Transcript Fiscal Policy

Fiscal Policy
Tax and Spend!
Objectives
• ID two tools used in Fiscal Policy
• Examine Tax structures and burdens
• Analyze how the President & Congress shape
Fiscal Policy
• Analyze the limitations of Fiscal Policy
• C3 PO4, C2 PO 3cd
What is a tax, anyway?
• A mandatory
payment/fee to
government in
order to fund
goods/service to
public
Who collects taxes?
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Local Districts
Counties
States
National Governments
Tax Burdens
National Tax Burden % of GDP
• All Listed Countries are spending more as a %
of GDP than they take in tax revenues!
Taxation General Categories
• Government can
discourage behavior via
taxes
– Direct taxes
• Ex=Income
– Indirect taxes
• EX=Sales Tax
– “Sin Taxes”
• Ex= Marijuana taxed per
gram
– Government can also
reward behavior
– Tax deductions
• Ex=Charity Giving
– Tax credits
• Cost of Solar Panels
– Tax exemptions
• Revitalize Depressed area
How taxes effect payers
• 3 possible effects of taxes
– Proportional %
• Everyone pays the same percentage of tax
– Sales taxes
– Progressive %
• The more you make, the more they take
– Income tax rates at 10%,15%,18%, 33%, Capital Gains taxes
– Regressive $
• Flat Fees have a greater impact on lower incomes
– User Fees for National Parks, Driver’s licenses
– Proportional taxes can also be regressive
The Two Tools
• Fiscal Policy means-Government can
influence the economy through taxing and
spending policies.
• In the USA, Congress and the President work
together to set fiscal policy.
– Congress passes tax and appropriations (spending)
bills, while
– President controls disbursement and borrowing
(via Treasury Dept)
Keynesian Economics
• JM Keynes 1936 book
General Theory of
Employment, Interest
and Money offered
fiscal policy instructions
– Cut taxes to speed
economic growth and
lower unemployment
Net Aggregate Demand
• By raising taxes, Gov can directly influence
the economy
– “raise and hold” slows the general economy
– “raise and spend” slows sections of economy
• By lowering taxes, the Gov puts money back
into wallets
– What does the government assume people will do
with the extra tax savings?
– What if the people do something else?
Expansionary Vs Contractionary
• Expansionary Fiscal Policy intends to speed
up the economy, creating jobs and
consumption
• Contractionary Fiscal Policy intends to slow
the economy, removing jobs and
consumption
• Why might a government want to SLOW an
economy?
Spending
• Gov. Taxing, Borrowing and Spending are
coordinated through the US Treasury Dept.
• Gov Borrowing influences Net Aggregate
Demand by spending money not yet earned
• DEFECIT=
– Spending-Tax Income=Money Borrowed to
fulfill needs in one year
• National Debt=
– Total amount borrowed by government over
time to fulfill needs.
Other Actors in Fiscal Policy
• Office of Management and Budget
– Advises President on costs of Congressional Bills
• US Department of Commerce
– Targets spending on weak economic sectors
• US Department of Energy
– Assists in setting taxes for domestic energy supplies
• US Dept of Health and Human Services
– Medicare, Medicaid and Social Security budgets
• US Dept of Defense
– Assessment of military spending priorities
US National Debt Clock
• http://www.usdebtclock.org/
• Unlike people, the government can usually run
a huge debt without too many problems.
– Ability to tax, print money
• What are the benefits to running a national
debt? What are the drawbacks?
• What if a country can’t repay?
Who Owns all that debt?
Automatic Stabilizers
• Automatic Stabilizers keep economy steady
through counterbalancing economic trends
• Unemployment insurance payments increase during
recessions, speeding up economy
• Proportional Taxes on income rise during expansion,
paying back gov. debt and gradually taking $$ away
from potential spending-slowing economy
• * Government action can backfire- Pres.
Bush’s tax cuts in July 2001, Tax rebates in
2007.
Fiscal Flaws
• Borrowing from foreign investors eventually
means less capital to invest in the USA
• Gov. Spending can compete with consumers
for the same resources (oil)
• Squabbling between Congress and President
about what to tax and where to spend money.
Summary
• Fiscal Policy is government taxing and
spending
• They are like a brake and accelerator for the
economy
– Gov. borrowing is like NOS!
• Despite flaws, fiscal policy is a good tool to
help manage the economy.