budget
Raising government spending can lead to budget deficits which add to the national debt
Deficit  amount of $ the government borrows in a year
Debt  sum of deficits from previous years
Balanced Budget  Revenue equals spending
Budget Surplus  Revenue more than spending
Budget Deficit  Revenue less than spending

46. Problems of National Debt
Reduces funds available for businesses to invest
High interest rates
Government spending on interest on debt is less money that can be spent elsewhere