benjamin franklin said, "the only things certain in life are death and taxes." "the...

• Benjamin Franklin said, "The only things certain in life are death and taxes."

• "The hardest thing in the world to understand is the income tax." -- attributed to Albert Einstein

• "Death and taxes may be certain, but we don't have to die every year." – Unknown

• "People who complain about taxes can be divided into two classes: men and women." – Unknown

Tax Quotes

• Tax – a required payment to a local, state, or national government– Income, sales, property, capital gains, etc.

• Revenue – income received by the government from tax collection

• Tax Base – income, property, good or service that is subject to a tax

Chapter 14 – Taxes and Government SpendingSection 1 – What are Taxes?

• Proportional Tax – % of income taxes remains the same for all income levels (Flat tax)

• Progressive Tax – % of income paid in taxes increases as income increases (Federal Income Tax)

• Regressive Tax - % of income paid in taxes decreases as income increases (Sales Tax)

Tax Structures

1. Simplicity – easy to understand, keep records, prepare tax forms, anticipate amount of taxes

2. Efficiency – easy to collect, taxpayers should not pay too much or take too much time to pay

3. Certainty – clear due dates, amount to be paid, how to pay

4. Equity – fair, so not one person bears too much or too little of the tax burden

Characteristics of a Good Tax

• “Pay-As-You-Earn” Taxation – taxes are paid based on annual income; individuals pay income taxes throughout the year

• Tax Withholding – tax payments taken out of employees pay before they receive it; ensures annual payment

• Tax Return – form used to file income taxes; declare income and taxable income

Individual Income Taxes

$934.00

• Taxable Income – A person’s gross income minus exemptions and deductions

• Personal Exemptions – set amounts that you subtract from your gross income – 0, 1, 2, 3, 4, 5, 6, etc.

• Deductions – amounts you can subtract, or deduct from your gross income.– Interest on a home, children, charity, religious, education, etc.

• Tax Bracket – scheduled rate at which you are taxed based on your annual income


• FICA (Federal Insurance Contributions Act) – funds Social Security and Medicare.

• Social Security – funds people of old-age, survivors and disabilities, established in 1935, originally to provide old-age pensions of workers

• Medicare – national health insurance program that helps pay for people over age of 65 or with certain disabilities

• Medicaid – national health insurance for people within the poverty threshold

• Unemployment – insurance for workers laid off through no fault of their own

Corporate Income Taxes

• Excise tax – tax on gasoline, cigarettes, alcohol, phone service, cable, internet, etc.

• Estate tax – “death tax”, tax on estate or value of money and property of a person who has died

• Gift tax – tax on money or property that one living person gives to another; a person can give up to $10,000 a year tax-free per individual

• Tariff – import tax on foreign goods brought into the country

Other Types of Taxes

Stossel Taxes

• Out of the 3.5 Trillion dollars of U.S. federal budget, break down in percentages the amount that you think should go towards the following areas of the economy:

Budget

Category Percentage Allocated

Dollars

Social Security 19.63 $ 695 billion

National Defense 18.74 $ 664 billion

Unemployment/Welfare

16.13 $ 571 billion

Medicare 12.79 $ 453 billion

Medicaid 8.19 $ 290 billion

Interest on Debt 4.63 $164 billion

Education 1.32 $ 46.7 billion

Other 18.0 $ 635 billion

• Fiscal Policy – the use of government spending and revenue collection to influence the economy– Expansionary Fiscal Policy – involves increased government spending to stimulate the

economy during or in anticipation of a business-cycle contraction– Contractionary Fiscal Policy - a decrease in government spending to slow the economy

down during an inflationary economy• Federal budget – a written document indicating the amount of money the government

expects to receive and how they will spend it– Released the first Monday in February each year

• Fiscal year – 12 month period, October 1 – September 30

Fiscal Policy and The Federal Budget

• Step 1 – Federal agencies request money; spending proposals are sent to the Office of Management and Budget (OMB)

• Step 2 – The OMB works with the President to create a budget, President presents to Congress

• Step 3 – Congress makes changes to the budget and sends the amended budget to the President

• Step 4 – The President signs the budget into law

Creating The Federal Budget

Step 1 → Step 2 → Step 3 → Step 4

http://upload.wikimedia.org/wikipedia/commons/f/fa/United_States_Department_of_the_Army_Seal.svg

• Mandatory Spending – programs that lawmakers are required by existing laws to spend money on (Social Security, Medicare, Medicaid, etc.)

