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? 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 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.