Transcript The Federal Government

The Federal
Government
Taxes,
Spending,
and
National Debt
I. What is the role of the government in
free enterprise economies?
A. To enforce private property rights- to
establish the rules of the game
B. To monitor external costs and benefitseconomic side effects of production (extern.)
C. To ensure market competition- enacting
antitrust laws to keep mkts open
D. To protect consumers- from faulty products
and false advertising
E. To manage the economy
Sometimes the govt must intervene- WHY??
_____________________________________
1. Monetary policy- regulating the money
supply / Which government agency is
responsible for doing this??
_____________________
•
•
•
Federal reserve ratio
Discount rate
Open market
operations
2. Fiscal policy- changes in the
•
expenditures or tax revenues of the
federal govt.
Expansionary fiscal policy: an increase
in govt spending &/or a decrease in
taxes; designed to increase demand
(spending by consumers) in the
economy
Under what circumstances would the govt
practice exp fiscal policy?
_______________________________
• Contractionary fiscal policy: a decrease in govt
spending &/or an increase in taxes; designed
to decrease demand (cut spending) and to
control inflation
Inflation- rising
prices;
purchasing
power declines
Why would the
govt ever need
to raise taxes?
Which policy is our govt practicing nowcontractionary or expansionary? _________
• Demand-side fiscal policy: when govt
policies affect consumers
• Supply-side fiscal policy: when govt policies
target suppliers
List some examples: ___________________
___________________, __________________
In which phase would we practice expansionary?
In which phase would we practice contractionary?
Effects of expansionary fiscal
policy:
5. More jobs
Leads to more
Output
Increasing
GDP
1. Govt buys
more G/ S
4. Increased
Spending leads to
Hiring more
Workers
2. Businesses
earn
more profit
3. Business have
More money
to spend
Predict the steps in contractionary
fiscal policy:
5. ___________
____________
____________
1. Govt …
__________
4. _______
____________
____________
2. _________
__________
__________
3. __________
___________
___________
Which one works better?
• Classical economics (monetarists)- says the
govt should rarely if ever interfere in the
economy; it works least effectively at the
extremes of the business cycle
• Keynesian economics- the govt should
intervene in the economy b/c instability is
inherent; fiscal takes longer to implement
and take effect which means the economy
could be over-corrected
II. Taxes
• This is how the
govt takes in
money
• This money is
then used to pay
for the various
programs and
projects we
receive
Federal Government Revenue, in Billions, by Major Source, 1965�2008
Government revenue has soared by more than $1.75 trillion since 1965, in part
because top marginal income, capital gains, and corporate tax rates were cut.
A. Types of taxes (2007 est.)
1. Income taxes (personal and corporate)taken out of our paychecks; accounts for
56.2% of total receipts = $1,357billion
2. Social insurance & retirement- 36.6% of ttl
receipts = $884.1 billion (social security,
medicaid, etc.)
3. Excise taxes- 3.1 % = $74.6 billion
4. Other receipts- 4.1% = $100.2 billion
B. Principles of taxation (what is fair?)
1. benefits received
2. ability to pay
Type of Taxes as a Percentage of Total Federal Revenue, 2007
Social insurance taxes, which fund programs such as Social Security and
Medicare, are now the second-largest source of revenue. Yet without reforms,
dramatically higher taxes will be needed to pay for these programs.
C. Tax structures:
1. Proportional- percentage paid is the same
for everyone (flat tax)
2. Regressive- the percentage of income paid
in taxes decreases as income increases
ex- sales tax
3. Progressive- as your income increases, so
does your tax rate or vice-versa
ex- federal income tax
Levels of Household Income Earners and their Proportion of
the Federal Income Tax in 2005
The U.S. tax system is highly progressive. The top 1 percent of income earners, by
household, paid 39 percent of all federal income taxes in 2005, whereas the bottom 50
percent paid a little over 3 percent. Further, 32 percent of all tax returns filed in 2005
were from people who paid no federal income tax at all.
Are taxes an incentive?
_________________________________
Why do we tax certain products or
industries?
Why do we want to raise cigarette taxes?
What other products/ industries are taxed
differently? Why?
Do we ever use positive reinforcement in our
taxation policies? How so?
III. Federal Spending
FY 2007
A. Mandatory- money that lawmakers are
required to spend by existing law; most of it
is for entitlements- social welfare programs
that people are entitled to if they meet
certain requirements such as FICA,
medicare and medicaid , and other welfare
programs
B. Discretionary- spending in which govt can
make choices on what and how much to
spend such as defense and education.
• Social Security is #1 expense at 21% of
the govt’s budget
• National defense is #2 at 19%
• Medicare 14%, Welfare 13.3 %
• Interest on the natl debt 8.9%
• Education is 3.2%
If you total all human resources, it is 64.5%
of the budget
(2007 est. numbers)
National Defense Spending as a Percentage of GDP, 1962-2007
IV. National Debt
A. Budget surplus- when we take in more
revenue than we spend
B. Budget deficit- when we spend more money
than we take in
C. National debt- the sum of the budget deficits
from year to year = all the money we owe with
interest
• Where do we get this money from?
• Who do we owe it to?
• What is our national debt?
• Will we go bankrupt?