UNIT 3 UNIT 3 MACROECONOMICSMACROECONOMICS

Government taxes, spending, Government taxes, spending, fiscal policy, deficits, surpluses, fiscal policy, deficits, surpluses,

debtsdebts

TAX STRUCTURESTAX STRUCTURES

Proportional tax-Proportional tax- percentage of income percentage of income paid in taxes is the same for all income paid in taxes is the same for all income levelslevels

Progressive tax-Progressive tax- the percentage of the percentage of income paid in taxes increases as income income paid in taxes increases as income increasesincreases

Regressive tax-Regressive tax- percentage of income percentage of income paid in taxes decreases as income paid in taxes decreases as income increasesincreases

CHARACTERISTICS OF A GOOD CHARACTERISTICS OF A GOOD TAXTAX

Simplicity-rules should be easy to Simplicity-rules should be easy to understandunderstand

Efficiency-should be able to compute Efficiency-should be able to compute easily and inexpensivelyeasily and inexpensively

Certainty-people should know when Certainty-people should know when they’re due, how much to pay, etc.they’re due, how much to pay, etc.

Equity-should be fairEquity-should be fair

TYPES OF TAXESTYPES OF TAXES Income tax- Income tax- % of income% of income Sales tax-Sales tax- % of a good’s price % of a good’s price FICA taxes-FICA taxes- fund Social Security and fund Social Security and

MedicareMedicare Property taxes-Property taxes- based on value of based on value of

propertyproperty Corporate income tax-Corporate income tax- % of a company’s % of a company’s

profitsprofits Excise tax-Excise tax- tax on the sale or tax on the sale or

manufacture of a goodmanufacture of a good

Estate tax-Estate tax- tax on the total value of the tax on the total value of the money and property of a person who has money and property of a person who has dieddied

Gift tax-Gift tax- tax on money or property that tax on money or property that one living person gives to anotherone living person gives to another

Tariffs-Tariffs- taxes on imported goods taxes on imported goods Incentive tax-Incentive tax- tax to encourage or discourage a tax to encourage or discourage a

certain behaviorcertain behavior

GOVERNMENT SPENDINGGOVERNMENT SPENDING Mandatory spending-Mandatory spending- government spending on government spending on

programs that are required by current lawprograms that are required by current law Interest on the national debtInterest on the national debt Entitlement programs-Entitlement programs- if people meet requirements if people meet requirements

they receive benefitsthey receive benefits Discretionary spending-Discretionary spending- government planners government planners

can make choices about spendingcan make choices about spending National defenseNational defense EducationEducation Foreign aidForeign aid Scientific researchScientific research Much moreMuch more

FISCAL POLICYFISCAL POLICY

The use of government spending and The use of government spending and revenue collection to influence the revenue collection to influence the economyeconomy

Expansionary policies-Expansionary policies- lower taxes and lower taxes and higher spending to promote growthhigher spending to promote growth

Contractionary/restrictive policies-Contractionary/restrictive policies- higher taxes and lower spending to reduce higher taxes and lower spending to reduce economic growtheconomic growth

LIMITS OF FISCAL POLICYLIMITS OF FISCAL POLICY

Hard to change spendingHard to change spending Predicting the futurePredicting the future Delayed resultsDelayed results Political pressuresPolitical pressures Coordinating policy with the states and the Coordinating policy with the states and the

Federal Reserve’s monetary policyFederal Reserve’s monetary policy

DEFICITS, SURPLUSES, AND DEFICITS, SURPLUSES, AND THE NATIONAL DEBTTHE NATIONAL DEBT

Budget deficit-Budget deficit- government spending government spending exceeds tax collectionexceeds tax collection

Budget surplus-Budget surplus- tax collection exceeds tax collection exceeds spendingspending

National debt-National debt- all the money the federal all the money the federal government owes to bondholdersgovernment owes to bondholders

FISCAL POLICY OPTIONSFISCAL POLICY OPTIONS

Classical economics-the market should Classical economics-the market should regulate itselfregulate itself

Keynesian economics-Keynesian economics- the economy is the economy is made up of three sectors: individuals, made up of three sectors: individuals, businesses, and the governmentbusinesses, and the government The government should intervene to make up The government should intervene to make up

for changes in the other two to move for changes in the other two to move aggregate demand in the right directionaggregate demand in the right direction

Supply-side economics-Supply-side economics- focuses on focuses on moving aggregate supply to help the moving aggregate supply to help the economyeconomy

GOVERNMENT INVOLVEMENT GOVERNMENT INVOLVEMENT IN THE ECONOMYIN THE ECONOMY

Public good-Public good- a shared good or service for a shared good or service for which it would be impractical to make which it would be impractical to make consumers pay for individually and exclude consumers pay for individually and exclude nonpayersnonpayers

free rider-free rider- someone who would not pay for a someone who would not pay for a good or service but gets the benefits of it if it good or service but gets the benefits of it if it were provided publiclywere provided publicly

Market failure-Market failure- a situation where the market a situation where the market doesn’t distribute resources efficientlydoesn’t distribute resources efficiently

EXTERNALITIESEXTERNALITIES

Externality- an economic side effect that Externality- an economic side effect that benefits or costs someone other than the benefits or costs someone other than the one who produces or consumes the goodone who produces or consumes the good

