2.  Spending, taxing, & borrowing policies  Government collects taxes to pay programs (Roads, education, National Defense)  Taxes used to influence behavior of individuals (tobacco, etc.)

3.  Tax Rates – the percentage of a person’s income that goes toward taxes.  Proportional Taxes – “flat rate tax”  Takes same percentage of income from individuals at all income levels.  Has greater impact on people with lower incomes.

4.  Progressive Taxes – takes larger percentage of income from a high- income person than lower income person  2000, $26,250 or less = 15%  $288,350 = 39.6% (highest tax bracket)  Effected those with the higher incomes more than those with lower incomes.

5.  Regressive Taxes – takes larger percentage of income from people with low incomes than from people with high incomes.  Falls more heavily on people in lower- income groups than on people who earn high incomes

6.  Individual Income Taxes – progressive (sometimes proportional) tax on a person’s income.  Collected by Federal government & most state governments  1996, provided 38% of federal revenue & 14% of state revenues.

8.  U.S. government taxes corporate profits.  Many corporations pay at a reduced rate  1996, made up 10% of federal tax revenues & 3% of state tax revenues

9.  Money withdrawn from workers paychecks to fund (OASDI) Old-Age, Survivors, & Disability Insurance & Medicare – provides health care to older Americans regardless of income.  Both proportional & regressive  Second largest source of revenue for federal government (1999 = 33.5%)

10.  Does not take a persons income into account.  1% of state revenues (25% of local governments revenue)

11.  Regressive tax assigned to certain goods and services by state & local governments  1996, 5% of federal revenues & 21% of state revenues.

12.  Excise tax – tax on manufacture, sale or consumption of a particular good or service (gas, tobacco, firearms, alcohol, telephone services, tires, & gambling)  Estate tax – tax placed on the assets of a person who has died  Gift tax – placed on the transfer of certain gifts of value (exceeds $10,000 annually)  Customs duty – tax on goods brought into the U.S.

13.  Supply-Side Economics – focuses on achieving economic stability & growth by increasing the supply of goods & services throughout the economy  Governments role to provide firms with incentives to increase production (tax cuts & less spending)  Leading supporter Jean-Baptiste Say – “Supply creates its own demand”  Producers provide enough goods & services to meet their own needs – produce more in exchange to meet their wants

14. 1. Assumption that economist can predict the economic behaviors of people 2. Tax cuts unfair  Spending cuts fell most heavily on social programs for the poor, unemployed, & other disadvantaged groups.

15.  Focuses on achieving economic growth through governments influence on aggregate demand.  John Maynard Keynes – “Father” of demand-side economics  Published “The General Theory of Employment, Interest and Money” – marketplace forces alone were not enough to increase aggregate demand during economic downturns. (government needed)  Employment Act of 1946 – pledged to promote “maximum employment, production, and purchasing power”

16.  Tax Rates – used to regulate aggregate demand in privately owned businesses  Congress reduces taxes to help unemployment  Congress raises taxes to limit inflation  Tax Incentives – special tax break the government extends to businesses to encourage investments in new capital  Investment tax credit – permits firms to deduct from their corporate income taxes a percentage of money spent on new capital

17.  Government Spending  Decrease of government spending results in lower aggregate demand & slower business activity  Increase results in higher spending, aggregate demand & employment opportunities  Public Transfer Payments  Redistribution of tax dollars to nonproductive (goods or services that are not created in exchange for government payments) actors in the economy. “Unemployment compensation”  Progressive Income Taxes  Period of prosperity leads higher incomes into higher tax brackets  Periods of recession – taxed at lower rates

18.  Timing Problems  Political Pressures  Restrictive fiscal policy – increases taxes & reduces government spending  Expansionary fiscal policy – decreased taxes & increased government spending to stimulate business activity  Unpredictable economic behaviors  Lack of coordination among government policies

19.  Federal Budget – federal governments plan for the use of government revenues  Summary of the ways in which the government uses fiscal policies.

20.  Wartime spending – causes dramatic increases in the level of government expenditures  Increased corruption  Progressive Reform Movement

21.  New Budget Process  1921, Budget and Accounting Act – created the Bureau of the Budget  Empowered the president to formulate an annual budget  OMB (Office of Management & Budget) replaced BOTB  Budget Process today  President develops it & consults with the OMB, Council of Economic Advisers, The Dept. of the Treasury  Focuses on the next fiscal year – 12-month finical period that typically does not duplicate the dates of the calendar year

22.  Budget deficit – government spends more than it collects  Budget surplus – government revenues exceed government expenditures  Deficit spending – spending more money for its programs than it’s able to cover with it’s revenues.  National Debt – total amount of money the federal government has borrowed (includes all deficits from previous years)

24.  Growth of the National Debt  1790 = $75 million  Civil War = $1 billion  WW1 = $3 billion (two years later $25 billion “Roaring 20’s)  1982 = $1 trillion  2000 = $5.6 trillion  Debt Ceilings – legislates a limit on the size of the national debt  Increased each time it was set…  Impact of the National Debt  Spending on social programs = improves quality of life  $362 billion on interest alone in 2000

25.  Increasing Revenues  Taxation?  1993, Omnibus Budget Reconciliation Act – raised individual income tax rates for highest tax bracket & raised taxes on gasoline  Decreasing Expenditures  Closing of military bases  Reducing defense spending  Legislating a Balanced Budget  Balanced Budget & Deficit Reduction Act (1985) “GRH”  Program set-up to balance budget in 5-years  Cuts to nearly every government program