Taxes, Fiscal Policy, and Macroeconomic Concepts

TAXES “Our new Constitution is now established, and has an appearance that promises permanency; but in the world nothing can be said to be certain except death and taxes.” – Ben Franklin

What are taxes? Tax  Required payment to a local, state, or national government Primary source of revenue for government Two limitations Common defense and general welfare Federal taxes must be the same in every state

Tax bases and tax structures Tax base  income, property, good, or service that is subject to tax Individual or corporate Income tax, sales tax, property tax Proportional taxes  % of income remains the same for all income levels Ex. “Flat tax”  15% Progressive taxes  % of income paid in taxes increases as income increases Ex. Income Tax Regressive taxes  % of income paid in taxes decreases as income increases Ex. Sales Tax

Characteristics of a Tax Simple, efficient, certain, fair Benefits-received principle People pay based on level of benefit Ability-to-pay Pay according to ability Tax Incidence If a product is inelastic, a tax will be paid by the consumer If a product is elastic, a tax will be paid by the producer Eventually paid by workers

Six types of taxes Individual income tax Corporate income tax Social insurance tax Excise tax Estate and gift taxes Import tax

Individual and Corporate Income Tax Individual  Amount each person owes to the federal government each year 45% of government revenue Corporate  less than 10% Pay-as-you-earn Pay weekly/monthly from check Employers withhold money from your pay Estimate of how much you will owe the government Tax return  form used to file income taxes Deductions and exemptions May owe the government, or they may owe you Income tax is progressive  tax brackets Rate schedule published each year

Taxable income is between The tax is: $0 - $9,275 10% $9,276 - $37,650 15% $37,651 - $91,150 25% $91,151 - $190,150 28% $190,151 - $413,350 33% $413,351 – $415,050 35% $415,051 or greater 39.6%

Social insurance taxes FICA  taxes that fund Social Security and Medicare Majority to Social Security $780 billion annually Social security  benefits to people over 65 and disabled Medicare  national health insurance program for people over 65 and disabled Unemployment tax Paid for by employer

Other taxes Excise Tax  general revenue tax on the sale or manufacture of a good Estate Tax  tax on the estate or value of money and property of a person who had died Less than $1.5 mil not taxed Gift Tax  Keep people from avoided estate tax Import Tax  Tax on imported goods (Tariff) Tax incentive  Tax on goods to discourage purchase

Government Spending

Types of spending Mandatory Spending Discretionary Spending Money that is required by law to be spent on certain programs & interest on debt Most goes to “entitlement programs” Continue to rise Ex. Social Security and Medicare Discretionary Spending Spending that government planners can make choices on its use Ex. Defense and Education

Discretionary Spending Defense spending  dropped since Cold War (20%) Troops and civilian workers Everything else Education Scientific research Student loans Technology National Parks Housing Environment clean-up Disaster relief Foreign aid

Defense spending

Federal Aid to State and Local Governments State and federal governments share costs of: some social programs highway construction Education housing,

State Government Revenue and Spending Money from federal and local governments are main source of revenue for state government Sales tax and Individual income taxes also large contributor The Georgia (GA) state sales tax rate is currently 4.0%. Depending on local municipalities, the total tax rate can be as high as 8%. No federal sales tax Where the money goes: Education (majority), Public Safety, Highways, Public welfare, Arts and recreation, Administration

State Budgets Operating Budget  Budget for day-to-day expenses Salaries for state employees, office supplies, maintenance Capital Budget  Budget for major capital, or investment New facilities, highways Borrowing All states but Alaska require a balanced budget Take in as much as they spend Revenue = Spending

Local Government revenue and spending Local governments earn revenue from federal and state governments Also collect from property taxes to pay for schools and road construction and maintenance Local governments pay for: Public schools (majority), Law enforcement and fire protection, Libraries, airports, hospitals, Parks and beaches, Public health & transportation, Elections

Fiscal Policy

Classical Economics Classical Economics  free markets can regulate themselves Adam Smith, Friedrich Hayek, Thomas Malthus Challenged by the Great Depression Prices fell  demand fell Classical economics didn’t address length of time for market to reach equilibrium Led to new thinking  Keynesian Economics

Keynesian Economics John Maynard Keynes (pronounced Canes) Demand-side economics  government spending and tax cuts help an economy by raising demand Keynesian Economics  demand-side economics that encourages government action to change demand and output

New Role for Government Three parts to an economy Business, consumers, and government If consumers and businesses aren’t spending, then the third part needs to spend (government) Government spending  encourage production  increase employment  spend wages  more production Continuous cycle Government would eventually reduce spending

Epic Rap Battle of Economics VS John Maynard Keynes Friedrich Hayek

Supply-Side Economics Supply-side economics  tax cuts can help the economy by raising supply Laffer Curve  shows effects of taxes Governments earn no revenue with 0% or 100% taxation Reducing taxes may encourage workers to work more and may bring in more revenue than with higher taxes

Fiscal Policy Fiscal Policy  use of government spending and revenue (taxing) to influence the economy Government spends about $400 million per hour, and $3.5 trillion (2013) Reasons for spending: Stimulate demand, increase production, create jobs, increase GDP, avoid recessions, control inflation, stabilize economic growth

Federal Budget Federal Budget  plan for federal government’s spending and revenues for a year Fiscal year  October 1 – Sept. 30 Office of Management and Budget (OMB)  manages federal budget Appropriations bills  bill that sets money aside for specific spending President can sign or veto

Expansionary Fiscal Policies Expansionary policies  encourage economic growth Higher spending and tax cuts Spending Buy more goods and services  cause prices to rise  increases production  creates jobs Lower Taxes Individuals have more money to spend  businesses earn more profit  more $ to invest in capital  create jobs

Contractionary Fiscal Policies Contractionary Fiscal Policies  Reduce economic growth Less Spending and higher taxes Goal is to decrease inflation Less Spending Decrease in spending  decrease in demand  lower prices  less production  lay off workers Higher taxes Individuals have less money to spend  prices fall and firms have less to spend on capital  less jobs

Budget Deficit and National Debt

Federal Budget Raising government spending can lead to budget deficits which add to the national debt Deficit  amount of $ the government borrows in a year Debt  sum of deficits from previous years Balanced Budget  Revenue equals spending Budget Surplus  Revenue more than spending Budget Deficit  Revenue less than spending

Problems of National Debt Reduces funds available for businesses to invest High interest rates Government spending on interest on debt is less money that can be spent elsewhere