Transcript Chapters 14-16-18

ECO 1003
Handouts for
Chapters 14-16-18
Chapter 14
Debts and Deficits: What’s a Trillion More or Less?
• Budget deficit
• The excess of government spending over
government revenues during a given time
period
• Public Debt
• The amount of money owed by a government to
its creditors
• Interagency borrowings
• Loans from one part of the government to
another
Chapter 14
Debts and Deficits: What’s a Trillion More or Less?
• Liabilities
• Amounts owned; the legal claims against an
individual or against an institution by those who
are not owners of that institution
• Unfunded taxpayer liabilities
• Obligations of taxpayers for which no specific
debt instruments have been issued
Chapter 16
Soak the Rich
• Regressive tax system
• A set of rules that result in the collection of a
smaller share of income as taxes when income
rises
• Progressive tax system
• A set of rules that result in the collection of a larger
share of income as taxes when income rises
• Proportional tax system
• A set of rules that result in the collection of an
unchanging share of income as income changes
Chapter 16
Soak the Rich
• Median income
• The income that separates the higher-income
half of the population from the lower-income
half
• Tax rebate
• A return of some previously paid taxes
• Earned income tax credit
• A tax program that permits negative taxes, that
is, that provides for payments to people (instead
of collecting taxes from them) if their incomes
go below a predetermined level
Chapter 18
The Hazards of High Taxes
• Static economic analysis
• A mode of analysis that assumes for simplicity
that people do not change their behavior when
incentives change
• Dynamic economic analysis
• A mode of analysis that recognizes that people
respond to changes in incentives and that takes
these responses into account when evaluating
the effects of policies
Chapter 18
The Hazards of High Taxes
• Tax rate
• The percentage of income that must be paid in
taxes
• Marginal tax rate
• The percentage of the last dollar earned that is paid
in taxes
• Tax evasion
• The deliberate failure to pay taxes, usually by
making a false report
• Negative tax
• A payment from the government to an individual
that is based on the individual’s income
The Government and Fiscal Policy
• Government can affect the macroeconomy
through two policy channels:
• fiscal policy The government’s spending and
taxing policies
• Fisc referring to the treasury of a government
• monetary policy The behavior of the Central
Bank concerning the nation’s money supply
The Government and Fiscal Policy
• Fiscal policy:
• Policies concerning government purchases of
goods and services
• Policies concerning taxes
• Policies concerning transfer payments (such as
social security benefits)
• discretionary fiscal policy Changes in taxes or
spending that are the result of deliberate changes
in government policy
Government in the Economy
GOVERNMENT PURCHASES (G), NET TAXES
(T), AND DISPOSABLE INCOME (YD)
• net taxes (T) Taxes paid by firms and
households to the government minus transfer
payments made to households by the
government
Government in the Economy
• disposable, or after-tax, income (Yd) Total
income minus net taxes: Y − T
disposable income ≡ total income − net taxes
Yd ≡ Y − T
Government in the Economy
• The disposable income (Yd) of households must
end up as either consumption or saving (S)
Yd≡C+S
• As disposable income is aggregate income (Y)
minus taxes (T)
Y-T≡C+S
Y≡C+S+T
Government in the Economy
• When government enters the picture, the
aggregate income identity gets cut into three
pieces:
• Government takes a part (net taxes T)
• Households divide the rest between
consumption (C) and saving (S)
• Planned aggregate expenditure (AE) is the sum
of consumption spending by households (C),
investment by business firms (I) and government
purchases of goods and services (G)
AE≡C+I+G
Government in the Economy
• budget deficit The difference between what a
government spends and what it collects in taxes
in a given period: G − T
budget deficit ≡ G − T
• If G>T government must borrow from the public
to finance the deficit
• If G<T government is spending less than it is
collecting in taxes, the government is running a
surplus
Government in the Economy
Adding Taxes to the Consumption Function
• To modify our aggregate consumption function to
incorporate disposable income instead of beforetax income, instead of C = a + bY, we write
C = a + bYd
C = a + b(Y − T)
• Our consumption function now has consumption
depending on disposable income instead of
before-tax income