Fiscal Policy

Taxing, Spending, & Borrowing Policies of the Federal Government—done by Congress

Types of Taxes:Determined by the percentage of a person’s income paid to taxes

Federal tax revenues are controlled by the Internal Revenue System…part of the Department of Treasury

Proportional (flat tax) same % of income of all income earners $100,000 X 5% = $5,000; $10,000 X 5% = $500 Ex. Is social security—up to $106,800 after that amount, it is regressive Ex. Is property tax—in California 1.05% of assessed value

Progressive (or graduated)--% of income taxed increases as income rises Ex. Is income tax, estate tax, gift tax $24,000 X 15% = $3600; $263,000 X 39% = $102,570

Regressive--% of income taxed decreases as income rises Ex. social security after $106,800 Ex. excise tax, sales tax Ex. sales tax (spend a higher portion of their income on necessities)

purchase of $100 X 7.25% = $7.25; $7.25/$100,000=.00725% purchase of $100 X 7.25% = $7.25; $7.25/$10,000 = .0725%

The most progressive taxes

Graduated Tax Brackets for Federal Income Taxes

If you are single:10%--$0-$835015%--$8350-$33,95025%--$33,950-$82,25028%--$82,250-$171,55033%--$171,550-$372,95035%--$372,950 and greaterThis is just the percentage of the federal

income tax you pay. You still pay many other taxes.

In 1954 the highest tax bracket was 91%

Taxes Collected: see handout

Income tax—became constitutional under the Sixteenth Amendment in 1913 automatically deducted from paycheck progressive IRS is in charge of collecting accounts for 43.6% of federal tax receipts First passed in 1913 as the 16th Amendment

Payroll tax (Social Security) deducted from paycheck employer must match it funds social security, unemployment compensation, Medicare accounts for 36.9% fastest growing source of federal tax income-created in 1933 under New Deal

Corporate Income tax—levied on corporations after all expenses have been paid accounts for 9.3% of tax receipts critics argue it results in double taxation

tax on corporation; tax on dividends when paid out stockholders pay at personal level and corporate level

Other Taxes excise taxes-imposed on manufacturers of certain items who then pass it on to the customer---

tobacco, cigarettes, gas, car tax…aka sin tax tariffs or custom duties—imposed on imports

discourages Americans from buying imported goods high tariffs can result in trade war

Federal Revenues

Fiscal Policy Strategies Supply-side economics—achieving economic stability by increasing the

supply of goods/services. Milton Friedman fathered the theory and Ronald Reagan made famous as “trickle-

down economics” or “Reaganomics” Done by lower taxes to businesses and wealthy to encourage business investment.

Increased supply lowers price. Leads to increases production, meaning more workers need hired. Creating more jobs leads to increased spending and lower unemployment.

Also done by reduced regulation on business “laissez-faire” because it leads to increased production costs

What if businesses/ wealthy individuals don’t invest, but spend? Increase demand leading to inflation

Favored by Republicans Demand-side economics—increasing economic growth through the

government’s influence on aggregate demand. John Maynard Keynes fathered this theory in 1936 designed to increase

government spending and was made famous by FDR. Can lead to high national debts if not done correctly Involves gov’t drastically increasing spending and cutting taxes during a recession

and cutting spending and raising taxes when recession ends. Which part do you think rarely happens?

Favored by Democrats

Tools of Fiscal Policy Tax Rates

Recession—lower taxes to increasing spending, aggregate demand Inflation—raise taxes to decrease spending, aggregate demand

Tax Incentives—special tax break to businesses to encourage investment spending

Investment tax credit—deduct new capital spending from corporate taxes

Recession—increase tax incentives Inflation—decrease tax incentives

Government Spending Recession—increase government spending, aggregate demand Inflation—decrease government spending, aggregate demand

Public Transfer Payments Recession—increase unemployment compensation, aggregate demand Inflation—decrease unemployment compensation, aggregate demand

Progressive Income Taxes Recession—drops people into lower income bracket, paying less taxes Inflation—puts people into higher income bracket, paying more taxes

Limitations on Fiscal Policy Timing Problems

identifying problem compromising a solution economic actors reaction of policy

Political Pressures—determined by elected officials restrictive fiscal policy—increases taxes, reduce gov’t

spending expansionary fiscal policy—decreases taxes,

increases gov’t spending Unpredictable economic behaviors Lack of Coordination among gov’t policies

dealing with monetary policy dealing with local/ state gov’t taxing policies

Federal Budgets Federal Budget Deficits—refer to pg. 494

Find any surpluses What have the largest deficits occurred?

Budget deficit—gov’t spends more than it collects Budget surplus—gov’t spends less than it collects Deficit spending—spending more money for its

programs than is able to be covered by taxes Reasons for Deficit Spending

National emergencies Providing public goods Stimulate the economy

Federal Spending

National Debt National Debt—total amount of money the

gov’t has borrowed Growth of Debt—refer to chart on pg. 496-

497 When did largest growth occur? Why? How long did it take to get $1 trillion in debt? How long did it take to add another $4 trillion?

Debt Ceilings—largest amount debt can reach; always adjusted when it approaches

Impact—in 2008 $240 billion paid on interest alone

National Debt

Holders of our National Debt

Foreign Holders of National Debt

Balancing the Federal Budget

Increasing Revenues—raising taxes Decreasing Expenditures—cutting

spending Why will this never happen?

Review Questions What category of taxes are hardest on the poor? Give examples. What category of taxes are hardest on the wealthy? Give examples Which specific tax accounts for the largest share of federal revenue? Explain Supply-side economics? Who developed it? Who championed it?

What party supports it? Explain Demand-side economics? Who developed it? Who championed it?

Which party supports it? What is restrictive fiscal policy? Which economic problem is it designed to

correct? What is expansive fiscal policy? Which economic problem is it designed to

correct? Who enacts fiscal policy? There are five fiscal policy tools. What would Congress do to each if

practicing expansive fiscal policy? Restrictive fiscal policy? What is the approximate federal debt? What caused it? What is deficit spending and why do we do it?