Transcript Fiscal Policy

Fiscal Policy
Government Spending
And
Taxes
Fiscal policy is …
Fiscal Policy
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Government spending
Increase:
stimulates the
economy
– Decrease: slow
down the
economy
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Taxes
Increase: slows
down the
economy
– Decrease:
Stimulates the
economy
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Taxes
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Way to raise revenues
Limit or regulate the use of products or
services
Give the competitive advantage to American
made goods
1st income tax
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North during the civil war
16th amendment: permanent tax since 1913
Types of Taxes
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Proportional Taxes
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Flat rate taxes
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The same percentage of
income from individuals at
all income level
Property tax
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Regressive Taxes
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Takes a larger percentage
from members of lowincome groups than high
income groups
Sales tax
Progressive Taxes
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A larger percentage of
income from a high income
person than a low-income
person
Federal income tax
Collecting Taxes
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Corporate Income Taxes
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Tax based on the value of
your property
Social Security Taxes
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Withholding taxes (FICA)
from workers paychecks
Sales Taxes
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Tax on income
Property Taxes
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Government taxes corporate
profits
Individual Income Taxes
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Gift tax
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A regressive tax based on
consumer spending
the transfer of money or
property of over $10,000.
Estate tax
assets of the deceased
Excise tax
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Tax on the manufacture, sale
or consumption of an item
Federal Budget in
Nation Debt Charts and Graphs
Demand Side
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Keynesian economics
Increase government
spending
Control demand to prevent
extremes:(inflation and
depressions)
Deficit spending and large
government budget to
stimulate the economy
Save surplus for future
Multiplier effect
Supply Side
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Reagan / Milton Friedman
Cut taxes and reduce
spending
Producers create changes to
deal with econ fluctuations:
Laissez faire
Gov’t provides tax cuts for
business to invest and
expand
Cut social program competes with private sector
Reduce the size of gov’t
Demand side economics
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Cyclically balanced budgets
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Save money during peaks and expansions
Spend during contractions and troughs
When the economy is doing very poorly the
government should take action
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Cut taxes for individuals
Increases government spending
Demand-side Economics
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Prior to Keynes
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Annually balanced budgets
Lows were especially tough
Concerns
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Booms and recessions aren’t always equal
Politically it is easier to cut taxes than raise taxes
It is also easier to increase spending than to cut programs
Will we spend too much?
Keynesian Economics
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John Meynard Keynes
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British economist
Influenced FDR’s New Deal
Stimulate demand by increasing government spending
and cutting taxes
Government involvement to eliminate lows by using
large budgets and deficit spending
Increasing government spending is more effective than
cutting taxes or cutting interest rates
Presidents who used
Demand-Side Economics
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FDR
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New Deal spending
Kennedy
Carter
Supply-side economics
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Say’s law 19th century : supply creates it own
demand
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When an entrepreneur produces something it
produces enough income in the economy to
purchase what’s produced
What might be some obstacles to this belief?
Supply-Side Economics
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Increasing the economic stability and growth
by increasing the supply of goods and services
Cut taxes as an incentives to increase
production
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Prices drop
Need for additional workers
Increased consumer demand
Reaganomics 1980’s
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Reaganomics; trickle down econ; voodoo econ
Based on Milton Friedman
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Tax cuts for producers to make capital
improvements and increase aggregate supply
Goal to decrease inflation and unemployment
Increase the tax revenues
Increase productivity as a nation
Producers can handle the changes in the business
cycle
Justification for
Supply-Side Economics
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Too much government discourages growth
Demand side action increases inflation by increasing
government spending and decreasing taxes
The crowding out effect is when the government
competes with the private sector for loans and
resources
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1. Cut government spending
2. Cut taxes for producers
3. Cut regulations set by government
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Government regulation increases cuts and hurts competition
Too much bureaucracy or “Red Tape”
Monetary and Fiscal Policy
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The economy is in a severe depression and something
needs to be done to help the economy. What should be
done?
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The economy is in the recovery phase but you are
starting to see slight inflation. What should be done?
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The economy is feeling high levels of Inflation. Prices
are skyrocketing. What should be done?
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The economy is in a recession. Demand is dropping;
companies are cutting jobs. What should be done?