Fiscal Policy Taxing and Spending

Why does government tax? The government taxes to 1) Raise Revenue 2) Change Behavior

What is Revenue? Revenue means “income” Revenue allows the government to pay for goods and services

How can a tax change behavior? When the government puts a tax on a product, it makes the product more expensive. This discourages people from using the product. There are three types of “behavior taxes” currently in use.

Sin Tax This tax is added to products that can harm people. Examples of a sin tax are those taxes placed on cigarettes and alcohol.

User Taxes These taxes are added to products to pay for services provided by the government. The most common user tax is the gasoline tax. The taxes collected from this tax are used to pay for pollution control and to build roads. What happens when the gasoline tax is increased?

Luxury Taxes These are taxes added to expensive, nonessential items such as yachts and limousines. The taxes collected are usually used to pay for social programs. The luxury tax is meant to target which group of citizens?

Types of Assessed Taxes There are three types of taxes collected by the government.

Regressive Taxes These are taxes that tend to fall on people who make less money. For example, sales taxes are regressive because the poor pay a higher percentage of their incomes.

Progressive Taxes These are taxes that are meant to fall heaviest on the rich in our country. The wealthiest citizens pay the highest percentage of their incomes. The poorest citizens pay the least percentage of their incomes. This is our current Federal Income Tax System.

Proportional or Flat Tax This tax is the same percentage of tax applied across all income levels. For example, the rich pay 6.75% of their incomes for Social Security Tax. The poor pay 6.75% of their incomes for Social Security Tax.

What is fiscal policy? Fiscal policy is when the government uses taxes and spending to address problems in the economy.

Remember that economic stability is a main goal of our government. This means that our government must address the challenges of 1)price stability (inflation versus deflation) 2)employment

Price Stability Remember that when money is put into the economy, this raises prices. Would raising or lowering taxes put money into the economy?

You’re right! Lowering taxes puts more money into peoples’ pockets. More money in our pockets means we spend more on goods and services. The more we spend on goods and services means more employment is created.

This works both ways… What should the government do to control inflation (high prices)?

Right again… To control inflation, the government should raise taxes.

The government can also use spending to address prices and employment. The government spends by creating government jobs, government projects (such as bridge and road building), and through social programs (such as welfare and Medicaid). When did government spending first increase in the 20 th century?

Remember… Money going into the economy increases prices, but also increases employment. Money being taken out of the economy decreases prices, but decreases employment.

How does government spending increase employment? The government is a consumer just like we are. When it spends, it raises demand. When demand increases, production increases…when production increases, so does employment.

But here’s the problem… If you are the president and faced with the challenges of high unemployment and high inflation (this is called “stagflation”), what fiscal policy do you follow? Would you raise or lower taxes? Would you increase or decrease government spending?

You see the problem… The problems of high unemployment and high inflation cannot be addressed with the same fiscal policy. You have to choose one. If you were the president, which would you choose to address: high unemployment or high prices?