1. Chapter 14 – Taxes and Government Spending Section 1 – What are Taxes?
Tax – a required payment to a local, state, or national government
Income, sales, property, capital gains, etc.
Revenue – income received by the government from tax collection
Tax Base – income, property, good or service that is subject to a tax

3. Tax Structures
Proportional Tax – % of income taxes remains the same for all income levels (Flat tax)
It’s the same percentage for all.
$40,000 income vs. $140,000 income
10% on $1000 = $100, Who has more in the end?
Progressive Tax – % of income paid in taxes increases as income increases (Federal Income Tax)
“The more you make the more they take”
Regressive Tax - % of income paid in taxes decreases as income increases (Sales Tax)
6% tax on a can of beans for the $25,000 and the $125,000. Who does this impact more?

4. Characteristics of a Good Tax
Simplicity – easy to understand, keep records, prepare tax forms, anticipate amount of taxes
Efficiency – easy to collect, taxpayers should not pay too much or take too much time to pay
Certainty – clear due dates, amount to be paid, how to pay
Equity – fair, so not one person bears too much or too little of the tax burden

5. Individual Income Taxes
“Pay-As-You-Earn” Taxation – taxes are paid based on annual income; individuals pay income taxes throughout the year
Tax Withholding – tax payments taken out of employees pay before they receive it; ensures annual payment
Tax Return – form used to file income taxes; declare income and taxable income

6. Individual Income Taxes
Taxable Income – A person’s gross income minus exemptions and deductions
Personal Exemptions – set amounts that you subtract from your gross income
0, 1, 2, 3, 4, 5, 6, etc.
Deductions – amounts you can subtract, or deduct from your gross income.
Interest on a home, children, charity, religious, education, etc.
Tax Bracket – scheduled rate at which you are taxed based on your annual income

7. Corporate Income Taxes
FICA (Federal Insurance Contributions Act) – funds Social Security and Medicare.
Social Security – funds people of old-age, survivors and disabilities, established in 1935, originally to provide old-age pensions of workers
Medicare – national health insurance program that helps pay for people over age of 65 or with certain disabilities
Medicaid – national health insurance for people within the poverty threshold
Unemployment – insurance for workers laid off through no fault of their own

8. Other Types of Taxes
Excise tax – tax on gasoline, cigarettes, alcohol, phone service, cable, internet, etc.
Estate tax – “death tax”, tax on estate or value of money and property of a person who has died
Gift tax – tax on money or property that one living person gives to another; a person can give up to $10,000 a year tax-free per individual
Tariff – import tax on foreign goods brought into the country

9. Daily Assignment Questions – Ch. 14 Section 1 pgs. 359 – 360
*Answer in complete sentences*
How did taxes affect early American colonists?
What gives the government the right to tax U.S. citizens?
What is the purpose of taxation?
What are some things that are provided by the government through revenue?
Where is the power to tax found in the Constitution?
What are the two limitations of taxes found in the taxation clause?
What is Congress unable to tax?
What is a tax base?
List the items that could be included in the tax base.

10. Chapter Do Now
Out of the 3.5 Trillion dollars of U.S. federal budget, break down in percentages the amount that you think should go towards the following areas of the economy:
Category
Percentage Allocated
Social Security
National Defense
Unemployment/ Welfare/Mandatory Programs
Medicare
Medicaid
Interest on Debt
Education

11. Chapter Do Now
Out of the 3.5 Trillion dollars of U.S. federal budget, break down in percentages the amount that you think should go towards the following areas of the economy:
Category
Percentage Allocated
Dollars
Social Security
19.63
$ 695 billion
National Defense
18.74
$ 664 billion
Unemployment/ Welfare
16.13
$ 571 billion
Medicare
12.79
$ 453 billion
Medicaid
8.19
$ 290 billion
Interest on Debt
4.63
$164 billion
Education
1.32
$ 46.7 billion
Other
18.0
$ 635 billion

12. Fiscal Policy and The Federal Budget
Fiscal Policy – the use of government spending and revenue collection to influence the economy
Federal budget – a written document indicating the amount of money the government expects to receive and how they will spend it
Released the first Monday in February each year
Fiscal year – 12 month period, October 1 – September 30

