Pearson Education, Inc., Longman © 2006 Chapter 13 Economic Policymaking American Government: Policy & Politics, Eighth Edition TANNAHILL

Pearson Education, Inc., Longman © 2006 In This Chapter Will We Cover: The goals of economic policy Tax revenues Budget deficits and surpluses Government expenditures Fiscal and monetary policy

Pearson Education, Inc., Longman © 2006 The Goals of Economic Policy Fund Government Services –In 2004, the federal government spent $2.2 trillion on government programs including Social Security, health care, national defense, and welfare.

Pearson Education, Inc., Longman © 2006 The Goals of Economic Policy Encourage/Discourage Private Sector Activity –Subsidies Farm price-support loans Low-interest student loans –Tax incentives Mortgage interest deduction Cigarette taxes Gasoline taxes

Pearson Education, Inc., Longman © 2006 The Goals of Economic Policy Redistribute Income –Involves the government taking items of value, especially money, from some groups of Americans and then giving items of value, either in cash or services to other groups of Americans. Social Security transfers money from today’s workers to retirees.

Pearson Education, Inc., Longman © 2006 The Goals of Economic Policy Economic Growth with Stable Prices –Some Americans think government can play a positive role in promoting economic growth with stable prices. A depression is a severe and prolonged economic slump characterized by decreased business activity and high unemployment. A recession is an economic slowdown characterized by declining economic output and rising unemployment.

Pearson Education, Inc., Longman © 2006 The Goals of Economic Policy Inflation is a decline in the purchasing power of the currency. Laissez-faire is an economic philosophy holding that government intervention impedes the free-market forces that drive a healthy economy.

Pearson Education, Inc., Longman © 2006 Federal Income Tax Brackets, 2003

Pearson Education, Inc., Longman © 2006 Tax Revenues Individual Income Tax –The single largest source of revenue for the federal government –Divides taxable income into brackets and applies different tax rates to the portion of income falling into each bracket

Pearson Education, Inc., Longman © 2006 Tax Revenues Policy –A tax preference is a tax deduction or exclusion that allows individuals to pay less than they would otherwise. –A tax exemption is the exclusion of some types of income from taxation. –A tax deduction is an expenditure that can be subtracted from a taxpayer’s gross income before figuring taxes owned. –A tax credit is an expenditure that reduces an individual’s tax liability by the amount of the credit.

Pearson Education, Inc., Longman © 2006 Tax Revenues Payroll Taxes –Employees pay 7.65%, employers pay 7.65% –The second largest source of federal income –Fund both the Social Security and Medicare programs –Most workers pay more in payroll taxes than in income taxes. –Applies to first $87,900 of salary

Pearson Education, Inc., Longman © 2006 Tax Revenues Issues in Government Finance –Tax Incidence and Tax Fairness A progressive tax places a greater burden on higher income earners. A regressive tax places a greater burden on lower income earners. –Tax Burden U.S. taxes are lower than many other nations. Some feel a tax burden that is too high hurts economic growth.

Pearson Education, Inc., Longman © 2006 Tax Revenues –Tax Reform The flat tax would tax income at one set percentage with few, if any, deductions. A national sales tax would be a levy assessed on the retail sale of taxable items.

Pearson Education, Inc., Longman © 2006 The Bush Tax Reforms Reduced tax rate in each tax bracket Agreed to repeal inheritance tax, a tax that is assessed on estates of $600,000 or more Reduced taxes on dividend income and exempted or deferred taxes on interest income from savings. Bulk of tax cuts to upper-income taxpayers –Shifted the federal tax burden away from taxes on dividends, capital gains, and interest to taxes on income and payroll taxes on wages and salaries

Pearson Education, Inc., Longman © 2006 Budget Deficits and Surpluses A budget deficit is the amount of money by which annual budget expenditures exceed annual receipts. A budget surplus is the sum by which annual budget receipts exceed expenditures. The national debt is the accumulated indebtedness of the federal government.

Pearson Education, Inc., Longman © 2006 Receipts and Outlays as Percentage of GDP

Pearson Education, Inc., Longman © 2006 Government Expenditures In 2003, the five major expenditure categories of the federal budget were: (1)Social Security 22% (2)Education, training, employment, social services, and income security 19% (3)Health 22% (4)National defense 19% (5)Interest on the debt 7%

Pearson Education, Inc., Longman © 2006 Federal Expenditures, (percentages do not sum to 100 because of rounding)

Pearson Education, Inc., Longman © 2006 Fiscal Policymaking Fiscal Policy –The use of government spending and taxation (via the federal budget) for the purpose of achieving economic goals –Ground rules for budgeting –Entitlements –Contractual commitments –Budget agreements –The budget process Mandatory spending, discretionary spending

Pearson Education, Inc., Longman © 2006 TANF Recipients,

Pearson Education, Inc., Longman © 2006 Monetary Policymaking Monetary Policy –Control of the money supply (via the Federal Reserve Board) for the purpose of achieving economic goals

Pearson Education, Inc., Longman © 2006 Concluding Review Questions Why are the Social Security, Medicare, and Medicaid programs threatened financially by the retirement of the baby- boom generation? What are the goals of economic policy? How has the relative importance of federal tax sources changed over the last thirty years?

Pearson Education, Inc., Longman © 2006 Concluding Review Questions Are Americans overtaxed? What is the basis of your answer? On what groups does the burden of taxation fall more heavily in the United States? What are the most important proposals for reforming the nation’s tax system?