Ch Taxes & Govt. Spending Sect. 1 - What are Taxes Tax - Payments to the govt. that allow the govt. to operate The Power to Tax - Article 1, Section 8 of the U.S. Constitution “The Congress shall have Power To lay and collect Taxes…” “All Bills for raising Revenue shall originate in the House of Representatives” What about the 16 th amendment?

Progressive Tax - Percentage of taxes paid increases as income increases Ex: Income Tax

Progressive Tax

Progressive Tax - Percentage of taxes paid increases as income increases Ex: Income Tax Proportional Tax - Percentage of income paid in taxes remains the same at all income levels Ex: Flat Tax Regressive Tax - Percentage of income paid in taxes decreases as income increases Ex: Sales Tax

Tax Base - What is going to be taxed? Income, real estate, goods? A Good Tax - Simplicity - Should be easily understood by taxpayers Efficiency - Easy for government to assess and collect Certainty - Clear to taxpayer how much is due and when Equity - Fair, no one pays too much or too little

Sect. 2 - Federal Taxes Individual Income Tax - Single largest source of government revenue - approx. 45% of annual revenue - paid through withholding Tax Brackets - Tax rate that increases as your taxable income increases

Sect. 2 - Federal Taxes Individual Income Tax - Single largest source of government revenue - approx. 45% of annual revenue - paid through withholding Tax Brackets - Tax rate that increases as your taxable income increases Corporate Income Tax - Taxes on the profits that corporations make - also a progressive tax - approx. 10% of annual govt. revenue

Excise Tax - Often called a luxury tax - on goods like tobacco, alcohol, phone service, etc. Estate Tax - Tax on the total value of the money and property of one who has died Gift Tax - Tax on money or property given from one person to another - on value of over $12,000 per year

Tariff - Tax on imported goods - used to protect U.S. industries by raising the price of foreign goods

Tariff - Tax on imported goods - used to protect U.S. industries by raising the price of foreign goods Tax Incentive - Used to encourage certain behavior from individuals or businesses - tax credit for using solar energy, hybrid cars, building a factory

Tariff - Tax on imported goods - used to protect U.S. industries by raising the price of foreign goods Tax Incentive - Used to encourage certain behavior from individuals or businesses - tax credit for using solar energy, hybrid cars, building a factory

Sect. 3 - Federal Spending Mandatory Spending - Money that the govt. is required to spend on certain programs - Cannot be used for other things Entitlement Programs - Programs that people are “entitled to” benefit from if they meet eligibility requirements Ex: Social Security, Medicare/Medicaid, Food Stamps, etc. Discretionary Spending - Congress decides what to spend taxes on - Military makes up abut 50% of discretionary spending - Education, all Fed. Govt. employees, etc.

Sect. 3 - Federal Spending Mandatory Spending - Money that the govt. is required to spend on certain programs - Cannot be used for other things Entitlement Programs - Programs that people are “entitled to” benefit from if they meet eligibility requirements Ex: Social Security, Medicare/Medicaid, Food Stamps, etc. Discretionary Spending - Congress decides what to spend taxes on - Military makes up abut 50% of discretionary spending - Education, all Fed. Govt. employees, etc.

Federal Aid to State & Local Govt. - Appxt. $400 billion a year goes to states for education, highways, healthcare, disaster relief, grants, etc.

Federal Spending

Federal Aid to State & Local Govt. - Appxt. $400 billion a year goes to states for education, highways, healthcare, disaster relief, etc. Ch Fiscal Policy Sect. 1 - Understanding Fiscal Policy Fiscal Policy - The use of govt. taxing and spending to influence the economy - used to expand or slow economic growth - control business cycle Federal Budget - Plan for annual spending between President and Congress for the Fiscal Year (Oct. 1st - Sept. 30 th )

Fiscal Policy

Federal Aid to State & Local Govt. - Appxt. $400 billion a year goes to states for education, highways, healthcare, disaster relief, etc. Ch Fiscal Policy Sect. 1 - Understanding Fiscal Policy Fiscal Policy - The use of govt. taxing and spending to influence the economy - used to expand or slow economic growth - control business cycle Federal Budget - Plan for annual spending between President and Congress for the Fiscal Year (Oct. 1st - Sept. 30 th )

Appropriation Bill - Once agreement is reached, Congress passes Bill for annual spending and submits to president to sign If agreement can’t be reached Govt. could shut down Expansionary Policy - Attempt to encourage economic growth, through increased spending or tax cuts

Expansionary Policy

Appropriation Bill - Once agreement is reached, Congress passes Bill for annual spending and submits to president to sign If agreement can’t be reached Govt. could shut down Expansionary Policy - Attempt to encourage economic growth, through increased spending or tax cuts Contractionary Policy - Reduce economic growth through decreased spending or higher taxes

Contractionary Policy

Appropriation Bill - Once agreement is reached, Congress passes Bill for annual spending and submits to president to sign If agreement can’t be reached Govt. could shut down Expansionary Policy - Attempt to encourage economic growth, through increased spending or tax cuts Contractionary Policy - Reduce economic growth through decreased spending or higher taxes

