Transcript Fiscal Policy - Cloudfront.net

California State Legislature
You are going to
Sacramento to
lobby for your
cause!
Lobbyists
1. K-12 education
2. Science
research
3. College funding
4. Environment
5. Health Care for
low income
adults
6. Mental illness
7. Police
Department
Lobbyists
• Create a statement that will persuade the
CA legislature to give you money!
• Describe your cause
• Describe your arguments
• Defend yourself against others who will
also be asking for money
Public Policy #4
Fiscal Policy
Fiscal Policy: taxing, spending
and borrowing
• Regulated by Congress (primarily) &
President
• It all starts with a budget: proposed
spending plan for a fiscal year
Federal Revenue Sources
•Tariffs: tax on imports
•Excise taxes: aka “sin” tax, tax on
alcohol, cigarettes
•Income taxes: from 16th amendment
– Tax on individual incomes
•Corporation taxes
– Tax on businesses
More Revenue
• Social Security / Medicare
– Payroll tax: comes out of paycheck
– SS: 4.2% up to 106,800
– Med: 1.45%
•Gift tax: more than $13,000, 35% tax
•Estate tax: die w/more than $5
million pay 35%
• Borrowing
Who pays the most in taxes?
State Revenue
• Property taxes: 1% of purchase
price w/local areas able to add additional
fees
• Sales tax: 9.25%, local areas can raise
to 10.75%
Types of taxes
•Progressive (or
Graduated): taxes
that go up in % as
your income increases
–Federal Income
tax: 10-35% of
income depending
on how much you
make
How much do you owe?
• If Taxable Income Is
• Not over $8,500
• $8,500 - $34,500
• $34,500 - $83,600
• $83,600 - $174,400
• $174,400 - $379,150
• Over $379,150
The Tax Is:
10% of the taxable income
$850 plus 15% of the
excess over $8,500
$4,750 plus 25% of
the excess over $34,500
$17,025 plus 28% of the excess
over $83,600
$42,449 plus 33% of the excess
over $174,400
$110,016.50 plus 35% of the
excess over $379,150
Regressive Taxes
• Taxes that take out a
larger % of income as
income decreases
–Sales tax: a 10% sales
tax has a much greater
impact (larger % of
income) on low income
than high income
What!?!
• I make $10,000 a
year and pay $100 in
sales tax
• This is 1% of my
income
• I make $100,000 a
year and pay $100 in
sales tax
• This is 0.1% of my
income
PP#5: Budget cuts
• You must cut the budget by
1.345 trillion dollars
Policy #4: Expenditures
1. Fiscal policy is
A. taxing B. spending C. borrowing
D. All of the above
2. An increase in taxes on cigarettes is what
kind of tax? A. progressive B. excise
C. corporate D. Payroll
3. Which of the following is a payroll tax?
A. Social Security B. Medicare
C. Unemployment D. All of the above
Expenditures
•Mandatory Spending:
–Entitlements: gov is required to
pay if ppl meet requirements
• EX: Social Security, Medicare
(programs ppl pay into)
• AFDC, EBT – programs you
qualify for w/your income
–2/3 of budget
Other Expenditures
• Discretionary Spending:
Congress can decide how to spend sort of 
–Military, education, enviro,
transportation, etc
–1/3 of budget
• Interest on debt: as debt grows,
minimum payment grows
Balanced Budget Act
• Required a balanced budget (spend
only as much as they have in
revenue) by late 1990s
• It worked! Congress & Pres balanced
budget and even had a surplus
(more revenue than spending) by 992000
• It all changes on 9/11
Where does all the money go?
• Debt: total amount owed
• Deficit: amount over spent in one year
How has mand/discr spending
changed since 1965?
How does this change in
spending affect Congress’
ability to change policy?
PP#8: Fiscal Policy Solutions
1. What does the federal gov spend the
majority of its money on?
2. From what source does the federal
gov get the majority of its revenue?
3. Taxes that increase in percentage as
one’s income goes up are called ….
