Fiscal Policy Government Spending AndTaxes

Fiscal Policy Government spending Government spending – Increase: stimulates the economy – Decrease: slow down the economy Taxes Taxes – Increase: slows down the economy – Decrease: Stimulates the economy Fiscal policy is …

Taxes Way to raise revenues Limit or regulate the use of products or services Give the competitive advantage to American made goods 1 st income tax – North during the civil war 16 th amendment: permanent tax since 1913

Types of Taxes Proportional Taxes Proportional Taxes – Flat rate taxes – The same percentage of income from individuals at all income level – Property tax Regressive Taxes Regressive Taxes – Takes a larger percentage from members of low- income groups than high income groups – Sales tax Progressive Taxes Progressive Taxes – A larger percentage of income from a high income person than a low-income person – Federal income tax

Collecting Taxes Corporate Income Taxes – Government taxes corporate profits Individual Income Taxes – Tax on income Sales Taxes – A regressive tax based on consumer spending Gift tax – the transfer of money or property of over $10,000. Property Taxes – Tax based on the value of your property Social Security Taxes – Withholding taxes (FICA) from workers paychecks Estate tax assets of the deceased Excise tax – Tax on the manufacture, sale or consumption of an item

Federal Budget in

Nation Debt Charts and Graphs

Demand Side Supply Side Keynesian economics Increase government spending Control demand to prevent extremes:(inflation and depressions) Deficit spending and large government budget to stimulate the economy Save surplus for future Multiplier effect Reagan / Milton Friedman Cut taxes and reduce spending Producers create changes to deal with econ fluctuations: Laissez faire Gov’t provides tax cuts for business to invest and expand Cut social program - competes with private sector Reduce the size of gov’t

Demand side economics Cyclically balanced budgets – Save money during peaks and expansions – Spend during contractions and troughs When the economy is doing very poorly the government should take action – Cut taxes for individuals – Increases government spending

Demand-side Economics Prior to Keynes – Annually balanced budgets – Lows were especially tough Concerns – Booms and recessions aren’t always equal – Politically it is easier to cut taxes than raise taxes – It is also easier to increase spending than to cut programs – Will we spend too much?

Keynesian Economics John Meynard Keynes – British economist – Influenced FDR’s New Deal Stimulate demand by increasing government spending and cutting taxes Government involvement to eliminate lows by using large budgets and deficit spending Increasing government spending is more effective than cutting taxes or cutting interest rates

Presidents who used Demand-Side Economics FDR – New Deal spending Kennedy Carter

Supply-side economics Say’s law 19 th century : supply creates it own demand – When an entrepreneur produces something it produces enough income in the economy to purchase what’s produced What might be some obstacles to this belief?

Supply-Side Economics Increasing the economic stability and growth by increasing the supply of goods and services Cut taxes as an incentives to increase production – Prices drop – Need for additional workers – Increased consumer demand

Reaganomics 1980’s Reaganomics; trickle down econ; voodoo econ Based on Milton Friedman – Tax cuts for producers to make capital improvements and increase aggregate supply – Goal to decrease inflation and unemployment – Increase the tax revenues – Increase productivity as a nation – Producers can handle the changes in the business cycle

Justification for Supply-Side Economics Too much government discourages growth Demand side action increases inflation by increasing government spending and decreasing taxes The crowding out effect is when the government competes with the private sector for loans and resources – 1. Cut government spending – 2. Cut taxes for producers – 3. Cut regulations set by government Government regulation increases cuts and hurts competition Too much bureaucracy or “Red Tape”

Monetary and Fiscal Policy The economy is in a severe depression and something needs to be done to help the economy. What should be done? The economy is in the recovery phase but you are starting to see slight inflation. What should be done? The economy is feeling high levels of Inflation. Prices are skyrocketing. What should be done? The economy is in a recession. Demand is dropping; companies are cutting jobs. What should be done?