Chapter 16

1. Government Spends, Collects, and Owes Chapter 16

2. Section 1: Growth in the Size of Government • Prior to the Great Depression, the Government (Federal, State, and Local) employed 3 million people nationwide. • Today the Government employs over 20 million people • As the number of government functions increases, so does the number of workers the government needs to get the job done

3. Why Has Government Grown? • Government services were necessary during the Great Depression and WWII • After WWII, we as a nation became very wealthy, but people saw a need for government services to close the gap between rich and poor • Today, government spending accounts for about 1/3 of the GDP

4. The True Size of Government • Impossible to know because private businesses are often taxed or forced to pay for public goods for their employees, so that is more money being spent on services, but not shown in the budget

5. The Growth of Government- Good or Bad? • Depends on who you ask….

6. Section 2: The Functions of Government • Providing Public Goods • Redistributing Income • Regulating Economic Activity • Ensuring Economic Stability

7. Providing Public Goods • Public Goods- goods/ services the government provides to its citizens • Merit Goods- a good/ service deemed socially desirable by government leaders • Demerit Goods-goods/ services deemed socially undesirable by government leaders government regulates these goods through taxes, licensing, and prohibition

8. Redistributing Income • Income redistribution-Government activity that takes income from some people through taxation and uses it to help citizens in need through transfer payments • Social Insurance Programs- Govt. programs that pay benefits to retired and disabled worker, their families, and the unemployed • Public-Assistance Programs- Govt. programs that make payments to citizens based on need

9. Social Insurance Programs- Govt. programs that pay benefits to retired and disabled workers, their families, and the unemployed. In order to be eligible, you must have paid into the system. • Public-Assistance Programs- Govt. program s that make payments to citizens based on need. Anyone is eligible, regardless of whether or not they paid into the system.

10. Regulating Economic Activity • Regulatory Functions of Government • Protecting Consumers • Supervising Labor and Management relations • Promoting Competition • Regulating Negative By-Products of the Production Process, also called negative externalities

11. Ensuring Economic Stability • Government attempts to shield its citizens from the side effects of fluctuations in the business cycle • Exs: Monetary and Fiscal Policy

12. Critics of Government Involvement • Many say that merit goods should be provided by private citizens who have a large amount of disposable income • Many also disagree with income redistribution programs because they say that government assistance discourages personal initiative and destroys the incentive to find work

13. Section 3: The Federal Budget and the National Debt • Government must spend huge sums of money to carry out all of its functions • An increase in spending in one category means a decrease in spending in another category

14. The Budget-Making Process

15. Five Largest Expenditures of the Federal Government • Income Security, Social Security, and Medicare • National Defense • Interest on the National Debt • Health • Other (national parks, museums, etc)

16. Five Largest Expenditures of State and Local Governments • Education • Other (state parks, sewers, and libraries) • Public Welfare • Police and Fire • Health and Hospitals

17. Deficit Spending and the National Debt • Deficit spending, also called deficit financing, is a government policy of spending more money than it is able to bring in through revenue • Most of the time, the government does not stick to its budget deficit spending budget deficit national debt • http://www.brillig.com/debt_clock/

18. Section 4: Taxation • Principles of Taxation • Benefits Received Principle • Ability to Pay Principle

19. Benefits Received Principle • System of taxation in which those who use a particular government service support it with taxes in proportion to the benefit they receive; those who don’t use the service don’t pay the tax • Ex: gasoline tax to repair highways • Problem: the elderly and the poor need the most services, but are the least able to pay taxes

20. Ability to Pay Principle • Principle of taxation in which those with higher incomes pay more taxes than those with lower incomes, regardless of the services they use • Ex: Property tax is used to support the local school system. Everyone pays, whether or not they have school age children

21. Forms of Taxation • Proportional Tax • Progressive Tax • Regressive Tax

22. Proportional Tax • Tax that takes the same percentage of all incomes; as income rises so does the taxes that are to be paid • Exs: Property tax; Customs duties

23. Progressive Tax • Tax that takes a larger percentage of higher incomes than lower incomes; justified on the basis of the ability to pay principle • Exs: Personal Income at the federal level; Estate; Gift

24. Regressive Tax • Tax that takes a larger percentage of lower incomes than of higher incomes • Exs: Excise and Sales taxes • Arguable b/c people with lower incomes spend a larger percent of their income on sales purchases, alcohol, tobacco, and gasoline