Fiscal PolicyFiscal PolicyWhy exactly did we almost pay $125 million for a bridge?Why exactly did we almost pay $125 million for a bridge?

The spending policies and practices of the The spending policies and practices of the federal and state governments that influence or federal and state governments that influence or

moderate the economy.moderate the economy.

Revenue Collection and Federal Budgeting Revenue Collection and Federal Budgeting ProcessProcess

Excise Taxes Personal Income Taxes

Payroll Taxes Corporate Income Taxes

Internal Revenue Service

U.S. Treasury

(to be spent according to law)

Fiscal PolicyFiscal PolicyWhere the revenue comes from:Where the revenue comes from: Income taxesIncome taxes ■ ■ FICA taxes – FICA taxes – dedicateddedicated Corporate income taxesCorporate income taxes ■■OtherOther

What Happens to America’s Earnings?What Happens to America’s Earnings?

Hours Earnings Year to Date

Description

Deductions Year to Date

77.5 1,142.32 24,746.40 Fed Tax 92.79 1,964.04

FICA/MED 85.24 1,834.29

CA Tax 30.16 638.47

MV, CA Tax

22.85 494.98

Health Ins 23.50 470.00

Dental Ins 2.00 80.00

Net Pay 885.78

Doyle Industries234 El CaminoMountain View, CA

12-20-07

Pay to the Order of William Wainwright_________________ $885.78

Eight Hundred Eighty-Five Dollars and Seventy Five Cents***********

Bank of America ____________David Jones____

What Happens to America’s Earnings?What Happens to America’s Earnings?Hours Earnings Year to Date Description Deductions Year to Date

77.5 1,142.32 24,746.40 Fed Tax 92.79 1,964.04

FICA/MED 85.24 1,834.29

CA Tax 30.16 638.47

MV, CA Tax 22.85 494.98

Health Ins 23.50 470.00

Dental Ins 2.00 80.00

Net Pay 885.78

Withholding Taxes – taxes that an employer automatically deducts from an employees paycheck. Based on a W-4 form that employee fills out before starting the job.

FICA – Federal Insurance Contributions Act which is the law that provides for Social Security, Medicare and unemployment insurance. Employer matches the employees contribution dollar for dollar. Also known as Payroll Tax

State and Municipal Taxes are income taxes paid to local governments and usually are between 4-5% of income.

Insurance Payments are often deducted from employees paycheck based on prior agreement.

a Control number0009

Copy C For EMPLOYEES RECORDS (See Notice on back.)OMB No 1545-0008

b Employer’s identification number53-801-9409

1 Wages, tips, other compensation16742.69

2 Federal income tax withheld1615.81

c Employer’s name, address, and ZIP codeA Place to Work4400 36th Street, NWWashington, DC 20006

3 Social security wages16742.69

4 Social security tax withheld1038.14

5 Medicare wages and tips16742.69

6 Medicare tax withheld240.77

7 Social Security tips 8 Allocated tips

d Employees social security number111-22-3333

9 Advanced EIC payment 10 Dependent care benefits

e Employee’s name, address, and ZIP codeYouYour AddressYour City, State, Zip

11 Nonqualified plans 12a See instructions for box 12

12b 12c 12d

13 Statutory employee Retirement plan

Third-party sick pay

14 Other

15 State DC

Employer’s state I.D. No.0017292001

16 State, wages, tips, etc.16742.69

17 State income tax1007.89

18 Local wages, tips, etc.

19 Local income tax

20 Locality name

Department of the Treasury – Internal Revenue ServiceW-2 Wage and Tax Statement 2008 This information is being furnished to the Internal Revenue Service. If you are required to file a tax return, a negligence penalty or other sanction may be imposed on you if this income is taxable and you fail to report it.

Tax Brackets 2005Tax Brackets 2005Demonstrate Demonstrate Progressive TaxProgressive Tax (aka (aka Graduated TaxGraduated Tax))

Joint return Single taxpayer Rate

$0–$14,600 $0–$7,300 10.0%

14,601–59,400 7,301–29,700 15.0

59,401–119,950 29,701–71,950 25.0

119,951 –182,800 71,951–150,150 28.0

182,801–326,450 150,151–326,450 33.0

326,451 and up 326,451 and up 35.0

Fiscal PolicyFiscal Policy

Where the revenue is spent:Where the revenue is spent: ENTITLEMENTS – mandatory expenditures on – mandatory expenditures on

social/public welfare programssocial/public welfare programs

Interest on the national debt – payments to those who Interest on the national debt – payments to those who lent US $ through purchase of treasury bondslent US $ through purchase of treasury bonds

