Fiscal Policy

Government Spending Government Spending

And And

TaxesTaxes

Fiscal Policy

Government spendingGovernment spending

– Increase: stimulates the economy

– Decrease: slow down the economy

TaxesTaxes

– Increase: slows down the economy

– Decrease: Stimulates the economy

Fiscal policy is …

TaxesTaxes

Way to raise revenues Limit or regulate the use of products or

services Give the competitive advantage to American

made goods 1st income tax

– North during the civil war 16th amendment: permanent tax since 1913

Types of TaxesTypes of Taxes

Proportional TaxesProportional Taxes– Flat rate taxes– The same percentage of

income from individuals at all income level

– Property tax

Regressive TaxesRegressive Taxes– Takes a larger percentage

from members of low-income groups than high income groups

– Sales tax

Progressive TaxesProgressive Taxes– A larger percentage of

income from a high income person than a low-income person

– Federal income tax

Collecting Taxes

Corporate Income Taxes– Government taxes corporate

profits Individual Income Taxes

– Tax on income

Sales Taxes– A regressive tax based on

consumer spending Gift tax

– the transfer of money or property of over $10,000.

Property Taxes– Tax based on the value of your

property Social Security Taxes

– Withholding taxes (FICA) from workers paychecks

Estate tax

assets of the deceased Excise tax

– Tax on the manufacture, sale or consumption of an item

Federal Budget in

Nation Debt Charts and Graphs

Demand SideDemand Side Supply SideSupply Side

Keynesian economics Increase government

spending Control demand to prevent

extremes:(inflation and depressions)

Deficit spending and large government budget to stimulate the economy

Save surplus for future Multiplier effect

Reagan / Milton Friedman Cut taxes and reduce spending Producers create changes to

deal with econ fluctuations: Laissez faire

Gov’t provides tax cuts for business to invest and expand

Cut social program - competes with private sector

Reduce the size of gov’t

Demand side economics

Cyclically balanced budgets– Save money during peaks and expansions– Spend during contractions and troughs

When the economy is doing very poorly the government should take action– Cut taxes for individuals– Increases government spending

Demand-side Economics

Prior to Keynes– Annually balanced budgets– Lows were especially tough

Concerns – Booms and recessions aren’t always equal– Politically it is easier to cut taxes than raise taxes– It is also easier to increase spending than to cut programs– Will we spend too much?

Keynesian Economics

John Meynard Keynes– British economist – Influenced FDR’s New Deal

Stimulate demand by increasing government spending and cutting taxes

Government involvement to eliminate lows by using large budgets and deficit spending

Increasing government spending is more effective than cutting taxes or cutting interest rates

Presidents who used Demand-Side Economics

FDR– New Deal spending

Kennedy Carter

Supply-side economics

Say’s law 19th century : supply creates it own demand– When an entrepreneur produces something it

produces enough income in the economy to purchase what’s produced

What might be some obstacles to this belief?

Supply-Side Economics

Increasing the economic stability and growth by increasing the supply of goods and services

Cut taxes as an incentives to increase production– Prices drop– Need for additional workers– Increased consumer demand

Reaganomics 1980’s

Reaganomics; trickle down econ; voodoo econ Based on Milton Friedman

– Tax cuts for producers to make capital improvements and increase aggregate supply

– Goal to decrease inflation and unemployment– Increase the tax revenues– Increase productivity as a nation– Producers can handle the changes in the business

cycle

Justification for Supply-Side Economics

Too much government discourages growth Demand side action increases inflation by increasing

government spending and decreasing taxes The crowding out effect is when the government

competes with the private sector for loans and resources

– 1. Cut government spending– 2. Cut taxes for producers– 3. Cut regulations set by government

Government regulation increases cuts and hurts competition Too much bureaucracy or “Red Tape”

Monetary and Fiscal Policy

The economy is in a severe depression and something needs to be done to help the economy. What should be done?

The economy is in the recovery phase but you are starting to see slight inflation. What should be done?

The economy is feeling high levels of Inflation. Prices are skyrocketing. What should be done?

The economy is in a recession. Demand is dropping; companies are cutting jobs. What should be done?