Download Unit 6 - Fiscal Policy

Unit 6 - Fiscal Policy

Fiscal Policy
Governments make decisions
regarding spending and taxation.
Macroeconomics
Unit 6 - Fiscal Policy

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

Fiscal Policy and Keynes
Keynes listed two types of fiscal policy:
1. Discretionary spending (needs government
approval). Examples include bills passed
to change spending on roads, highways,
stadiums, or taxation in order to stimulate
the economy.
2. Automatic stabilizers (already part of
existing programs). Examples include
welfare programs and progressive taxes.
Unit 6 - Fiscal Policy

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

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

Fiscal Policy and the Classical
Theory
Fiscal policy
implementation lags
1. Information lag
2. Policy lag
3. Impact lag
Macroeconomics
Unit 6 - Fiscal Policy

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

Federal Government Expenditures
See our CD, Unit 6, Section 3,
or visit:
http://www.gpoaccess.gov/usbudget/
Federal government spending:
Unit 6 - Fiscal Policy

Federal Government Revenue
See our CD, Unit 6, Section 4.
Or visit:
http://www.gpoaccess.gov/usbudget/
Unit 6 - Fiscal Policy

Federal Government Tax Rates
2011 Individual
Income Tax Brackets
for a single person
Marginal Tax Rate
2011 Brackets for
Married Households
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.
2.
3.
4.
Keep them the same
Lower them for everyone
Raise them for everyone
Lower them for
households earning less
than $200,000 and raise
them for higher incomes
5. Don’t know
0 of
30
10
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.
2.
3.
4.
5.
0 of 30
22%
37%
52%
71%
82%
:10
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.
2.
3.
4.
5.
6.
0 of 30
0%
3%
10%
22%
30%
50%
:10
Federal government spending:
Unit 6 - Fiscal Policy

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

Alternative Tax Plans
The Flat Tax
 All income groups pay the same tax
percentage.
 No or very few tax deductions.
 Easy to complete tax returns.
 Less need for tax accountants and tax
auditors.
 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

Alternative Tax Plans
The Consumption Tax
 No more individual income taxes (complicated).
 Taxes on consumption only.
 Easy to administer.
 More incentive to save.
 Even drug dealers pay taxes.
 It is a regressive tax, unless essential
products are exempt.
Which tax system do you
prefer?
1.
2.
3.
4.
5.
6.
0 of
30
Our current income tax
system
Our current income tax
system, but with lower rates
Our current income tax
system, but with higher
rates for some groups
A Flat tax system
A consumption tax system
Other
30
Federal government spending:
Unit 6 - Fiscal Policy

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

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

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
U.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

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

State and Local Government Spending
and Revenue
For expenditure and revenue data,
see CD, Unit 6, Section 5.
Unit 6 - Fiscal Policy

Estimated Taxes Paid by a Typical U.S. Worker
1. Federal average income tax after deductions: 12%
2. FICA tax: 7.65%
3. Federal excise tax: .35%
4. State sales tax as % of total income: 3.5%
5. State income tax after deductions: 4%
6. Other state taxes: 2%
7. County income tax after deductions: 2%
8. County property tax as a % of total income: 3%
9. Other county taxes: .5%
10. Corporate or self employment taxes: 3%
Total estimated taxes as a % of total income: 38%.
Macroeconomics
Unit 6 - Fiscal Policy

Public Choice
is the analysis of the effectiveness of
government (public sector) spending.
Topics include:
 Non-profit nature of government
 Special interest groups
 Short-run versus long run considerations
 Capture theory
 End-of-fiscal year spending
Macroeconomics