Chapter 18 Economic P olicy

1. Chapter 18 Economic Policy

2. Deficit • The deficit is when the government spend more money than it takes in form taxes.

3. The politics of economic prosperity • American like to blame politicians for a bad economy • Low income people are more likely to vote democratic • While high income people will vote democratic.

4. The politics of taxing and spending • Politicians confront two inconsistent kinds of majoritarian politics: • Everybody wants general prosperity • Large majorities want more gov spending on popular programs

5. How do you raise taxes without alienating voters? • You tax the minority of the group • New programs require • Letting the gov go deeper in debt • Raise taxes

6. Economic theories and political needs • Four main theories about improving the economy: • Monetarism • Keynesianism • Planning • Supply side tax cut

7. Monetarism • The belief that the proper thing to do is have a steady predictable increase in the money supply

8. Keynesianism • To create the right level of demand. • When demand is to little the gov should pump money into the economy • When it is too great the gov should take money out

9. Planning • Price and wage controls • Big corporations can raise prices because completion is too weak

10. Supply side tax cuts • Supply side theory • The belief that lower taxes and fewer regulations will stimulate the economy • In particular, cutting taxes will be incentive to people to… • Work • Save • Invest

11. The machinery of economic policy making • Three people in the executive branch are important • Called the troika • The chairman of the Council of Economic Advisors • Director of Office of Management and Budget • Secretary of treasury

12. Council of Economic Advisors • It is an impartial group of experts responsible for forecasting economic trends. • Each member is picked sympathetically by the president

13. Office of Management and Budget • Originally the Bureau of the Budget • Chief function is to • prepare estimates of the amount that will be spent by federal agencies • Negotiate with other departments over the size of their budget • Make certain that everyone else’s proposals are following the presidents program

14. Secretary of Treasury • Provides estimates of the revnue that the gov can expect from existing taxes abd what will bethe result of changing tax laws

15. The Fed • The Fed sets monetary policy • Monetary policy • Managing the economy by altering the supply of money and interest rates

16. Congress • Congress taxes and must approve all expenditures • they make decisions on how high the taxes should be and hoe much the gov can spend on fiscal policy

17. Globalization • The growing integration of the economies and societies of the world • Supporters think it has increased income, literacy, and standard of living in almost every country • These supporters support free trade because it makes products cheaper

18. The Budget • Budget • A document that states tax collections, spending levels, and the allocation of spending among purposes • Fiscal year • For the federal government, October 1 through the following September 30

19. In theory the budget should be decided on how much money the gov is going to spend and then allocating that money • The federal budget is a list of everything the gov is going to spend money on • The budget resolution proposes a total spending ceiling for each of several spending areas

20. Reducing Spending • Because the Budget act did not automatically lead to spending cuts the Sequester was put in as a back up plan. • Sequester is automatic spending cuts • Discretionary spending • spending what is not required to pay for contracts, interest on the nations debt or entitlement programs such as social security

21. Levying Taxes • Tax policy reflects a mixture of majoritarian politics and client politics. • Examples of majoritarian politics • Keeping the Tax burden low • Cheating at a minimum

22. The rise of income tax • In 1913 states ratified the 16th amendment which authorized peacetime income tax • Taxes were raised during war time and lowered during peacetime. • The rates were progressive, the wealthier paid more than those who were less affluent.

23. After the adoption of income tax in 1913, only a small amount of people paid a significant amount in taxes until WWII • Taxes did not fall afterword's • People did not care to much because everyone benefited from the loopholes. • IG’s organized around loopholes • Builders organized to support the mortgage interest deduction

24. Universities supported the charitable contribution deduction. • In addition to these well known loopholes, there were many unknown loopholes that were made popular through the work of IG’s • By 1986 tax fights were more about deductions and less about rates • Loopholes politics were client politics

25. The Tax Reform Act of 86 flipped the compromise and instead of high rates and big deductions, they got low rates and much smaller deductions • But not long after rates started rising again but without the deductions to make things easier for more affluent citizens

26. Quiz • What is a deficit? • What are the four theories of improving the economy? • What is the supply side theory? • How long is fiscal year? • What does congress have to do with taxes? • Name a loophole. • What happened with the Tax reform Act of 86?