Fiscal Policy Policy carried out by Government It simply means… is the end result a change in taxes? Or a change in government spending?

Who pays taxes? Households Businesses

If the government charges fewer taxes what is the result? Households and firms will have more dollars in their pockets to spend!

If the government raises taxes what is the result? The government now has more money to spend. However, firms and households have less disposable money.

When the government spends exactly what it takes in…that is called? A Balanced Budget

If the government spends less than it takes in…. The result is a surplus!

When the government spends MORE than the dollars it takes in? A BUDGET DEFICIT

When governments spend more than they take in, how do they pay for the goods and services they are committed to provide? They must borrow the money needed.

Historically the U.S. has had many more years with budget deficits than with years of budget surpluses so…. (Since 1940 we have only had 13 years with a budget SURPLUS)

We have a large Public Debt What do you think our current national debt is?

You will hear the term… Discretionary fiscal policy An act of Congress is required to set it in motion For example…tax rebates (stimulus $) Or passing a bill to charge higher taxes.

If not discretionary… Then the fiscal policy is considered an automatic stabilizer. A policy already in place that will try to keep the economy on an “even keel” For example…Our progressive income tax system. When we are in an expansionary business cycle, and households and firms are doing well and making large amounts of money, they will have to… Pay more in taxes.

When we are in a business cycle contraction, and households and firms are NOT doing as well, that same progressive income tax (automatically!) reduces the amount of tax that we must pay to the government. There is no need to have Congress act on the economy, because the automatic stabilizer was, well, automatic!

Why does government use fiscal policy? To achieve national economic goals such as economic growth, price stability and high employment. Remember these only became our national goals after the economic horror of the Great Depression Picture from the FDR, courtesy of the National Archives and Records Administration.

A little more information… Discretionary Fiscal Policy takes TIME! Why?... Due to lags in action… It takes time to recognize that we have a problem…called a recognition lag. It takes time for Congress to figure out what to do, agree to do it, and put the action in place…called an administrative lag. Also, it takes time for the fiscal policy to actually work…called an operational lag.

Progressive Taxes Progressive taxes, as your earnings go UP, the tax rates go UP. (U.S. Income Tax) Example (2011 Tax brackets) Tax Bracket Married Filing Jointly 10% Bracket $0 – $17,000 15% Bracket $17,001 – $69,000 25% Bracket $69,001 – $139,350 28% Bracket $139,351 – $212,300 33% Bracket $212,301 – $379,150 35% Bracket Over $379,150 Earn $20,000 pay 15% of your income or $3,000 in taxes Earn $80,000 pay 25% of your income or $20,000 in taxes

Regressive taxes When rates are higher for lower incomes. (Sales Tax… The rate stays the same but poorer people pay more taxes as a percent of their income, because they spend most of their income) Example $20,000 income… 6% sales tax …spend $18,000 on yearly living …pay $1,080 sales tax…so sales taxes equal 5.4% of your income $80,000 income… 6% sales tax… spend $18,000 on yearly living …pay $1,080 sales tax…so sales taxes equal 1.35% of your income

Proportional Taxes Proportional taxes… everyone pays the same percentage of their income in taxes. Example Earn $20,000…pay 10% of income…so pay $2,000 in taxes. Earn $80,000…pay 10% of income…so pay $8,000 in taxes.