13. Creating The Federal Budget
Step 1 – Federal agencies request money; spending proposals are sent to the Office of Management and Budget (OMB)
Step 2 – The OMB works with the President to create a budget, President presents to Congress
Step 3 – Congress makes changes to the budget and sends the amended budget to the President
Step 4 – The President signs the budget into law
Step 1 → Step 2 → Step → Step 4

14. Federal Spending
Mandatory Spending – programs that lawmakers are required by existing laws to spend money on (Social Security, Medicare, Medicaid, etc.)
Discretionary Spending – spending that government can adjust; increase or decrease (Defense, environment, scientific research, etc.)

15. Budget Deficits and the National Debt
Which President had the smallest budget deficit’s in recent history?
Which President had the largest budget deficit in recent history?
Other than our current President, which three presidents had the largest budget deficits?
What do you have to do when you spend more than you can afford?

16. Budget Deficits and the National Debt
Balanced budget – money going into the U.S. Treasury is the same amount of money going out
Revenue = Spending
The last balanced budget occurred in 1997 under President Bill Clinton

17. Balancing the Budget
Budget Surplus – occurs when the government takes in more than it spends
Revenue > Spending
Budget Deficit – occurs when the government spends more than it takes in
Revenue < Spending

18. Dealing with a Budget Deficit
Create money – the government can print or inject money into economy
Borrow money – government borrows money by selling bonds
Bond is a type of loan with a promise to repay with interest
Bonds sold domestically or globally
China owns 1 trillion dollars in U.S. bonds

19. The National Debt
National debt – the total amount of money the federal government owes to bondholders
Budget deficit – the amount of money the government owes to bondholders in one fiscal year
Who does the United States owe money to?
US Debt Clock

20. Mandatory and Discretionary Spending Chart pgs. 371-373
Mandatory Spending
Description
Entitlements
Social Security
Medicare
Medicaid
Other Mandatory Spending Programs
Social welfare programs that people are “entitled to” if they meet certain eligibility requirements.
The largest category of federal spending. More than 50 million retired or disabled people and their families and survivors receive monthly benefits.
Serves around 40 million people, most over 65 years old. Pays for hospital care and the costs of physicians and medical services.
A program that benefits low-income families, disabled and elderly people in nursing homes. Largest source of funds for medical and health related services for people within the poverty threshold.
Food stamps, supplemental security income and child nutrition, retirement benefits and insurance for federal workers, veterans pensions and unemployment.
Discretionary Spending
Description
Defense Spending
Other Spending
Pays the salaries of people in the army, navy, air force, marines and civilian employees. Largest portion of discretionary spending.
Education, training, scientific research, student loans, technology, national parks and monuments, law enforcement, environmental cleanup, housing.

21. Expansionary and Contractionary Fiscal Policies, pgs. 389-390
Word
Definition
Description
Expansionary Fiscal Policies
Purpose
Increase in government spending
Cutting Taxes
Contractionary Fiscal Policies
Decrease in government spending
Increasing Taxes

22. Tools of Fiscal Policy Chart
Expansionary/ Contractionary
Explanation
1. The government cuts business and personal income taxes and increases its own spending.
2. The government increases the personal income, Social Security and corporate income tax.
3. Government spending goes up while taxes remain the same.
4. The government reduces the wages of its employees while raising taxes on consumers and businesses.

23. Tools of Fiscal Policy Chart
Expansionary/ Contractionary
Explanation
1. The government cuts business and personal income taxes and increases its own spending.
Expansionary
Decreased taxes increase C & I.
Increase in government spending increases G.
Shifts AD to the right.
2. The government increases the personal income, Social Security and corporate income tax.
3. Government spending goes up while taxes remain the same.
4. The government reduces the wages of its employees while raising taxes on consumers and businesses.

24. Tools of Fiscal Policy Chart
Expansionary/ Contractionary
Explanation
1. The government cuts business and personal income taxes and increases its own spending.
Expansionary
Decreased taxes increase C & I.
Increase in government spending increases G.
Shifts AD to the right.
2. The government increases the personal income, Social Security and corporate income tax.
Contractionary
I & C decrease because of the tax increase.
Shifts AD to the left.
3. Government spending goes up while taxes remain the same.
4. The government reduces the wages of its employees while raising taxes on consumers and businesses.

