Transcript Power Point
Chapter 14
Taxes and Government Spending
Taxes
Tax – Financial charges imposed on individuals
and businesses by a government
Purposes of taxes
To provide public goods that the market
does not provide (e.g., military, roads,
libraries)
Income redistribution (e.g., assistance to
the poor, social security)
Classifications of Taxes
Progressive Taxes – charge the rich a
higher % of income than the poor
Example – Income taxes in the U.S.
Classifications of Taxes
Proportional Taxes – charge all people an
equal % of income
Example – Proposed “Flat Tax”
Classifications of Taxes
Regressive Taxes – Charge the poor a
higher % of income than the rich
Example – Sales Taxes, FICA Payroll
Tax
Government Spending
Fiscal Policy – government policies involving
collecting tax revenue and deciding how to
spend it
Executive branch submits a proposed budget
to Congress
Congress makes revisions and votes on the
final budget
President has choice to sign or veto the
budget
Government Spending
What is the budget (approx. $2.7 Trillion) currently spent on?
Health – 23%
Includes Medicare, Medicaid, Safety Inspections,
Veterans Benefits
Social Security – 22%
Defense – 21%
Income Security – 13%
Includes Unemployment Assistance, Housing
Assistance, Food Stamps
Government Spending
What is the budget (approx. $2.7 Trillion) currently spent on?
Interest on the Debt – 9%
Other Programs – 7%
Includes Homeland Security, Science and
Technological Research, Agriculture Subsidies, many
more
Education – 3%
Environmental Protection – 1%
International Affairs – 1%
Includes assistance to foreign countries
Government Spending
Possible outcomes of budgets
Surplus – more tax revenue than government
spends
Deficit – more spending than tax revenue
Money must be borrowed to make up the
difference (government sells bonds)
Creates debt – money that has not been
repaid over time, plus interest
Perspectives on Debt and Deficit
Deficit Hawks – opposed to deficit spending
Classical economists like Von Hayek and Friedman
Believe deficits are unsustainable, pass costs on that
will hurt future economic growth, raise interest rates
Deficit Doves – believe deficit spending can stimulate
economic growth
Keynesian economists
See no harm in short term deficits, as long as they
are used wisely, they could produce future growth
that exceeds the present deficit
Expansionary vs. Contractionary
Fiscal Policy
Just like monetary policy can expand or contract the
economy, so can fiscal policy
Expansionary policy – to grow GDP and cut
unemployment, but could cause inflation
Cut taxes on individuals
Spend more on benefits and other programs
Contractionary policy – to cut inflation, but could lead
to slowing growth and raising the unemployment rate
Raise taxes on individuals
Cut government spending
Perspectives on the “Best” Fiscal
Policy
Classical Economists (like Von Hayek, Friedman)
Demand-Side (Keynesian) Economists
Government should not interfere in the economy, to
establish equilibrium prices and quantities
Government should cut taxes on individuals, spend
money to benefit people in order to raise demand and
grow the economy
Supply-Side Economists (Reaganomics)
Government should cut taxes and regulations on
businesses to raise supply and grow the economy