Transcript Fiscal Policy - Teacher Pages

Fiscal Policy
Taxing and Spending
Why does government tax?
The government taxes to
 1) Raise Revenue
 2) Change Behavior

What is Revenue?
Revenue means “income”
 Revenue allows the government to pay
for goods and services

How can a tax change behavior?
When the government puts a tax on a
product, it makes the product more
expensive.
 This discourages people from using the
product.
 There are three types of “behavior taxes”
currently in use.

Sin Tax
This tax is added to products that can
harm people.
 Examples of a sin tax are those taxes
placed on cigarettes and alcohol.

User Taxes
These taxes are added to products to
pay for services provided by the
government.
 The most common user tax is the
gasoline tax. The taxes collected from
this tax are used to pay for pollution
control and to build roads.
 What happens when the gasoline tax is
increased?

Luxury Taxes
These are taxes added to expensive,
nonessential items such as yachts and
limousines.
 The taxes collected are usually used to
pay for social programs.
 The luxury tax is meant to target which
group of citizens?

Types of Assessed Taxes

There are three types of taxes collected
by the government.
Regressive Taxes
These are taxes that tend to fall on
people who make less money.
 For example, sales taxes are regressive
because the poor pay a higher
percentage of their incomes.

Progressive Taxes
These are taxes that are meant to fall
heaviest on the rich in our country.
 The wealthiest citizens pay the highest
percentage of their incomes.
 The poorest citizens pay the least
percentage of their incomes.
 This is our current Federal Income Tax
System.

Proportional or Flat Tax
This tax is the same percentage of tax
applied across all income levels.
 For example, the rich pay 6.75% of their
incomes for Social Security Tax. The
poor pay 6.75% of their incomes for
Social Security Tax.

What is fiscal policy?

Fiscal policy is when the government
uses taxes and spending to address
problems in the economy.
Remember that economic stability is
a main goal of our government.
This means that our government must
address the challenges of
 1)price stability (inflation versus
deflation)
 2)employment

Price Stability
Remember that when money is put into
the economy, this raises prices.
 Would raising or lowering taxes put
money into the economy?

You’re right!
Lowering taxes puts more money into
peoples’ pockets.
 More money in our pockets means we
spend more on goods and services.
 The more we spend on goods and
services means more employment is
created.

This works both ways…

What should the government do to
control inflation (high prices)?
Right again…

To control inflation, the government
should raise taxes.
The government can also use spending to
address prices and employment.
The government spends by creating
government jobs, government projects
(such as bridge and road building), and
through social programs (such as welfare
and Medicaid).
 When did government spending first
increase in the 20th century?

Remember…
Money going into the economy increases
prices, but also increases employment.
 Money being taken out of the economy
decreases prices, but decreases
employment.

How does government spending
increase employment?
The government is a consumer just like we
are. When it spends, it raises demand.
 When demand increases, production
increases…when production increases, so
does employment.

But here’s the problem…
If you are the president and faced with
the challenges of high unemployment
and high inflation (this is called
“stagflation”), what fiscal policy do you
follow?
 Would you raise or lower taxes?
 Would you increase or decrease
government spending?

You see the problem…
The problems of high unemployment and
high inflation cannot be addressed with
the same fiscal policy.
 You have to choose one.
 If you were the president, which would
you choose to address: high
unemployment or high prices?