25. Tools of Fiscal Policy Chart
Expansionary/ Contractionary
Explanation
1. The government cuts business and personal income taxes and increases its own spending.
Expansionary
Decreased taxes increase C & I.
Increase in government spending increases G.
Shifts AD to the right.
2. The government increases the personal income, Social Security and corporate income tax.
Contractionary
I & C decrease because of the tax increase.
Shifts AD to the left.
3. Government spending goes up while taxes remain the same.
Higher government spending without a corresponding rise in tax receipts increases G.
4. The government reduces the wages of its employees while raising taxes on consumers and businesses.

26. Tools of Fiscal Policy Chart
Expansionary/ Contractionary
Explanation
1. The government cuts business and personal income taxes and increases its own spending.
Expansionary
Decreased taxes increase C & I.
Increase in government spending increases G.
Shifts AD to the right.
2. The government increases the personal income, Social Security and corporate income tax.
Contractionary
I & C decrease because of the tax increase.
Shifts AD to the left.
3. Government spending goes up while taxes remain the same.
Higher government spending without a corresponding rise in tax receipts increases G.
4. The government reduces the wages of its employees while raising taxes on consumers and businesses.
Reduction in government spending results in a decrease in aggregate demand.
Increases in taxes reduces C.
Increased business taxes reduce I.

27. Model of aggregate demand & aggregate supply
Model used to explain short-run fluctuations in economic activity around its long-run trend
Aggregate - sum of all supply and demand in an economy
Two variables:
Economy’s output of goods and services
Average level of prices (CPI or GDP Deflator)
Price
Level
Aggregate supply (AS)
Aggregate demand (AD)
Equilibrium
price level
Equilibrium
output
Quantity of
Output

28. Why is the AD Curve Downward Sloping?
Wealth effect – consumers are wealthier, which stimulates the demand for consumption goods
Interest rate effect – interest rates fall, which stimulates the demand for investment goods
Exchange Rate effect – currency depreciates, which stimulates the demand for net exports, vice versa
Price
Level
Aggregate demand (AD)
Equilibrium
price level
Equilibrium
output
Quantity of
Output

29. Aggregate Demand Aggregate-demand curve
Sum of C+I+G+NX (real GDP) at each price level
Downward sloping
Low price levels increase the quantity of goods and services, vice versa
Price
Level
Aggregate demand (AD)
Equilibrium
price level
Equilibrium
output
Quantity of
Output

30. Why the AD Curve Might Shift?
Shifts arising from changes in consumption
Decreases in spending – people become more concerned with saving for retirement
Increases in spending – stock market boom increases disposable income
Shifts arising from changes in investment
Change in firm investing – tax policy, pessimism about economy in future, interest rates
Shifts arising from changes in government purchases
Congress increases/decreases spending
Shift arising from changes in net exports
Global recessions would cause a decrease in demand for U.S. products

31. What Shifts the Aggregate Demand Curve?
Price
Level A B C
Quantity of
Output
Situation
Change in AD
New AD Curve
Congress cuts taxes
Business spending decreases
Government spending increases; no new taxes
Survey shows consumer confidence jumps
Stock collapses; investors lose billions
President cuts defense spending by 20%; no increase in domestic spending C A C C A A

32. Effects of Fiscal Policy Chart
Scenario
Expansionary/ Contractionary
Effect on Federal Budget
Objective for Aggregate Demand
Action on Taxes
Action on Gov’t Spending
Effect on the National Debt
1. National unemployment rate rises to 12%
2. Inflation is strong at a rate of 14% per year.
3. Surveys show consumers are losing confidence in the economy, retail sales are weak and business inventories are increasing rapidly
4. Business sales and investment are expanding rapidly, and economists think strong inflation lies ahead.
Move toward a deficit
Expansionary
Move toward a surplus
Contractionary
Move toward a deficit
Expansionary
Move toward a surplus
Contractionary

33. Chapter 15 Practice Worksheet
1. If a country’s central bank were to engage in activist stabilization policy, in which direction should it move the money supply in response to the following events?
A wave of optimism boosts business investment and household consumption causing price levels to increase.
Decrease the money supply
To balance its budget, the government raises taxes and reduces expenditures causing a slowdown in the economy.
Increase the money supply
OPEC raises the price of crude oil causing people’s disposable income to reduce.
The taste for the country’s products amongst the residents of other countries declines.
The stock market falls.