• Discretionary Spending – spending that government can adjust; increase or decrease (Defense, environment, scientific research, etc.)

Federal Spending

Budget Deficits and the National Debt

• Balanced budget – money going into the U.S. Treasury is the same amount of money going out– Revenue = Spending– The last balanced budget occurred in 1997 under

President Bill Clinton

Budget Deficits and the National Debt

• Budget Surplus – occurs when the government takes in more than it spends– Revenue > Spending

• Budget Deficit – occurs when the government spends more than it takes in– Revenue < Spending

Balancing the Budget

• Create money – the government can print or inject money into economy

• Borrow money – government borrows money by selling bonds– Bond is a type of loan with a promise to repay with interest– Bonds sold domestically or globally– China owns 1 trillion dollars in U.S. bonds

Dealing with a Budget Deficit

• National debt – the total amount of money the federal government owes overall to bondholders– Combination of all borrowing over time

• Budget deficit – the amount of money the government owes to bondholders in one fiscal year

The National Debt

Mandatory and Discretionary Spending Chart pgs. 371-373Mandatory Spending Description

Entitlements

Social Security

Medicare

Medicaid

Other Mandatory Spending Programs

Discretionary Spending

Description

Defense Spending

Other Spending

Social welfare programs that people are “entitled to” if they meet certain eligibility requirements.

The largest category of federal spending. More than 50 million retired or disabled people and their families and survivors receive monthly benefits.

Serves around 40 million people, most over 65 years old. Pays for hospital care and the costs of physicians and medical services.

A program that benefits low-income families, disabled and elderly people in nursing homes. Largest source of funds for medical and health related services for people within the poverty threshold.

Food stamps, supplemental security income and child nutrition, retirement benefits and insurance for federal workers, veterans pensions and unemployment.

Pays the salaries of people in the army, navy, air force, marines and civilian employees. Largest portion of discretionary spending.

Education, training, scientific research, student loans, technology, national parks and monuments, law enforcement, environmental cleanup, housing.

Expansionary and Contractionary Fiscal Policies, pgs. 389-390

Word Definition Description

Expansionary Fiscal Policies

1. Purpose2. Increase in

government spending

3. Cutting Taxes

Contractionary Fiscal Policies

1. Purpose2. Decrease in

government spending

3. Increasing Taxes

PriceLevel

(CPI/GDP Deflator)

Model of aggregate demand & aggregate supply

Model used to explain short-run fluctuations in economic activity around its long-run trend

Aggregate - sum of all supply and demand in an economy Two variables:

Economy’s output of goods and services Average level of prices (CPI or GDP Deflator)

Quantity of Output (GDP)

Equilibriumprice level

Aggregate supply (AS)

Aggregate demand (AD)

Equilibriumoutput

Aggregate Demand

Aggregate-demand curve – Sum of C+I+G+NX (real GDP) at each price level– Downward sloping– Low price levels increase the quantity of goods and

services, vice versa

PriceLevel

(CPI/GDP Deflator)

Quantity of Output (GDP)

Aggregate demand (AD)

Why the AD Curve Might Shift?

• Shifts arising from changes in consumption– Decreases in spending – people become more concerned with saving

and paying off debt because of a recession– Increases in spending – people’s fear of a recession ends; consumption

increases

• Shifts arising from changes in investment– Change in firm investing – tax policy, pessimism about economy in

future, interest rates

• Shifts arising from changes in government purchases– Congress increases/decreases spending

• Shift arising from changes in net exports– Global recessions would cause a decrease in demand for U.S. products

What Shifts the Aggregate Demand Curve?PriceLevel

Quantity of Output

A B C

Situation Change in AD New AD Curve

Congress cuts taxes

Business spending decreases

Government spending increases; no new taxes

Survey shows consumer confidence jumps

Stock collapses; investors lose billions

President cuts defense spending by 20%; no increase in domestic spending

C

A

C

C

A

A

The Aggregate Supply Curve• AS curve – total quantity of goods and services firms can

produce and sell at any given price level• Aggregate-supply curve is upward sloping• What shifts the curve?