Defense spendingDefense spending

DISCRETIONARY SPENDING – all other programs the – all other programs the government funds. Congress can/does alter the amount government funds. Congress can/does alter the amount spent from year to yearspent from year to year– Theoretically if increase spending in one program should cut Theoretically if increase spending in one program should cut

spending in another programspending in another program

Supply Side Fiscal PolicySupply Side Fiscal PolicyMinimal government intervention in the market and Minimal government intervention in the market and business so producers have a greater incentive to business so producers have a greater incentive to

produce. Lower taxes and streamlined minimal produce. Lower taxes and streamlined minimal regulationsregulations

When the economy is slowing down monetary When the economy is slowing down monetary policy should be primary tool to handle the policy should be primary tool to handle the

problem.problem.ProsPros

Incentive to Incentive to innovateinnovate

If you expand If you expand supply, then jobs supply, then jobs will be created will be created which in turns which in turns stimulates stimulates demand.demand.

ConsCons No guarantee No guarantee

suppliers will use $ suppliers will use $ to increase supply.to increase supply.

Less consumer Less consumer protection.protection.

Outsourcing of jobs.Outsourcing of jobs. Little safety net for Little safety net for

the poor.the poor.

Demand Side Fiscal PolicyDemand Side Fiscal PolicyGovernment should intervene in the economy as Government should intervene in the economy as

necessary to stimulate or cool down demand.necessary to stimulate or cool down demand.John Maynard KeyennesJohn Maynard Keyennes

EXPANSIONARY POLICY

(falling GDP) To grow GDP – lower

taxes, reduce regulations, increase gov’t discretionary spending

Should expand $ in the economy and stimulate production and consumption

CONTRACTIONARY POLICY

(rising inflation + rising GDP) To prevent possible

recession lower gov’t spending, raise taxes

Should take $ out of circulation and cool down consumption.

Demand Side Fiscal PolicyDemand Side Fiscal Policy

PROSPROS Faith in government is Faith in government is

increased.increased. Greater consumer Greater consumer

protection.protection. Safety net for the Safety net for the

poor.poor.

CONSCONS Gov’t is inefficientGov’t is inefficient Too much taxation can Too much taxation can

strangle innovation strangle innovation and productionand production

May encourage May encourage outsourcing.outsourcing.

Rarely do spending Rarely do spending cuts actually occur.cuts actually occur.

Rarely do tax Rarely do tax increases occur.increases occur.

Deficit vs. DebtDeficit vs. Debt

DeficitDeficit - the amount the government spends in one - the amount the government spends in one year over the amount it collects in revenue during that year over the amount it collects in revenue during that year. year.

– Up to 2009 the deficit had been $300 to $400 billion Up to 2009 the deficit had been $300 to $400 billion dollars annually for 10+ years. dollars annually for 10+ years.

– In 2009 it ballooned to $1.3 trillion due to response to In 2009 it ballooned to $1.3 trillion due to response to Great Recession.Great Recession.

To pay for the deficit the government borrows money To pay for the deficit the government borrows money through the sale of bonds or from it’s own accounts.through the sale of bonds or from it’s own accounts.– Borrowed money is Borrowed money is notnot revenue because the revenue because the

government will eventually have to repay the lender. government will eventually have to repay the lender.

National debtNational debt - the total amount of money that the - the total amount of money that the federal government has borrowedfederal government has borrowed– Each year the deficit is added to the overall debtEach year the deficit is added to the overall debt

The national debt is composed of two parts. The national debt is composed of two parts. – Public debtPublic debt, is the amount the government , is the amount the government

borrows from private investorsborrows from private investors

– Intragovernmental debt - Intragovernmental debt - government borrows government borrows it from itself, from special savings accounts it from itself, from special savings accounts established by law and supported by taxes (for established by law and supported by taxes (for example, the Social Security Trust Fund). example, the Social Security Trust Fund).

Deficit vs. DebtDeficit vs. Debt

Unfunded liabilitiesUnfunded liabilities are benefits that the are benefits that the government has promised to pay in the future, government has promised to pay in the future, without knowing in advance exactly where the without knowing in advance exactly where the money to pay those benefits will come from. money to pay those benefits will come from.

Social Security & Medicare are both unfunded Social Security & Medicare are both unfunded liabilities.liabilities.

Deficit vs. DebtDeficit vs. Debt