34. Chapter 15 Practice Worksheet
2. In which direction should the Federal Reserve move interest rates in response to the following events?
A wave of optimism boosts business investment and household consumption causing price levels to increase.
Increase interest rates
To balance its budget, the government raises taxes and reduces expenditures causing a slowdown in the economy.
Decrease interest rates
OPEC raises the price of crude oil causing people’s disposable income to reduce.
The taste for the country’s products amongst the residents of other countries declines.
The stock market falls.

35. Chapter 15 Practice Worksheet
3. If policy makers were to use fiscal policy to actively stabilize the economy, in which direction should they move government spending and taxes?
A wave of optimism boosts business investment and household consumption causing price levels to increase.
Decrease spending, increase taxes
To balance its budget, the government raises taxes and reduces expenditures causing a slowdown in the economy.
Increase spending, decrease taxes
OPEC raises the price of crude oil causing people’s disposable income to reduce.
The taste for the country’s products amongst the residents of other countries declines.
The stock market falls.

36. Daily Assignment Questions State and Local Taxes and Spending, pgs
What does a states operating budget pay for? List examples.
What does a state’s capital budget pay for? List examples
How do the state budgets differ from the federal government?
Where are taxes spent? List and describe each of the following:
Education
Public Safety
Highways and Transportation
Public Welfare
Arts and Recreation
Administration

37. Flow Chart Types of Taxes, pgs. 365-369
Individual Income Taxes
Corporate Income Taxes
Social Security, Medicare and Unemployment Taxes
Other Types of Taxes
1. Pay-As-You-Earn Taxation
2. Tax Withholding
3. Tax Return
4. Taxable Income
5. Personal Exemptions
6. Deductions
7. Tax Brackets
1. Impact on Federal Budget 2. Deductions
3. Progressive structure of Corporate taxes
1. FICA
2. Social Security
3. Medicare
4. Unemployment Taxes
1. Excise Taxes
2. Estate Taxes
3. Gift Taxes
4. Import Taxes (Tariffs)
5. Tax Incentive

38. Flow Chart Types of Taxes, pgs. 365-369
Individual Income Taxes
Corporate Income Taxes
Social Security, Medicare and Unemployment Taxes
Other Types of Taxes
1. Pay-As-You-Earn Taxation
2. Tax Withholding
3. Tax Return
4. Taxable Income
5. Personal Exemptions
6. Deductions
7. Tax Brackets
1. Impact on Federal Budget 2. Deductions
3. Progressive structure of Corporate taxes
1. FICA
2. Social Security
3. Medicare
4. Unemployment Taxes
1. Excise Taxes
2. Estate Taxes
3. Gift Taxes
4. Import Taxes (Tariffs)
5. Tax Incentive

39. Consumers Expect a Recession Fall in AD – Prices fall, real GDP falls
Foreign Income Rises Rise in AD – Prices rise, real GDP rises
Foreign price levels fall Fall in AD – Prices fall, real GDP falls
Workers Expect Future Inflation, Negotiate Higher Wages Now Fall in AS – Prices rise, real GDP falls
Technological Improvements Increase Productivity Rise in AS – Prices fall, real GDP rises
Government Spending Increases Rise in AD – Prices rise, real GDP rises

40. Extra Credit
What is the name of the economist that supported government intervention to stabilize the economy?
What is the primary way that a state budget differs from the federal budget?
Around what amount is the national debt?

41. Binder Check Due Today 5-4
Chapter 15 Practice Worksheet
Chapter Study Guide
Ch CW Puzzle
Daily Tens
Vocab Terms
Ch Notes
Online Assignment – Article