Unit 6 - Fiscal Policy Fiscal Policy Governments make decisions regarding spending and taxation. Macroeconomics

Unit 6 - Fiscal Policy Fiscal Policy and Keynes Keynes encouraged governments to increase spending and/or decrease taxes during recessions, and the opposite during expansions. Macroeconomics

Unit 6 - Fiscal Policy Fiscal Policy and Keynes Federal government spending: Unit 6 - Fiscal Policy Fiscal Policy and Keynes Keynes listed two types of fiscal policy: Discretionary spending (needs government approval). Examples include bills passed to change spending on roads, highways, stadiums, or taxation in order to stimulate the economy. Automatic stabilizers (already part of existing programs). Examples include welfare programs and progressive taxes.

Unit 6 - Fiscal Policy Fiscal Policy and Classical Economists The classical theory supports government spending only on essential functions, but not as a way to stimulate the economy. Macroeconomics

Unit 6 - Fiscal Policy Fiscal Policy and the Classical Theory Classical economists believe that government stimulation is harmful in the long run, because it: Raises inflation Raises interest rates, Slows down the economy in the long run. Is subject to lags in the implementation. Macroeconomics

Unit 6 - Fiscal Policy Fiscal Policy and the Classical Theory implementation lags Information lag Policy lag Impact lag Macroeconomics

Unit 6 - Fiscal Policy United States Government Levels Government spending and taxation occurs at the following levels in the United States: Federal (national) State Local (county and city) Macroeconomics

Unit 6 - Fiscal Policy Federal Government Expenditures Federal government spending: Unit 6 - Fiscal Policy Federal Government Expenditures See our CD, Unit 6, Section 3, or visit: http://www.gpoaccess.gov/usbudget/

Unit 6 - Fiscal Policy Federal Government Revenue Federal government spending: Unit 6 - Fiscal Policy Federal Government Revenue See our CD, Unit 6, Section 4. Or visit: http://www.gpoaccess.gov/usbudget/

Unit 6 - Fiscal Policy Federal Government Tax Rates $0 10% $8,500 15% 2011 Individual Income Tax Brackets for a single person Marginal Tax Rate 2011 Brackets for Married Households Filing Jointly $0 10% $8,500 15% $17,000 $34,500 25% $69,000 $83,600 28% $139,350 $174,400 33% $212,300 $379,150 35%

(Survey) Regarding our tax rates in the United States, we should: Keep them the same Lower them for everyone Raise them for everyone Lower them for households earning less than $200,000 and raise them for higher incomes Don’t know 10 0 of 30 Cross-Tab Label 0 / 30

In 2008, the top 10% of all income earners (households) in the U. S In 2008, the top 10% of all income earners (households) in the U.S. (income higher than $109,000) paid approximately ___ of all federal income taxes 22% 37% 52% 71% 82% :10 0 of 30

In 2008, the bottom 50% of all income earners (households) in the U. S In 2008, the bottom 50% of all income earners (households) in the U.S. (incomes lower than $32,000) paid approximately ___ of all federal income taxes 0% 3% 10% 22% 30% 50% :10 0 of 30

Unit 6 - Fiscal Policy Federal Tax Burden Federal government spending: The top 25% (household income higher than $65,000) paid 86% of all federal income taxes in 2008. For a breakdown of the burden of tax of all income groups in the United States, see our CD, Unit 6, Section 4.

Unit 6 - Fiscal Policy Alternative Tax Plans Federal government spending: Unit 6 - Fiscal Policy Alternative Tax Plans The Flat Tax All income groups pay the same tax percentage. No or very few tax deductions. Easy to complete tax returns. Less need for tax accountants and tax auditors. Will taxes go down for the wealthy and up for the poor? (some plans exempt incomes below $30,000 though)

Unit 6 - Fiscal Policy Alternative Tax Plans Federal government spending: Unit 6 - Fiscal Policy Alternative Tax Plans The Consumption Tax No more individual income taxes (complicated). Taxes on consumption only. Easy to administer. More incentive to save. Even drug dealers pay taxes. It is a regressive tax, unless essential products are exempt.

Which tax system do you prefer? Our current income tax system Our current income tax system, but with lower rates Our current income tax system, but with higher rates for some groups A Flat tax system A consumption tax system Other 30 0 of 30

Unit 6 - Fiscal Policy Effects of a Tax Cut Federal government spending: Unit 6 - Fiscal Policy Effects of a Tax Cut Let’s say Congress decides to cut taxes across the board by 10%. Who benefits? Consider 4 households: Household 1 pays $0 in taxes. Household 2 pays $4,000 in taxes. Household 3 pays $30,000 in taxes. Household 4 pays $100,000 in taxes.

Unit 6 - Fiscal Policy Effects of a Tax Cut Federal government spending: Unit 6 - Fiscal Policy Effects of a Tax Cut Household 1 saves $0. Household 2 saves $400. Household 3 saves $3,000. Household 4 saves $10,000. Household 1 saves nothing. Household 4 saves the most. Do tax cuts benefit the wealthy?

Unit 6 - Fiscal Policy Federal government spending: The Laffer Curve Effects of a Tax Cut The Laffer Curve An increase in tax rates at lower rates increases government tax revenue. An increase in tax rates at higher rates decreases government tax revenue.

Unit 6 - Fiscal Policy U.S. Federal Expenditures and Tax Revenue as a Percentage of GDP Year Revenue Expenditures 1930 4.2 3.4 1940 6.8 9.8 1944 20.9 43.7 1960 17.8 1980 18.9 21.6 2007 17.6 20.1 2009 18.5 28.3 2011 (est) 14.8 26.0

Unit 6 - Fiscal Policy U.S. Federal Expenditures and Tax Revenue as a Percentage of GDP Website with federal government spending and revenue information: http://www.whitehouse.gov/omb/budget Macroeconomics

Unit 6 - Fiscal Policy and Revenue Federal government spending: State and Local Government Spending and Revenue For expenditure and revenue data, see CD, Unit 6, Section 5.

Unit 6 - Fiscal Policy Estimated Taxes Paid by a Typical U.S. Worker Federal average income tax after deductions: 12% FICA tax: 7.65% Federal excise tax: .35% State sales tax as % of total income: 3.5% State income tax after deductions: 4% Other state taxes: 2% County income tax after deductions: 2% County property tax as a % of total income: 3% Other county taxes: .5% Corporate or self employment taxes: 3% Total estimated taxes as a % of total income: 38%. Macroeconomics

Unit 6 - Fiscal Policy Public Choice is the analysis of the effectiveness of government (public sector) spending. Topics include: Non-profit nature of government Special interest groups Short-run versus long run considerations Capture theory End-of-fiscal year spending Macroeconomics