unit 6 - fiscal policy fiscal policy governments make decisions regarding spending and taxation....
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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 toincrease spending and/or decrease taxes during recessions,and the opposite during expansions.
Macroeconomics
Unit 6 - Fiscal PolicyFederal government spending:
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 governmentstimulation is harmfulin the long run, because it:
1.Raises inflation2.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 lags1. 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. State3. Local (county and city)
Macroeconomics
Unit 6 - Fiscal PolicyFederal government spending:
Federal Government Expenditures
See our CD, Unit 6, Section 3,or visit:http://www.gpoaccess.gov/usbudget/
Unit 6 - Fiscal PolicyFederal government spending:
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:
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1. Keep them the same2. Lower them for everyone3. Raise them for everyone4. Lower them for
households earning less than $200,000 and raise them for higher incomes
5. Don’t know
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
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1. 22%
2. 37%
3. 52%
4. 71%
5. 82%
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
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1. 0%
2. 3%
3. 10%
4. 22%
5. 30%
6. 50%
Unit 6 - Fiscal PolicyFederal government spending:
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.
Unit 6 - Fiscal PolicyFederal government spending:
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)
Unit 6 - Fiscal PolicyFederal government spending:
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?
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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 system5. A consumption tax system6. Other
Unit 6 - Fiscal PolicyFederal government spending:
Effects of a Tax Cut
Let’s say Congress decides to cut taxesacross 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.
Unit 6 - Fiscal PolicyFederal government spending:
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?
Unit 6 - Fiscal PolicyFederal government spending:
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 ratesdecreases governmenttax 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
Unit 6 - Fiscal PolicyFederal government spending:
State and Local Government Spending and Revenue
For expenditure and revenue data, see CD, Unit 6, Section 5.
Unit 6 - Fiscal Policy
Macroeconomics
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%.
Unit 6 - Fiscal Policy
Macroeconomics
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