2. Government and the Economy Unit 3

3. Government Responsibilities Provide legal and social frameworkProvide legal and social framework Maintain competitionMaintain competition Provide public goods and servicesProvide public goods and services Redistribute incomeRedistribute income Correct for externalitiesCorrect for externalities –Unintended side effect on an unintended 3 rd Party Stabilize the economyStabilize the economy

4. Effect of Taxes Resource AllocationResource Allocation –Can change the way companies use their Factors of production Behavior adjustmentBehavior adjustment –Tax deduction for homeowners Productivity and growthProductivity and growth –Can affect people’s desire to work hard to earn more money. –If one gets taxed more for earning more, why earn more?

5. Incidence of a Tax Who is bearing the burden of the tax?Who is bearing the burden of the tax? –Producer or consumer Can be predicted by the supply and demand analysisCan be predicted by the supply and demand analysis If the tax is on the production of a product, who will ultimately pay for the tax?If the tax is on the production of a product, who will ultimately pay for the tax? If the tax is $1, and the equilibrium price goes up $.90, then the producer pays $.90, then the consumer only pays $.10. and vice versa.If the tax is $1, and the equilibrium price goes up $.90, then the producer pays $.90, then the consumer only pays $.10. and vice versa.

6. Tax Revenue Tax: Required payment to local, state, and federal government.Tax: Required payment to local, state, and federal government. Government given this right in the ConstitutionGovernment given this right in the Constitution Taxes collected to provide for the common defense and general welfare, and to pay debts.Taxes collected to provide for the common defense and general welfare, and to pay debts. Must be uniform throughout the USMust be uniform throughout the US

7. Power to tax is limitedPower to tax is limited –Cannot tax Church services –Cannot tax exports –Even income tax across the board

8. Types of Taxes ProportionalProportional –Everyone pays the same tax percentage no matter what the income ProgressiveProgressive –% of tax rises with the income (income tax) RegressiveRegressive –The more income you make, the less the tax you pay (sales tax)

10. Good or Bad Tax 4 characteristics of a good tax4 characteristics of a good tax SimplicitySimplicity –Easy to understand EfficiencyEfficiency –No wasted time in collecting taxes CertaintyCertainty –When the tax is due, how much, and how EquityEquity –Fair

13. Federal Taxes Income Tax: Pay as you earnIncome Tax: Pay as you earn Pay is removed before you get it. (withholding)Pay is removed before you get it. (withholding) Must fill out a tax return to figure out how much you owe on taxable income.Must fill out a tax return to figure out how much you owe on taxable income. Taxable Income:Taxable Income: –Total income (Gross) minus exemptions DeductionsDeductions –Could be dependants, mortgage interest, charity donations, medical payments, and state and local taxes (pay more than you owe and get a rebate…)

15. Other taxes Estate TaxEstate Tax –Tax on value of a person that has died Gift taxGift tax –That one living person gives another Import taxImport tax –On goods coming into the country Tax incentivesTax incentives –Use of a tax to encourage/discourage a behavior

17. Federal Spending Mandatory v. Discretionary spendingMandatory v. Discretionary spending MS: Money that must be spent, by law, on certain programs.MS: Money that must be spent, by law, on certain programs. DS: Money that government spenders are free to make choices on how to spend.DS: Money that government spenders are free to make choices on how to spend.

18. Mandatory Spending Entitlement ProgramsEntitlement Programs –Biggest chunk of spending other than the debt. –Some of the programs are means tested –The higher the income, the less you get. –Examples???? –Social Security –Medicare –Medicaid –Welfare/food stamps

20. Discretionary spending Choice on where to spend tax dollarsChoice on where to spend tax dollars –Education –Scientific research and development –Student loans –Technology –National Parks –Law enforcement –Transportation

21. Fiscal Policy Use of taxing to keep the government stableUse of taxing to keep the government stable –Spends $200 million an hour –$4.8 billion a day Main decisions, how much to tax, how much to spend?Main decisions, how much to tax, how much to spend? Fiscal year is from 10/1-9/30Fiscal year is from 10/1-9/30 These policies can both help or hurt the economy.These policies can both help or hurt the economy.

22. Budget How much revenue is expected, how and where to spend it.How much revenue is expected, how and where to spend it. Must be passed before 9/30 or “stop gap funding” bills are passedMust be passed before 9/30 or “stop gap funding” bills are passed

23. Federal Reserve System Functions:Functions: –Provide banking and fiscal services to government –Banking services to member banks –Regulate banks –Track money supply to keep stability