1. Unit 6 - Fiscal Policy Fiscal Policy
Governments make decisions regarding spending and taxation.
Macroeconomics

2. Unit 6 - Fiscal Policy Fiscal Policy and Keynes
Keynes encouraged governments to increase spending and/or decrease taxes during recessions, and the opposite during expansions.
Macroeconomics

3. Unit 6 - Fiscal Policy Fiscal Policy and Keynes
Federal government spending:
Unit 6 - Fiscal Policy
Fiscal Policy and Keynes
Keynes listed two types of fiscal policy:
Discretionary spending (needs government approval). Examples include bills passed to change spending on roads, highways, stadiums, or taxation in order to stimulate the economy.
Automatic stabilizers (already part of existing programs). Examples include welfare programs and progressive taxes.

4. Unit 6 - Fiscal Policy Fiscal Policy and Classical Economists
The classical theory supports government spending only on essential functions, but not as a way to stimulate the economy.
Macroeconomics

5. Unit 6 - Fiscal Policy Fiscal Policy and the Classical Theory
Classical economists believe that government stimulation is harmful in the long run, because it:
Raises inflation
Raises interest rates,
Slows down the economy in the long run.
Is subject to lags in the implementation.
Macroeconomics

6. Unit 6 - Fiscal Policy Fiscal Policy and the Classical Theory
implementation lags
Information lag
Policy lag
Impact lag
Macroeconomics

7. Unit 6 - Fiscal Policy United States Government Levels
Government spending and taxation occurs at the following levels in the United States:
Federal (national)
State
Local (county and city)
Macroeconomics

8. Unit 6 - Fiscal Policy Federal Government Expenditures
Federal government spending:
Unit 6 - Fiscal Policy
Federal Government Expenditures
See our CD, Unit 6, Section 3,
or visit:

9. Unit 6 - Fiscal Policy Federal Government Revenue
Federal government spending:
Unit 6 - Fiscal Policy
Federal Government Revenue
See our CD, Unit 6, Section 4.
Or visit:

10. Unit 6 - Fiscal Policy Federal Government Tax Rates $0 10% $8,500 15%
2011 Individual Income Tax Brackets for a single person
Marginal Tax Rate
2011 Brackets for Married Households Filing Jointly $0
10%
$8,500
15%
$17,000
$34,500
25%
$69,000
$83,600
28%
$139,350
$174,400
33%
$212,300
$379,150
35%

11. (Survey) Regarding our tax rates in the United States, we should:
Keep them the same
Lower them for everyone
Raise them for everyone
Lower them for households earning less than $200,000 and raise them for higher incomes
Don’t know 10
0 of 30
Cross-Tab Label
0 / 30

12. In 2008, the top 10% of all income earners (households) in the U. S
In 2008, the top 10% of all income earners (households) in the U.S. (income higher than $109,000) paid approximately ___ of all federal income taxes
22%
37%
52%
71%
82%
:10
0 of 30

13. In 2008, the bottom 50% of all income earners (households) in the U. S
In 2008, the bottom 50% of all income earners (households) in the U.S. (incomes lower than $32,000) paid approximately ___ of all federal income taxes 0% 3%
10%
22%
30%
50%
:10
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14. Unit 6 - Fiscal Policy Federal Tax Burden Federal government spending:
The top 25% (household income higher than $65,000) paid 86% of all federal income taxes in 2008.
For a breakdown of the burden of tax of all income groups in the United States, see our CD, Unit 6, Section 4.

15. Unit 6 - Fiscal Policy Alternative Tax Plans
Federal government spending:
Unit 6 - Fiscal Policy
Alternative Tax Plans
The Flat Tax
All income groups pay the same tax percentage.
No or very few tax deductions.
Easy to complete tax returns.
Less need for tax accountants and tax auditors.
Will taxes go down for the wealthy and up for the poor? (some plans exempt incomes below $30,000 though)

16. Unit 6 - Fiscal Policy Alternative Tax Plans
Federal government spending:
Unit 6 - Fiscal Policy
Alternative Tax Plans
The Consumption Tax
No more individual income taxes (complicated).
Taxes on consumption only.
Easy to administer.
More incentive to save.
Even drug dealers pay taxes.
It is a regressive tax, unless essential products are exempt.

17. Which tax system do you prefer?
Our current income tax system
Our current income tax system, but with lower rates
Our current income tax system, but with higher rates for some groups
A Flat tax system
A consumption tax system
Other 30
0 of 30

18. Unit 6 - Fiscal Policy Effects of a Tax Cut
Federal government spending:
Unit 6 - Fiscal Policy
Effects of a Tax Cut
Let’s say Congress decides to cut taxes across the board by 10%.
Who benefits?
Consider 4 households:
Household 1 pays $0 in taxes.
Household 2 pays $4,000 in taxes.
Household 3 pays $30,000 in taxes.
Household 4 pays $100,000 in taxes.

19. Unit 6 - Fiscal Policy Effects of a Tax Cut
Federal government spending:
Unit 6 - Fiscal Policy
Effects of a Tax Cut
Household 1 saves $0.
Household 2 saves $400.
Household 3 saves $3,000.
Household 4 saves $10,000.
Household 1 saves nothing. Household 4 saves the most.
Do tax cuts benefit the wealthy?

20. Unit 6 - Fiscal Policy Federal government spending: The Laffer Curve
Effects of a Tax Cut
The Laffer Curve
An increase in tax rates at lower rates increases government tax revenue. An increase in tax rates at higher rates decreases government tax revenue.

21. Unit 6 - Fiscal Policy
U.S. Federal Expenditures and Tax Revenue as a Percentage of GDP
Year
Revenue
Expenditures
1930
4.2
3.4
1940
6.8
9.8
1944
20.9
43.7
1960
17.8
1980
18.9
21.6
2007
17.6
20.1
2009
18.5
28.3
2011 (est)
14.8
26.0

22. Unit 6 - Fiscal Policy
U.S. Federal Expenditures and Tax Revenue as a Percentage of GDP
Website with federal government spending and revenue information:
Macroeconomics

23. Unit 6 - Fiscal Policy and Revenue Federal government spending:
State and Local Government Spending
and Revenue
For expenditure and revenue data,
see CD, Unit 6, Section 5.

24. Unit 6 - Fiscal Policy Estimated Taxes Paid by a Typical U.S. Worker
Federal average income tax after deductions: 12%
FICA tax: 7.65%
Federal excise tax: .35%
State sales tax as % of total income: 3.5%
State income tax after deductions: 4%
Other state taxes: 2%
County income tax after deductions: 2%
County property tax as a % of total income: 3%
Other county taxes: .5%
Corporate or self employment taxes: 3%
Total estimated taxes as a % of total income: 38%.
Macroeconomics

25. Unit 6 - Fiscal Policy Public Choice
is the analysis of the effectiveness of government (public sector) spending. Topics include:
Non-profit nature of government
Special interest groups
Short-run versus long run considerations
Capture theory
End-of-fiscal year spending
Macroeconomics