You can do this! Don’t be afraid of Economics… Bruce Damasio Maryland Council for Economic Education

Fiscal Policy Use by government of taxes, spending, and changes in entitlements to keep the economy stable by affecting total demand for goods and services Attempting to reverse the business cycle

Fiscal Policy

The U. S. Constitution Federal Responsibilities State Responsibilities Local Responsibilities Divides powers and responsibilities among:

“Taxes are what we pay for civilized society” Oliver Wendell Holmes Jr., 1904

Taxes Fund Public Goods and Services National Defense State and Local Police Financial Aid Health Care for Elderly Public Education Social Services

The Federal Government Dollar Where It Goes Homeland Security 1% Medicare, and other Retirement 32% DOD Military 19% Social Security 21% Other 19% Net Interest on the Debt 7%

The State Dollar Where It Goes Social Services 21% Government Administrative 4% Education 30% Utility Expenditure 7% Transportation 7% Interest on General Debt 4% Public Safety 8% Environment and Housing 7% General Expenditure 5% Insurance Trust Expenditure 7%

The Federal Government Dollar Where It Comes From Excise, Customs, Estate, Gift, and Miscellaneous Taxes 7% Personal Income Taxes 43% Social Security, Medicare, and Unemployment and other Retirement Taxes 36% Corporate Income Taxes 13% Borrowing to Cover Deficit 1%

The State Dollar Where It Comes From All Other 10% Motor Fuel Sales Tax 4% Property Tax 32% General Sales Tax & Gross Receipts 25% Individual Income Tax 22% Alcoholic Beverages Sales Tax 1% Tobacco Product Sales Tax 1% Motor Vehicle License 2% Corporate Income Tax 3%

Payroll Taxes

FICA & Social Security

State Income Taxes Come from earned and unearned income (interest) Levied on individuals and corporations Support state expenses, education programs, and welfare

Property Taxes Levied on property, especially real estate Can also be levied on boats, RVs, business inventories Fund schools, local services, welfare programs

User Fees Fund public services.

Gasoline Tax A user tax that generates revenue to build and maintain roadways

How Taxes Evolve House Ways and Means Committee Full House Senate Finance Committee Full Senate Joint Conference Committee Senate/House Compromise bill President vetoes bill Tax law enacted President signs bill Veto override fails Veto override passes

Automatic Fiscal Policies Go into effect automatically to increase or decrease taxes and spending according to the needs of the economy. Unemployment insurance Welfare programs Income tax

Two Types of Spending Discretionary Controllable spending Actually a small portion of the federal budget Mandatory Not controllable Spending that, by law, must occur.

Two Types of Spending 84¢ of every $1.00 is already committed to: interest on the federal debt defense and homeland security entitlements – Medicare, Medicaid, Social Security Entitlements are growing at the rate of 8% a year

Expansionary Fiscal Policy Purpose: increase output/growth when the economy is in a downswing or recession How? Increase government spending Decrease taxes (workers and businesses)

Contractionary Fiscal Policies Purpose: decrease GDP, slow down the economy (reduce inflationary pressures) How? Decrease government spending Increase taxes

Problems with Fiscal Policy How quickly does the government recognize economic trends? How accurate are predictions? How long will it take to pass legislation? How long will it take for the changes to take effect? Will the changes actually have the desired effect?

Problems of Fiscal Policy Coordinating federal, state, and local governments Ideally state and local governments would move in the same direction as the federal government. Does this happen? Coordinating fiscal policy with monetary policy

Problems of Fiscal Policy Lowering taxes and increasing spending are politically popular. Raising taxes and decreasing spending are not popular. Cutting programs that benefit people “back home” are not popular.

Deficits and Debts Deficits – difference between spending and tax revenue received National debt – sum of annual deficits Borrow from the Treasury by issuing bonds. These will be repaid at maturation with interest.

The Debt Government spending can “crowd out” private business investment

Federal Reserve & Other Government Agencies 52.5% Banks, Insurance Companies & Mutual Funds 6.1% Foreign & International 24% State & Local Governments 5.6% Other 5.4% Pension: Gov’t & Private 3.7% US Savings Bonds 2.3% Ownership of Public Debt Source: Federal Reserve

The Debt Refinancing – borrowing new funds to pay off old debt Debt-service – interest on debt Opportunity cost – what else could have been financed by debt or debt service

Fiscal Policy: A Two-Act Play Prepare a few lines to use in acting out your role. You will have about 15 minutes to prepare your act. Feel free to be creative but stick to the ideas in your script.

Need more ideas or help? Feel free to contact Maryland Council on Economic Education ( or for more ideas or materials. You can also write me at as well.

Thank you for your time and interest in monetary and fiscal policy You CAN do this! Good luck with your teaching the rest of the year as well! Thanks again!