– Temporary changes in Land, Labor, Capital

27

What Shifts the Aggregate Supply Curve?PriceLevel

Quantity ofOutput

A B C

Situation Change in AS New AD Curve

Unions grow more aggressive; wage rates increase

OPEC successfully increases oil prices

Labor productivity increases dramatically

Giant natural gas discovery decreases energy prices

Computer technology brings new efficiency

Research shows that improved schools have increased the skills of American workers

A

A

C

CC

C

Aggregate Demand or Supply?Scenario AD or AS

1. A factory

2. A printing press

3. A woman buys a hamburger for her child

4. A U.S. company sells a jet to a foreign country

5. A company builds a new factory

6. Trees

7. A corn field

8. A coal mine

9. Students purchase tickets for a football game

10. Two newlyweds buy a house

ASAS

ADADAD

AS

AS

AS

ADAD

Difference between Monetary and Fiscal Policy

Monetary Policy Fiscal Policy

Agency

Structure

Focus

Expansionary Policy

Contractionary Policy

Head Official

Federal Reserve Federal Government

1 Central Bank, 12 Districts President and Congress

Money Supply and Banking Federal Budget

Tools for Policymaking OMOs, RRR, Discount Rate (Interest Rates)

Government Spending, Taxation

Buy bonds, lower RRR and DR

Spend more, tax less

Sell bonds, raise RRR and DR Spend less, tax more

Ben Bernanke Barack Obama

AD AS Scenarios1. A significant increase in world oil prices2. Government announces a large increase in spending on health and education3. Average wage rises way above inflation for the third month running4. Exchange rate appreciation knocks export hopes for manufacturing5. US productivity levels at their highest level for 10 years6. A booming stock market leads to highest rate of retail sales in a century

31

PriceLevel

Quantity ofOutput

Pe

AS

AD

Y

AS1

Y1

Pe1


32

PriceLevel

Quantity ofOutput

Pe

AS

AD

Y

AD1

Y1

Pe1


33

PriceLevel

Quantity ofOutput

Pe

AS

AD

Y

AS1

Y1

Pe1


34

PriceLevel

Quantity ofOutput

Pe

AS

AD

Y AD1Y1

Pe1


35

PriceLevel

Quantity ofOutput

Pe

AS

AD

Y

AS1

Y1

Pe1


36

PriceLevel

Quantity ofOutput

Pe

AS

AD

Y

AD1

Y1

Pe1

Tools of Fiscal Policy ChartFiscal Policy Expansionary/

ContractionaryExplanation

1. The government cuts business and personal income taxes and increases its own spending.

2. The government increases the personal income, Social Security and corporate income tax.

3. Government spending goes up while taxes remain the same.

4. The government reduces the wages of its employees while raising taxes on consumers and businesses.




Expansionary Decreased taxes increase C & I. Increase in government spending increases G.Shifts AD to the right.









Contractionary I & C decrease because of the tax increase.Shifts AD to the left.










Expansionary Higher government spending without a corresponding rise in tax receipts increases G.Shifts AD to the right.









Expansionary Higher government spending without a corresponding rise in tax receipts increases G.Shifts AD to the right.


Contractionary Reduction in government spending results in a decrease in AD.Increases in taxes reduces C + I.Shifts AD to the left.

Effects of Fiscal Policy ChartScenario Expansionary/

ContractionaryEffect on Federal Budget

Objective for Aggregate Demand

Action on Taxes

Action on Gov’tSpending

Effect on the National Debt

1. National unemployment rate rises to 12%

2. Inflation is strong at a rate of 14% per year.

3. Surveys show consumers are losing confidence in the economy, retail sales are weak and business inventories are increasing rapidly

4. Business sales and investment are expanding rapidly, and economists think strong inflation lies ahead.

5. The government eliminates the deductibility of interest expense for tax purposes

Expansionary

Contractionary

Expansionary

Contractionary

Move toward a deficit

Move toward a surplus

Move toward a deficit

Move toward a surplus

ContractionaryMove toward a surplus

Chapter 15 Practice Worksheet1. If a country’s central bank were to engage in activist stabilization policy, in which direction should it move the money supply in response to the following events?a. A wave of optimism boosts business investment and household

consumption causing price levels to increase.• Decrease the money supply

b. To balance its budget, the government raises taxes and reduces expenditures causing a slowdown in the economy.• Increase the money supply

c. OPEC raises the price of crude oil causing people’s disposable income to reduce.• Increase the money supply

d. The taste for the country’s products amongst the residents of other countries declines.• Increase the money supply

e. The stock market falls.• Increase the money supply

Chapter 15 Practice Worksheet2. In which direction should the Federal Reserve move interest rates in response to the following events?