Using Fiscal Policy to Fix the
Economy
•Keynesian Economics: govt can
stimulate economy by spending
more when times are bad
• But, wait, if gov is broke, should
we spend more $?
Maybe…
• Deficit spending: spending more
money than one has in revenue
• Used by FDR during depression &
Obama during Great Recession
– Stimulus Package: Over $1 trillion
• Gov builds a dam, pays workers for
their labor, workers have more $ - pay
taxes & spend more
Remember….
•Deficit: amount over spent in one
period
–Over 1 trillion this fiscal year
•Debt: total amount owed
–14 trillion & growing
• Should we increase spending
when the economy is hurting?
Another view:
• Supply Side Economics “Trickle Down Theory”: Govt cuts
taxes on individuals & businesses
• But wait, if gov is broke, should
we cut taxes?
Maybe….
• Ppl w/more money – spend more
• If a business has more money,
they pay employees more, hire
more ppl, etc
• Used by Reagan & Bush
What should we do to fix
our economy today?
Which is better – Keynesian
or Supply Side Economics?
PP #9: Your Gov @ Work 
•
1.
2.
3.
4.
5.
6.
7.
8.
9.
Turn to pg. 448-49 on Representative Democracy
Why don’t we have a direct democracy? Why is
representative democracy better?
What do elected officials try to maximize?
How much does the gov spend on wool subsidies
(financial aid) each year?
How many ppl went to Congress to discuss this issue?
Why don’t more voters challenge this issue?
Why do special interests often have more power than the
rest of us?
How much does the wool subsidy cost per person?
Explain rational ignorance.
Why do consumers focus more on private decisions than
on public decisions?
Balanced Budget Act
• Required a balanced budget (spend
only as much as they have in
revenue) by late 1990s
• It worked! Congress & Pres balanced
budget and even had a surplus
(more revenue than spending) by 992000
• It all changes on 9/11
Policy #4: Monetary Policy
1. Fiscal policy is
A. taxing B. spending C. borrowing
D. All of the above
2. An increase in taxes on cigarettes is what
kind of tax? A. progressive B. excise
C. corporate D. Payroll
3. Which of the following is a payroll tax?
A. Social Security B. Medicare
C. Unemployment D. All of the above
Monetary Policy: regulates
amount of money in circulation
Regulated by the
Federal Reserve
Board
–Bd of 7 members,
appt’ed by Pres,
confirmed by S,
serve fixed terms
(independent
regulatory agency)
Imagine you each have $5….
Will you be willing to spend $5
for one soda?
Now, each of you have $20
Will you be willing to spend $5
for one soda?
You were (probably) more likely
to say yes when you had $20.
When you only had $5 your
money was more valuable to you
and were less likely to spend it.
But, as you get more money,
you’re more likely to spend and
thus increase the prices of
goods. This is inflation!
How does the Fed work?
• Controls supply (amount) of money
–Too much money = inflation
• Inflation – increase in prices (like
when your parents say I
remember when it cost $3 to go
to the movies – you need how
much to go to the movie!!!?)
• Some is good & normal
• Too much – prices rise faster than
wages = scary!
BUT,
• Too little money = hurts economy,
deflation
–People aren’t spending - thus
employees aren’t hiring- thus
people don’t have jobs – thus can’t
spend & can create a vicious cycle
How does the FED do it?
1. Regulate interest rates
• Low interest rates = cheap money /
loans – many ppl borrow
• High interest rates – stops ppl from
borrowing money, curbs inflation
• 200,000 @ 6.5% for 30 yrs =
$1550/mo
• 200,000 @ 4.5% for 30 yrs =
$1300/mo
Reserve Requirement
2. Reserve Requirement: amount
banks are required to keep on hand
in bank
• High reserve – less money to
give out in loans (curbs spending)
• Low reserve – more money to
give out in loans (encourages
spending)
Question time 
• Interest rates are currently very low,
what does this tell us about the
nature of the economy?
• In the early 1990s interest rates for
mortgages were about 15%, what does
this tell you about the economy then?