Transcript Ch. 14, Ch. 15

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.
Income Tax Rates for Single Filer
(2009)

10% on income between $0 and $8,350

15% on the income between $8,350 and $33,950; plus $835

25% on the income between $33,950 and $82,250; plus
$4,675

28% on the income between $82,250 and $171,550; plus
$16,750

33% on the income between $171,550 and $372,950; plus
$41,754

35% on the income over $372,950; plus $108,216
Classifications of Taxes

Proportional Taxes – charge all people an
equal % of income
 Example – Proposed “Flat Tax”

All taxpayers would pay around 20%
regardless of income
Classifications of Taxes

Regressive Taxes – Charge the poor a
higher % of income than the rich
 Example – Sales Taxes, FICA Payroll
Tax
How Sales Taxes are Regressive

Person #1
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Income of $45,000
Saves $3,000, spends
$42,000
Taxed 10% on $42,000,
or $4,200
$4,200 / $45,000 = 9.3%

Person #2

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Income of $450,000
Saves $100,000,
spends $350,000
Taxed 10% on
$350,000, or $35,000
$35,000 / $450,000 =
7.8%
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. $3.5 Trillion) currently spent on?
 Health – 22%
 Includes Medicare, Medicaid, Safety Inspections,
Veterans Benefits
 Social Security – 19%
 Defense – 19%
 Income Security – 15%
 Includes Unemployment Assistance, Housing
Assistance, Food Stamps
Government Spending

What is the budget (approx. $3.5 Trillion) currently spent on?
 Interest on the Debt – 6%
 Other Programs – 15%
 Includes Homeland Security, Science and
Technological Research, Agriculture Subsidies, many
more

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
Education – 2%
Environmental Protection – 1%
International Affairs – 1%

Includes assistance to foreign countries
Categories of Federal Spending

Mandatory Spending – Congress has no choice
on changing funding amounts

Includes entitlements – programs that all Americans who
reach a certain status are eligible for, regardless of high or
low income


Ex. – Social Security, Medicare
Discretionary Spending – Can be cut or expanded
by Congress

Includes “means-tested” programs – those that only low
income individuals qualify for

Ex. – Food stamps, TANF, Housing assistance
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
Deficit Projections 2009-2019
Who is the Money Owed To?
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)
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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