a. A wave of optimism boosts business investment and household consumption causing price levels to increase.• Increase interest rates

b. To balance its budget, the government raises taxes and reduces expenditures causing a slowdown in the economy.• Decrease interest rates

c. OPEC raises the price of crude oil causing people’s disposable income to reduce.• Decrease interest rates

d. The taste for the country’s products amongst the residents of other countries declines.• Decrease interest rates

e. The stock market falls.• Decrease interest rates

Chapter 15 Practice Worksheet3. If policy makers were to use fiscal policy to actively stabilize the economy, in

which direction should they move government spending and taxes?

a. A wave of optimism boosts business investment and household consumption causing price levels to increase.• Decrease spending, increase taxes

b. To balance its budget, the government raises taxes and reduces expenditures causing a slowdown in the economy.• Increase spending, decrease taxes

c. OPEC raises the price of crude oil causing people’s disposable income to reduce.• Increase spending, decrease taxes

d. The taste for the country’s products amongst the residents of other countries declines.• Increase spending, decrease taxes

e. The stock market falls.• Increase spending, decrease taxes

1. What does a states operating budget pay for? List examples.

2. What does a state’s capital budget pay for? List examples

3. How do the state budgets differ from the federal government?

4. Where are taxes spent? List and describe each of the following:1. Education2. Public Safety3. Highways and Transportation4. Public Welfare5. Arts and Recreation6. Administration

Daily Assignment QuestionsState and Local Taxes and Spending, pgs. 375-376

Flow Chart Types of Taxes, pgs. 365-369


Corporate Income Taxes

Social Security, Medicare and

Unemployment Taxes

Other Types of Taxes

Types of Taxes

1. Pay-As-You-Earn Taxation

2. Tax Withholding

3. Tax Return

4. Taxable Income

5. Personal Exemptions

6. Deductions

7. Tax Brackets

1. Impact on Federal Budget

2. Deductions

3. Progressive structure of Corporate taxes

1. FICA

2. Social Security

3. Medicare

4. Unemployment Taxes

1. Excise Taxes

2. Estate Taxes

3. Gift Taxes

4. Import Taxes (Tariffs)

5. Tax Incentive

Consumers Expect a RecessionFall in AD – Prices fall, real GDP falls

Foreign Income RisesRise in AD – Prices rise, real GDP rises

Government Spending IncreasesRise in AD – Prices rise, real GDP rises

Foreign price levels fallFall in AD – Prices fall, real GDP falls

Workers Expect Future Inflation, Negotiate Higher Wages NowFall in AS – Prices rise, real GDP falls

Technological Improvements Increase ProductivityRise in AS – Prices fall, real GDP rises

Extra Credit1. Around what amount is the national debt?2. What is the difference between monetary and fiscal policy?3. What type of monetary and fiscal policy has been evident in our

U.S. economy over the past few years?

MM = 1/RRR

1. Banking Simulation2. OMOs Simulation3. SQ3R, pgs. 420-4214. RRR and the Money Multiplier5. The Fed Webquest6. Chapter 10 Practice7. Chapter 10 and 16 Study Guide8. Chapter 10 and 16 CW Puzzle9. Ch. 14 + 15 Study Guide10. Ch. 14 + 15 CW Puzzle11. Chapter 15 Practice Worksheet12. Daily Tens13. Essential Questions14. Notes (10, 16, 14, 15)15. Vocab Terms

Binder Check Due Today 4-25

Essential Questions

• What is the difference between monetary and fiscal policy?

• What is the difference between the national debt and a budget deficit?

Monetary policy deals with decisions made by the ________, while fiscal policy deals with decisions made by the ______________________

Fed

the federal government.

A budget deficit is earning less than you spend for ________, while national debt reflects ____________________________

one year

all borrowing throughout U.S. history.

*Answer in complete sentences*1. How did taxes affect early American colonists?2. What gives the government the right to tax U.S.

citizens?3. What is the purpose of taxation?4. What are some things that are provided by the

government through revenue?5. Where is the power to tax found in the Constitution?6. What are the two limitations of taxes found in the

taxation clause?7. What is Congress unable to tax?8. What is a tax base?9. List the items that could be included in the tax base.

Daily Assignment Questions – Ch. 14 Section 1 pgs. 359 – 360

benjamin franklin said, "the only things certain in life are death and taxes." "the...

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