Unit 6 - Fiscal Policy

1. Unit 6 - Fiscal Policy • Fiscal Policy Governments make decisions regarding spending and taxation. Macroeconomics

2. 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

3. Unit 6 - Fiscal Policy • 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. Federal government spending:

4. 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

5. Unit 6 - Fiscal Policy • Fiscal Policy and the Classical Theory Classical economists believe that governmentstimulation is harmfulin the long run, because it: • Raises inflation • Raises interest rates, • Slows down the economyin the long run. • Is subject to lags in the implementation. Macroeconomics

6. Unit 6 - Fiscal Policy • Fiscal Policy and the Classical Theory Fiscal policy implementation lags • Information lag • Policy lag • Impact lag Macroeconomics

7. Unit 6 - Fiscal Policy • United States Government Levels Government spending and taxation occurs at the following levels in the United States: • Federal (national) • State • Local (county and city) Macroeconomics

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

9. Unit 6 - Fiscal Policy Federal government spending: • Federal Government Revenue • See our CD, Unit 6, Section 4. • Or visit:http://www.gpoaccess.gov/usbudget/

10. Unit 6 - Fiscal Policy • Federal Government Tax Rates

11. 0 / 30 (Survey) Regarding our tax rates in the United States, we should: • 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 • Don’t know 10 0 of 30 Cross-Tab Label

12. 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 • 22% • 37% • 52% • 71% • 82% :10 0 of 30

13. 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 • 0% • 3% • 10% • 22% • 30% • 50% :10 0 of 30

14. 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:

15. 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:

16. 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. Federal government spending:

17. Which tax system do you prefer? • 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 0 of 30

18. Unit 6 - Fiscal Policy • 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. Federal government spending:

19. 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:

20. Unit 6 - Fiscal Policy • Effects of a Tax Cut • The Laffer Curve Federal government spending: An increase in tax rates at lower rates increases government tax revenue.An increase in tax rates at higher ratesdecreases governmenttax revenue.

21. Unit 6 - Fiscal Policy • U.S. Federal Expenditures and Tax Revenue as a Percentage of GDP

22. 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

23. Unit 6 - Fiscal Policy Federal government spending: • State and Local Government Spending and Revenue • For expenditure and revenue data, • see CD, Unit 6, Section 5.

24. Unit 6 - Fiscal Policy • 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

25. 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