Unit 6 - Fiscal Policy - Inflate Your Mind by hcj

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									       Unit 6 - Fiscal Policy


q   Fiscal Policy

    Governments make decisions
    regarding spending and taxation.




                                 Macroeconomics
       Unit 6 - Fiscal Policy


q   Fiscal Policy and Keynes

    Keynes encouraged governments to
    increase spending and/or decrease
    taxes during recessions,
    and the opposite during expansions.


                                 Macroeconomics
     Federal government spending:
       Unit 6 - Fiscal Policy
q   Fiscal Policy and Keynes

    Keynes listed two types of fiscal policy:
    • Discretionary spending (needs government
      approval). Examples include bills passed to
      change spending on roads, highways,
      stadiums, or taxation in order to stimulate
      the economy.
    • Automatic stabilizers (already part of
      existing programs). Examples include
      welfare programs and progressive taxes.
       Unit 6 - Fiscal Policy

q   Fiscal Policy and Classical Economists

    The classical theory supports
    government spending
    only on essential functions, but
    not as a way to stimulate
    the economy.

                                   Macroeconomics
        Unit 6 - Fiscal Policy
q   Fiscal Policy and the Classical Theory
    Classical economists
    believe that government
    stimulation is harmful
    in the long run, because it:

1. Raises inflation
2. Raises interest rates,
3. Slows down the economy
   in the long run.
4. Is subject to lags
   in the implementation.
                                       Macroeconomics
         Unit 6 - Fiscal Policy
q   Fiscal Policy and the Classical
    Theory

    Fiscal policy
    implementation lags
    1.   Information lag
    2.   Policy lag
    3.   Impact lag

                             Macroeconomics
         Unit 6 - Fiscal Policy
q   United States Government Levels

    Government spending and taxation
    occurs at the following levels in the
    United States:

    1.   Federal (national)
    2.   State
    3.   Local (county and city)

                                   Macroeconomics
    Federal government spending:
     Unit 6 - Fiscal Policy

q   Federal Government Expenditures

      See our CD, Unit 6, Section 3,
      or visit:
      http://www.gpoaccess.gov/usbudget/
Federal government spending:
    Unit 6 - Fiscal Policy

q   Federal Government Revenue

    See our CD, Unit 6, Section 4.
    Or visit:
    http://www.gpoaccess.gov/usbudget/
           Unit 6 - Fiscal Policy
     q   Federal Government Tax Rates
2011 Individual       Marginal Tax Rate   2011 Brackets for
Income Tax Brackets                       Married Households
for a single person                       Filing Jointly
$0                    10%                 $0
$8,500                15%                 $17,000
$34,500               25%                 $69,000
$83,600               28%                 $139,350
$174,400              33%                 $212,300
$379,150              35%                 $379,150
       (Survey) Regarding our tax rates
        in the United States, we should:
1. Keep them the same
2. Lower them for everyone
3. Raise them for everyone
4. Lower them for
   households earning less
   than $200,000 and raise
   them for higher incomes
                                           10
5. Don’t know
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      In 2008, the top 10% of all income earners
      (households) in the U.S. (income higher than
      $109,000) paid approximately ___ of all federal
      income taxes

    1.    22%
    2.    37%
    3.    52%
    4.    71%
    5.    82%


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      In 2008, the bottom 50% of all income earners
      (households) in the U.S. (incomes lower than
      $32,000) paid approximately ___ of all federal
      income taxes

    1.    0%
    2.    3%
    3.    10%
    4.    22%
    5.    30%
    6.    50%

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     Federal government spending:
      Unit 6 - Fiscal Policy
q   Federal Tax Burden

    The top 25% (household income
    higher than $65,000) paid 86% of all
    federal income taxes in 2008.

    For a breakdown of the burden of tax
    of all income groups in the United
    States, see our CD, Unit 6, Section 4.
        Federal government spending:
          Unit 6 - Fiscal Policy
q   Alternative Tax Plans

    The Flat Tax
    Ø All income groups pay the same tax
    percentage.
    Ø No or very few tax deductions.
    Ø Easy to complete tax returns.
    Ø Less need for tax accountants and tax
    auditors.
    Ø Will taxes go down for the wealthy and up for
    the poor? (some plans exempt incomes below
    $30,000 though)
       Federal government spending:
        Unit 6 - Fiscal Policy
q   Alternative Tax Plans

    The Consumption Tax
    Ø No more individual income taxes (complicated).
    Ø Taxes on consumption only.
    Ø Easy to administer.
    Ø More incentive to save.
    Ø Even drug dealers pay taxes.

    Ø It is a regressive tax, unless essential
      products are exempt.
         Which tax system do you
                 prefer?
  1.   Our current income tax
       system
  2.   Our current income tax
       system, but with lower rates
  3.   Our current income tax
       system, but with higher
       rates for some groups
  4.   A Flat tax system
  5.   A consumption tax system
  6.   Other                          30
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     Federal government spending:
      Unit 6 - Fiscal Policy
q   Effects of a Tax Cut

    Let’s say Congress decides to cut taxes
    across the board by 10%.
    Who benefits?

    Consider 4 households:
    Household 1 pays $0 in taxes.
    Household 2 pays $4,000 in taxes.
    Household 3 pays $30,000 in taxes.
    Household 4 pays $100,000 in taxes.
     Federal government spending:
      Unit 6 - Fiscal Policy
q   Effects of a Tax Cut

    Household 1 saves $0.
    Household 2 saves $400.
    Household 3 saves $3,000.
    Household 4 saves $10,000.

    Household 1 saves nothing.
    Household 4 saves the most.

    Do tax cuts benefit the wealthy?
     Federal government spending:
       Unit 6 - Fiscal Policy
q   Effects of a Tax Cut

     The Laffer Curve
                           An increase in tax
                           rates at lower rates
                           increases government
                           tax revenue.
                           An increase in tax
                           rates at higher rates
                           decreases government
                           tax revenue.
             Unit 6 - Fiscal Policy
qU.S. Federal Expenditures and Tax Revenue as a
Percentage of GDP
Year              Revenue      Expenditures

1930              4.2          3.4

1940              6.8          9.8

1944              20.9         43.7

1960              17.8         17.8

1980              18.9         21.6

2007              17.6         20.1

2009              18.5         28.3

2011 (est)        14.8         26.0
        Unit 6 - Fiscal Policy
q   U.S. Federal Expenditures and Tax
    Revenue as a Percentage of GDP

     Website with federal government spending
     and revenue information:
     http://www.whitehouse.gov/omb/budget



                                 Macroeconomics
    Federal government spending:
      Unit 6 - Fiscal Policy

q   State and Local Government Spending
     and Revenue

    For expenditure and revenue data,
    see CD, Unit 6, Section 5.
           Unit 6 - Fiscal Policy
q   Estimated Taxes Paid by a Typical U.S. Worker

    • Federal average income tax after deductions: 12%
    • FICA tax: 7.65%
    • Federal excise tax: .35%
    • State sales tax as % of total income: 3.5%
    • State income tax after deductions: 4%
    • Other state taxes: 2%
    • County income tax after deductions: 2%
    • County property tax as a % of total income: 3%
    • Other county taxes: .5%
    • Corporate or self employment taxes: 3%
    Total estimated taxes as a % of total income: 38%.

                                           Macroeconomics
        Unit 6 - Fiscal Policy
q   Public Choice

    is the analysis of the effectiveness of
    government (public sector) spending.
    Topics include:
    Ø Non-profit nature of government
    Ø Special interest groups
    Ø Short-run versus long run considerations
    Ø Capture theory
    Ø End-of-fiscal year spending

                                   Macroeconomics

								
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