Sect. 2 - Fiscal Policy Options Classical Economics - (Laissez Faire) A free market regulates itself (Adam Smith) - supply and demand will return to equilibrium on their own The Great Depression challenged this theory Keynesian Economics - (John Maynard Keynes ) Only increased demand will bring the economy out of recession (demand-side economics) The govt. should get involved if consumer demand is not sufficient

Sect. 2 - Fiscal Policy Options Classical Economics - (Laissez Faire) A free market regulates itself (Adam Smith) - supply and demand will return to equilibrium on their own The Great Depression challenged this theory Keynesian Economics - (John Maynard Keynes ) Only increased demand will bring the economy out of recession (demand-side economics) The govt. should get involved if consumer demand is not sufficient

Multiplier Effect - Every one dollar change in fiscal policy (increase in spending or decrease in taxes) creates a change greater than one dollar in the economy Supply Side Economics - Theory that the supply of goods drives the economy - opposite of Keynesian theory - Reducing taxes increases profits, employment, and production Laffer Curve - Graph showing the relationship between tax rate and total taxes collected - suggests that higher tax rate brings in less revenue if it reduces economic production

Laffer Curve

Multiplier Effect - Every one dollar change in fiscal policy (increase in spending or decrease in taxes) creates a change greater than one dollar in the economy Supply Side Economics - Theory that the supply of goods drive the economy - opposite of Keynesian theory - Reducing taxes increases profits, employment, and production Laffer Curve - Graph showing the relationship between tax rate and total taxes collected - suggests that higher tax rate brings in less revenue if it reduces economic production

Sect. 3 - Budget Deficit & National Debt Budget Deficit - (one year) When budget spending exceeds budget revenue - If govt. increases spending or cuts taxes without doing anything else it will result in a deficit

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Sect. 3 - Budget Deficit & National Debt Budget Deficit - (one year) When budget spending exceeds budget revenue - If govt. increases spending or cuts taxes without doing anything else it will result in a deficit Budget Surplus - Situation in which budget revenue exceeds budget spending Borrowing Money - Govt. does not print more money to cover deficit - it borrows

Sect. 3 - Budget Deficit & National Debt Budget Deficit - (one year) When budget spending exceeds budget revenue - If govt. increases spending or cuts taxes without doing anything else it will result in a deficit Budget Surplus - Situation in which budget revenue exceeds budget spending Borrowing Money - Govt. does not print more money to cover deficit - it borrows

National Debt - Total amount of debt from all yearly deficits - Appxt. $17 trillion - Appxt. $250 billion in annual interest

National Debt

Ch The Federal Reserve & Monetary Policy Sect. 1 - The Federal Reserve System Monetary Policy - The actions the Federal Reserve takes to control the money supply and influence the economy Federal Reserve Act of Created the Federal Reserve System - 12 regional Federal Reserve Banks - Board of Governors in Washington appointed by the President - Federal Reserve Chairman appointed by the President Janet Yellen

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Federal Reserve

Ch The Federal Reserve & Monetary Policy Sect. 1 - The Federal Reserve System Monetary Policy - The actions the Federal Reserve takes to control the money supply and influence the economy Federal Reserve Act of Created the Federal Reserve System - 12 regional Federal Reserve Banks - Board of Governors in Washington appointed by the President - Federal Reserve Chairman appointed by the President Ben Bernanke until 2014

Sect. 2 - Federal Reserve Functions Bank for U.S. Govt. - Provides banking services for the Federal Govt. and public banks throughout the U.S. Issuing Currency - Prints and issues paper currency (Federal Reserve Notes) - also replaces worn currency Check Clearing - Processes all checks issued by banks - (appxt. 18 billion checks annually)

Discount Rate - The interest rate that the Federal Reserve charges banks for loans - sets the interest rate banks charge to customers Sect. 3 - Monetary Policy Tools Required Reserve Ratio - Percentage of bank deposits that must be held with the Federal Reserve - not available to loan out Money Multiplier - Formula for calculating the amount of money added to the money supply from an initial deposit or purchase initial cash deposit x (1 / RRR) = Increase in money supply Ex: $1000 x (1/.10) = 10 x $1000 = $10,000

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Discount Rate - The interest rate that the Federal Reserve charges banks for loans - sets the interest rate banks charge to customers Sect. 3 - Monetary Policy Tools Required Reserve Ratio - Percentage of bank deposits that must be held with the Federal Reserve - not available to loan out Money Multiplier - Formula for calculating the amount of money added to the money supply from an initial deposit or purchase initial cash deposit x (1 / RR) = Increase in money supply Ex: $1000 x (1/.10) = 10 x $1000 = $10,000

Open Market Operations - The buying and selling of government securities to alter the supply of money - the most commonly used monetary policy action - Buying govt. securities increases the money supply - Selling govt. securities reduces the money supply

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