1. Taxes, spending, fiscal policy, deficits, surpluses, national debt
UNIT 3 MACROECONOMICS
Taxes, spending, fiscal policy, deficits, surpluses, national debt

2. TAX STRUCTURES
Proportional tax- % of income paid is the same for all income levels
Progressive tax- % of income paid increases as income increases
Regressive tax- % of income paid decreases as income increases

4. CHARACTERISTICS OF A GOOD TAX
Simplicity-easy to understand
Efficiency-computed easily and inexpensively
Certainty-people know when they’re due, how much to pay, etc.
Equity-should be fair

5. TYPES OF TAXES Income tax- % of income Sales tax- % of a good’s price
FICA taxes- fund Social Security and Medicare
Property taxes- based on property value
Corporate income tax- % of a company’s profits
Excise tax- tax on the sale/manufacture of a good

6. Gift tax- tax on money or property that one person gives to another
Estate tax- tax on the value of the money and property of a person who has died
Gift tax- tax on money or property that one person gives to another
Tariffs- taxes on imported goods

7. FEDERAL GOVT SPENDING
Mandatory spending- spending on programs required by current law
Interest on the national debt
Entitlement programs- if people meet requirements they receive benefits
Discretionary spending- choices made about spending
National defense
Education
Foreign aid
Scientific research
Much more

8. Flat Tax

9. Use of govt spending and taxes to influence the economy
Fiscal Policy
Use of govt spending and taxes to influence the economy
The federal budget is developed by Congress and the president for a fiscal year: Sept 30-next Oct 1
The president develops his budget with the OMB (Office of Management and Budget)
Congress develops its budget with the help of the CBO (Congressional Budget Office)
In addition to funding govt agencies, the budget is used to move the economy in the desired direction

10. Expansionary policies- lower taxes and higher spending to promote growth
More govt. spending increases AD
This pushes up prices
Gives producers incentive to make more output
More workers are hired
Tax cuts work in similar fashion

11. Contractionary/restrictive policies- higher taxes and lower spending to reduce economic growth
Less govt. spending decreases AD
This pushes down prices
Gives producers incentive to make less output
Workers may be laid off
Inflation comes under control
Higher taxes work in similar fashion

12. LIMITS OF FISCAL POLICY
Hard to change spending
Predicting the future
Delayed results
Political pressures
Coordinating policy with the states and the Federal Reserve’s monetary policy

13. FISCAL POLICY OPTIONS
Classical economics-the market should regulate itself
In the long run downturns will end
Great Depression questioned this thinking

14. Keynesian (demand side) economics- the economy is made up of three sectors: individuals, businesses, and govt
The government should track spending to be sure it’s enough for the economy to run at full capacity
Govt should intervene by adjusting spending/ taxes to deal with/prevent recession/ unemployment and inflation by influencing AD
Multiplier effect-every dollar of govt spending creates > than a dollar in economic activity

15. Supply-side economics- focuses on moving AS by lowering taxes to help the economy
Argues that tax cuts will increase employment so much that the govt will collect more revenue than with higher taxes

16. Automatic stabilizers-govt programs that change automatically depending on GDP and personal income
When income is high, tax revenues rise and govt spends less on transfer payments-helps keep the economy from overheating
When income is low, tax revenues fall and govt spending on transfer payments rise stimulating the economy

17. DEFICITS, SURPLUSES, AND THE NATIONAL DEBT
Budget deficit- government spending exceeds tax collection
Budget surplus- tax collection exceeds spending
National debt- all the money the federal government owes to bondholders

18. IS THE DEBT A PROBLEM? Govt borrowing “crowds out” private borrowing
Govt must pay the interest on the debt that might be spent elsewhere
Some argue increasing the debt is worth it to increase output and employment

19. POVERTY
Poverty rate- % of people who live in households below the official poverty line
Causes of poverty
Lack of education
Location
Discrimination
Economic shifts
Changes in family structure