Unit 6 – Fiscal Policy and Monetary Policy Fiscal Policy - The term fiscal policy at the federal level refers to legislation, passed by Congress and signed into law by the President, changing levels of taxation and/or government spending to stabilize the economy. By changing the amount of taxes people pay or the amount of spending by the government, fiscal policy influences economic activity in the circular flow of the economy. State and local governments also use changes in taxes or spending to influence economic activity. Todays notes will focus on types of taxes collected by the government

Purposes of Taxes Raise Revenue – pay for cost of government Example: property tax to pay for a park Influence Behavior – create positive or negative incentives - Example: cigarette taxes to discourage smoking Maintain Fairness- redistribute income Social Security Main purpose of taxes is to pay for the cost of government Influence behavior – taxes on cigarettes are supposed to discourage people from smoking. Does it work? Evidence suggest that taxes on cigarettes do not discourage those alreadyt smoking from smoking, but may hold down new people from smoking. And smoking rates have fallen from 42% of all adults in 1965 to 16% today. https://www.washingtonpost.com/news/to-your-health/wp/2015/11/12/smoking-among-u-s-adults-has-fallen-to-historic-lows-these-7-charts-show-who-still-lights-up-the-most/?utm_term=.30affbeef87e

Three Categories of Taxes Progressive, Regressive and Proportional Progressive Tax – the rate increases as income increases, meaning the wealthy pay a higher percentage of their earnings than people less financially well-off. The U.S. federal income tax is a progressive tax. Current Federal tax rates: 10%, 12%, 22%, 27%, 32%, 35%, 37% Don’t need to know the tax rates – but know that the US income is progressive. Current Republican plans call for reducing the Who pays

On average, those in the bottom 40 percent of the income spectrum end up getting money from the government. Meanwhile, the richest 20 percent of Americans, by far, pay the most in income taxes, forking over nearly 87 percent of all the income tax collected by Uncle Sam Don’t have to write down, just good background info: Because our tax system is progressive the wealthy pay the most taxes Keep in mind this is income tax, not social security tax. Since the Social Security Tax is capped at $127,000 income, the middle class and poor pay a larger (but not majority) share of SSI taxes.

Regressive - a tax rate that decreases as income increases. A $1,000 tax would impact on who earns $20,000 a year much more than it would someone who earns $100,000/year Example – sales taxes are regressive Examples of a regressive tax – Lets say a local government passes a $1000 tax to pay for schools on all residents. Hurt low earners more than high earners. Sales taxes are also regressive for the same reason. If a teacher and a teenager spend $100 on clothes, the That’s why in Georgia, groceries and medicine are tax exempt on sales tax – you only pay the local 3% on food, but not the 4% sales tax to the state Other taxes are regressive in who they target. Cigarette taxes are considered regressive because the poor smoke at a significantly higher rate: Among those making $6,000 to $11,999 per year, 34% say they smoke, while only 13% in the top two incomebrackets (those with incomes of at least $90,000 per year) say the same -- a 21 percentage-point gap. The Well-Being Index also confirms distinctions in U.S.smoking rates relating to gender and race.

Social Security Tax (7% up to $125,000 of income) Proportional Taxes - also known as a flat tax, does not change with respect to changes in income. If the proportional tax rate is 15%, then everyone pays 15%, regardless of whether he or she makes $10,000 or $570,000. Social Security Tax (7% up to $125,000 of income) Social Security Taxes – Social Security is a 6.5% income tax, regardless of income so it is proportional (up to $125,000, so in a sense it is also regressive, but don’t confuse the kids) Property Taxes in GA are proportional. The county or city sets a millage rate (percent of tax) and all residents pay the same rate, but different amounts based on the value of their property. A million dollar home is charged the same percentage as a $100,000 home, though obviously different amounts. Important to understand the difference between amount and rate on the three categories of taxes.