Unit 6 - Fiscal Policy

Fiscal Policy

Governments make decisions regarding spending and taxation.

Macroeconomics

Unit 6 - Fiscal Policy

Fiscal Policy and Keynes

Keynes encouraged governments toincrease spending and/or decrease taxes during recessions,and the opposite during expansions.

Macroeconomics

Unit 6 - Fiscal PolicyFederal government spending:

Fiscal Policy and Keynes

Keynes listed two types of fiscal policy:1. Discretionary spending (needs government

approval). Examples include bills passed to change spending on roads, highways, stadiums, or taxation in order to stimulate the economy.

2. Automatic stabilizers (already part of existing programs). Examples include welfare programs and progressive taxes.

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

Unit 6 - Fiscal Policy Fiscal Policy and the Classical Theory

Classical economists believe that governmentstimulation is harmfulin the long run, because it:

1.Raises inflation2.Raises interest rates, 3.Slows down the economy

in the long run. 4. Is subject to lags

in the implementation.

Macroeconomics

Unit 6 - Fiscal Policy

Fiscal Policy and the Classical Theory

Fiscal policy

implementation lags1. Information lag

2. Policy lag

3. Impact lag

Macroeconomics

Unit 6 - Fiscal Policy

United States Government Levels

Government spending and taxation occurs at the following levels in the United States:

1. Federal (national)2. State3. Local (county and city)

Macroeconomics

Unit 6 - Fiscal PolicyFederal government spending:

Federal Government Expenditures

See our CD, Unit 6, Section 3,or visit:http://www.gpoaccess.gov/usbudget/

Unit 6 - Fiscal PolicyFederal government spending:

Federal Government Revenue

See our CD, Unit 6, Section 4.Or visit:http://www.gpoaccess.gov/usbudget/

Unit 6 - Fiscal Policy Federal Government Tax Rates

2011 Individual Income Tax Brackets for a single person

Marginal Tax Rate 2011 Brackets for Married Households Filing Jointly

$0 10% $0

$8,500 15% $17,000

$34,500 25% $69,000

$83,600 28% $139,350

$174,400 33% $212,300

$379,150 35% $379,150

(Survey) Regarding our tax rates in the United States, we should:

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1. Keep them the same2. Lower them for everyone3. Raise them for everyone4. Lower them for

households earning less than $200,000 and raise them for higher incomes

5. Don’t know

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

:100 of 30

1. 22%

2. 37%

3. 52%

4. 71%

5. 82%

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

:100 of 30

1. 0%

2. 3%

3. 10%

4. 22%

5. 30%

6. 50%

Unit 6 - Fiscal PolicyFederal government spending:

Federal Tax Burden

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.

Unit 6 - Fiscal PolicyFederal government spending:

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)

Unit 6 - Fiscal PolicyFederal government spending:

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.

Which tax system do you prefer?

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1. Our current income tax system

2. Our current income tax system, but with lower rates

3. Our current income tax system, but with higher rates for some groups

4. A Flat tax system5. A consumption tax system6. Other

Unit 6 - Fiscal PolicyFederal government spending:

Effects of a Tax Cut

Let’s say Congress decides to cut taxesacross 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.

Unit 6 - Fiscal PolicyFederal government spending:

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?

Unit 6 - Fiscal PolicyFederal government spending:

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 ratesdecreases governmenttax revenue.

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 17.8

1980 18.9 21.6

2007 17.6 20.1

2009 18.5 28.3

2011 (est) 14.8 26.0

Unit 6 - Fiscal Policy

U.S. Federal Expenditures and Tax Revenue as a Percentage of GDP

Website with federal government spending and revenue information:

http://www.whitehouse.gov/omb/budget

Macroeconomics

Unit 6 - Fiscal PolicyFederal government spending:

State and Local Government Spending and Revenue

For expenditure and revenue data, see CD, Unit 6, Section 5.

Unit 6 - Fiscal Policy

Macroeconomics

Estimated Taxes Paid by a Typical U.S. Worker

1. Federal average income tax after deductions: 12%2. FICA tax: 7.65%3. Federal excise tax: .35%4. State sales tax as % of total income: 3.5%5. State income tax after deductions: 4%6. Other state taxes: 2%7. County income tax after deductions: 2%8. County property tax as a % of total income: 3% 9. Other county taxes: .5%10. Corporate or self employment taxes: 3%Total estimated taxes as a % of total income: 38%.

Unit 6 - Fiscal Policy

Macroeconomics

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