EXTERNALITIES AND EXTERNALITIES AND MARKET INEFFICIENCY MARKET INEFFICIENCY

Negative ExternalitiesNegative Externalities Automobile exhaustAutomobile exhaust Cigarette smokingCigarette smoking Barking dogs (loud pets)Barking dogs (loud pets) Loud stereos in an apartment buildingLoud stereos in an apartment building

EXTERNALITIES AND EXTERNALITIES AND MARKET INEFFICIENCY MARKET INEFFICIENCY

Positive ExternalitiesPositive Externalities ImmunizationsImmunizations Restored historic buildingsRestored historic buildings Research into new technologiesResearch into new technologies

POVERTYPOVERTY

Poverty rate- % of people who live in Poverty rate- % of people who live in households below the official poverty linehouseholds below the official poverty line

Causes of povertyCauses of poverty Lack of educationLack of education LocationLocation DiscriminationDiscrimination Economic shiftsEconomic shifts Changes in family structureChanges in family structure

ANTI-POVERTY PROGRAMSANTI-POVERTY PROGRAMS WelfareWelfare- economic aid to the poor- economic aid to the poor Cash transfers-Cash transfers- direct payments of money to poor direct payments of money to poor

peoplepeople Temporary Assistance for Needy FamiliesTemporary Assistance for Needy Families Social SecuritySocial Security Unemployment benefitsUnemployment benefits Worker’s compensationWorker’s compensation

In-kind transfers- goods and services provided for free In-kind transfers- goods and services provided for free or reduced pricesor reduced prices Food stampsFood stamps HousingHousing Legal servicesLegal services

FORM 1040 FORM 1040 Fill out the info at the top-use a spouse if Fill out the info at the top-use a spouse if

you want to, dream spouse, etc.you want to, dream spouse, etc. Don’t use real social security #, make it upDon’t use real social security #, make it up 1-5. filing status1-5. filing status

SingleSingle Married jointlyMarried jointly Married separatelyMarried separately Head of household: married with childrenHead of household: married with children Widower: spouse deceasedWidower: spouse deceased

6. exemptions6. exemptions Check box for you and for spouseCheck box for you and for spouse List names of kids if anyList names of kids if any Add up total number of exemptions and put Add up total number of exemptions and put

the number in the boxthe number in the box

7. make up a salary for last year7. make up a salary for last year 8a. Make up interest from a bank account8a. Make up interest from a bank account 9a. Make up dividends from stock 9a. Make up dividends from stock

investmentsinvestments 11. if you like, write down alimony 11. if you like, write down alimony

received from previous spouse(s)received from previous spouse(s) 12. if you ran your own business, put the 12. if you ran your own business, put the

income you made from thatincome you made from that

13. if you made money selling stocks, put 13. if you made money selling stocks, put it hereit here

17. if you rented out real estate, put the 17. if you rented out real estate, put the amount you made hereamount you made here

18. if you got income from a farm, put it 18. if you got income from a farm, put it herehere

19. if you were unemployed for part of last 19. if you were unemployed for part of last year, put the amount you received hereyear, put the amount you received here

22. add up lines 7-21 and put here22. add up lines 7-21 and put here

23. up to $250 in teacher expenses can be put 23. up to $250 in teacher expenses can be put herehere

26. if you spent money to move, put it here26. if you spent money to move, put it here 31. if you paid alimony to a former spouse, put 31. if you paid alimony to a former spouse, put

the amount herethe amount here 33. if you were paying interest on a student 33. if you were paying interest on a student

loan, put it hereloan, put it here 34. if you paid tuition and fees, put the amount 34. if you paid tuition and fees, put the amount

herehere 36. add lines 23-35 and put here36. add lines 23-35 and put here 37. line 22 minus line 3637. line 22 minus line 36

Turn over the form and copy the amount on line Turn over the form and copy the amount on line 37 to line 3837 to line 38

40a. Write your standard deduction from the 40a. Write your standard deduction from the box on the leftbox on the left

41. line 38 minus line 40a41. line 38 minus line 40a 42. Put $10,00042. Put $10,000 43. put line 41 on line 43 also $10,000 less43. put line 41 on line 43 also $10,000 less 44. using your income on line 43 and the tax 44. using your income on line 43 and the tax

table on the next slide, compute your tax and table on the next slide, compute your tax and write it herewrite it here

10%10% on income between $0 and $8,350 on income between $0 and $8,350

15%15% on the income between $8,350 and $33,950; on the income between $8,350 and $33,950; plusplus $835 $835

25%25% on the income between $33,950 and $82,250; on the income between $33,950 and $82,250; plusplus $4,675 $4,675

28%28% on the income between $82,250 and $171,550; on the income between $82,250 and $171,550; plusplus $16,750 $16,750

33%33% on the income between $171,550 and $372,950; on the income between $171,550 and $372,950; plusplus $41,754 $41,754

35%35% on the income over $372,950; on the income over $372,950; plusplus $108,216 $108,216

61. put ½ of line 4361. put ½ of line 43 71. recopy from line 6171. recopy from line 61 72. if 71 is bigger than 60, 71-60; 0 if not 72. if 71 is bigger than 60, 71-60; 0 if not

truetrue 75. if 60 is bigger than 71, 60-71; 0 if not 75. if 60 is bigger than 71, 60-71; 0 if not

truetrue