Chapter 4 additional terms• Inflation\unemployment relationship• Monetary and fiscal policy• How Federal Reserve sets monetary policy• Demand side vs. Supply side (as in Lafer curve)• Line item veto\Balance Budget Amendment

Budgets and TaxesNote: the less important slides are hiddenGo to View | Slide Sorter to see them all

Revenues and Spending (Outlays)

BUDGET CONTROL ACT OF 2011

• Raises the Debt Ceiling in exchange for long term budget cuts (900 Billion 1.2 Trillion) over ten years.

• “Supercommittee must produce something better by November 23, 2011 (it didn’t)

• Mandatory cuts now go into place, beginning January 2013-2021• SEQUESTER: Cuts:

across the board cuts, except Social Security, Medicare and Medicaid beneficiaries

Total Government Surplus\ Deficit, % of GDP

OECD Economic Outlook, Statistical Appendix, 2012

Total Government Debt, % of GDP

OECD Economic Outlook, Statistical Appendix, 2012

Ten Largest Deficits and Debts, % of GDP, 2012

Health Care | Education | Higher Education | Poverty | Crime and Punishment | Debt and Deficits | Defense

OECD Economic Outlook, Statistical Appendix, 2012

Debt

Greece 146%

Japan 134

Italy 98United States 86Portugal

83Belgium

83Ireland 80United Kingdom

73France 66Spain 58

Deficits

Japan -9.9%United States -8.5Ireland -8.1Spain -8.1Greece -6.9United Kingdom -6.6Portugal -5.2Israel..... -4.7Slovak Republic -4.6France -4.5

Fiscal 2013 Budget

Debttriples

InterestPaymentsgo down

Taxation

Fairness?• absolute equity – all benefit from government

– all should pay equally(head tax)

• Ability to pay -- justification for progressive taxation (graduated income tax)

• Benefit principle -- tax in proportion to the benefit (gas tax, social security payroll tax)

Economic Neutrality -- Tax systems should exert minimal impact on the

spending and business decisions of individuals and businesses.

Violations of neutrality:(create positive and negative externalities)• tax subsidies for oil drilling, homeownership,

health care • Tax incentives for positive social behavior • Sin taxes• Brick and Mortar Sales tax vs Internet sales

Top 20 Biggest Tax Expenditure of US Govt.

Efficiency and Simplicity

• Cost of collecting taxes(toll roads vs. IPass)

• Cost of compliance (tax lawyers and accoutnants)

Visibility

• Taxes should not be hidden – those who bear the burden should be aware

(Hidden taxes: Gross Receipts Tax, Lottery?)

Other principles

• Broad base (to allow lower rates)• Predictable and stable supply of revenue• Diverse sources (for stability and lower rates)• Addresses geographic competition

Tax Penalizes RewardsFederalIncome Tax

progressive medium Work tax exemptedincome

Ill StateIncome Tax

flat medium Work tax exemptedincome

Social SecurityMedicare

veryregressive

very low work

Corporationtax

flat low businessinvestment

Sales Tax regressive low brick &mortar stores

savings,Internet sales

Gas tax even low driving,large vehicles

public transportation

Toll roads even high

Property tax flat mediumpropertyimprovmnt

homeownership(exemption)

cigarette\alcohol

regressive low --

drinking smoking healthy people

Economic EffectsProgressive?

CollectionCosts

UserTax?

SinTax?

Revenues

The Laffer Curve

TAX RATEO 100

-2%|

+16%|

+27%|

+82% ---

0

-10%

10%

30%

50%

70%

90%

'81 82 83 84 85 86 87 88 89 92 93 94 95 96 97 98 99 00

Reagan 1982 tax cut Clinton 1993 tax increase

FIGURE 3.1bIncome Tax Revenues after Tax Changes, Cumulative % Change(constant$)