1. Introduction to Macroeconomics
Chapter 25
Taxes, Deficits, and the Debt

2. Taxes, Deficits & the Debt
1. Tax Structures
2. Discretionary vs Automatic Fiscal Policy
3. Fiscal Policy and the Budget
4. Deficits, Debt, and Fiscal Policy

3. 1. Tax Structure Types of Taxes - Average Tax Rates
Regressive Tax - average tax rate declines with increases in income
Porportional Tax - tax rate is a fixed percentage of income
Progressive Tax - average tax rate increases with increases in income
Regressive Tax:
Social Security tax
Proprtional Tax:
sales tax
excise tax
property tax
Progressive Tax:
income tax

4. 1. Tax Structure Average Tax Rates

5. 1. Tax Structure Marginal Tax Rates
Marginal Tax Rate - tax rate that applies to each additional dollar of income
Regressive Tax
marginal tax rate < average tax rate
Proportional Tax
marginal tax rate = average tax rate
Progressive Tax
marginal tax rate > average tax rate

6. 1. Tax Structure Marginal Tax Rates - Income Tax

7. 2. Discretionary vs Automatic Policy Definitions
Discretionary Fiscal Policy
government spending or taxes that can be changed by policy makers
Automatic Fiscal Policy
desirable automatic changes in government spending or taxes that occur without policymakers taking action
Discretionary Policy:
Changes to government spending
Tax rebates
Change in tax rates
Automatic fiscal policy
Income tax
Unemployment compensation

8. 2. Discretionary vs Automatic Policy Automatic Stabilizers
Automatic Stabilizers - Automatic fiscal policy changes that reduce the strength of upswings or downswings in the economy (i.e., are countercyclical)
Examples:
income taxes
unemployment benefits

9. 2. Discretionary vs Automatic Policy Automatic Stabilizers

10. 3. Fiscal Policy and the Budget Definitions
Budget Surplus / Deficit
amount by which government tax revenues exceed / fall short of government spending
Debt
total accumulated value of budget surplus or deficit

11. 3. Fiscal Policy and the Budget Government Expenditures Share of GDP
Source: Bureau of Economic Analysis, National Income and Product Accounts

12. 3. Fiscal Policy and the Budget Where Federal Spending Goes
Defense
Retirement
Other Domestic
Retirement: Social Security, Medicare, other retirement payments
International

13. 3. Fiscal Policy and the Budget Deficits Over Time

14. 3. Fiscal Policy and the Budget Deficits as a Percentage of GDP

15. 3. Fiscal Policy and the Budget Total U.S. Debt

16. 3. Fiscal Policy and the Budget Total U.S. Debt as a Percentage of GDP

17. 3. Fiscal Policy and the Budget External Debt as a Percentage of GDP
External debt as a share of GDP for 195 countries
Source: CIA World factbook

18. 3. Fiscal Policy and the Budget Budget Balancing Options
Cyclically Balanced Budget
budget deficit during recessions
budget surplus during inflationary booms
budget balances over full business cycle
Benefits
allows use of discretionary policy
Costs
reduces budget discipline
deficits crows out investment

19. 3. Fiscal Policy and the Budget Budget Balancing Options
Balanced Budget Amendment
Benefits
no crowding out of investment
less price inflation
Costs
inhibits use of discretionary policy
eliminates benefits of automatic stabilizers

20. 4. Deficits, Debt, and Fiscal Policy Deficits and Crowding Out
Crowding Out - government deficit spending increases the real interest rate, which reduces (crowds out) investment spending
deficit financed by borrowing money (sell bonds to public)
price of bonds falls
interest rate rises
reduction in investment demand