1. Fiscal Policy: Spending & Taxing
Unit 5 – Public & Private Solutions
Economics Honors
Edgenuity Lessons 5.1 & 5.2

2. Goals of Government Spending
Balancing social needs and economic growth:
Meeting public needs
Public safety
Education
Health care
Infrastructure
Improving economic indicators
Reducing unemployment
Improve economic stability
Improve production
Encourage competition

3. Inefficiency exists in the budget process due to:
Spending Challenges
Inefficiency exists in the budget process due to:
Personal motivation
Special interests
Heavy social needs

4. Balanced budget: expenditures = revenue
Budget States
Balanced budget: expenditures = revenue
Surplus: revenue > expenditures
Deficit: expenditures > revenue
Gov’t takes on debt
$ borrowed from citizens or other countries (BONDS)
Borrowed money accumulates interest

6. Allocating Money – Federal Budget Categories
Mandatory: required by law (entitlements)
Discretionary: can be changed each year
Interest: spending on interest payments for the gov’t debt

7. Injector Factors:
Ways that sectors bring money into the economy
Leakage Factors:
Ways that sectors remove money from the economy

8. Effect of Gov’t Spending on the Economy
Gov’t sector of the circular flow model
Spending money injects capital into the economy
Reduces unemployment
Increases production
In 2010, about 25% of GDP was gov’t spending
Employs about 4M Americans – 2-3% of workers in U.S.
Gov’t
Households
Firms

9. Direct Payments vs. Gov’t Grants
Two types of direct payments:
Gov’t directly pays its employees
Gov’t programs provide income support to citizens
Social Security; Medicare
Grants:
Gov’t sends funds to state & local governments
Companies and universities receive special grants for projects

10. Reasons for Taxation
Funding necessary programs & ensuring citizens contribute to meet needs in their society
Article I, Section 8 of the Constitution grants this power:

11. Progressive Taxation
Charges individuals with higher incomes a higher percentage of their total income

12. Proportional Taxation
Charges higher and lower-income citizens equally in proportion to their income
A.K.A. flat tax

13. Regressive Taxation
Charges individuals with high incomes a lower percentage of their total income

14. Income Taxes 16th Amendment allows these Paid on money earned
Income includes wages and profits from investments
Collected by federal and many state gov’ts
Federal income taxes are direct & progressive

15. Corporate Taxes & Property Taxes
Federal and state gov’ts require businesses to pay these on their earnings annually
Property taxes
Paid on homes, land, other property
Collected by state and local gov’ts
Direct and proportional

16. Taxes on goods Sales Taxes: Tariffs: Excise Taxes:
Taxes on purchased goods
Collected by state and local gov’t (4-10%)
Indirect and regressive
Excise Taxes:
Federal and state gov’t impose on specific products
Gas, gambling, cigarettes, alcohol (“sin” taxes)
Tariffs:
Tax issued on imported goods
Designed to protect domestic industries

17. Expansionary Fiscal Policy
Occurs when the gov’t chooses to run a larger deficit
Lowering taxes and/or increasing spending
Why?
In response to high unemployment
Theory is that raising spending stimulates the economy
Positive effects:
Jobs, growth of businesses, help develop new industries, fund research/innovation
Negative effects:
Can lead to debt; can cause inflation/higher prices

18. Contractionary Fiscal Policy
Gov’t chooses to reduce deficit or gain a surplus
Raising taxes and/or decreasing spending
Why?
Because economy is growing too quickly  inflation
Theory is that cutting spending improves gov’t finances
Positive effects:
Reduces debt; can improve inflation and lower prices
Negative effects:
Can increase unemployment and reduce consumer spending

19. Summary of impact of taxes
High income taxes can lead to:
Less disposable income
Less spending
Decreasing demand
Lower inflation
Lower taxes can lead to:
More disposable income
More spending
More economic growth
Increasing demand
Less unemployment
Taxes that are too low will result in:
Less gov’t spending
Lower gov’t employment
Less gov’t funding for states and programs