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Fiscal PolicyFiscal PolicySECTION 1: Defining Fiscal Policy

SECTION 2: Fiscal Policy Strategies

SECTION 3: Fiscal Policy and the Federal Budget

CHAPTER 15

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Objectives:Objectives:What role do taxes play in fiscal policy?What kinds of tax rates do governments set?Which taxes are the most profitable?

Defining Fiscal PolicyDefining Fiscal PolicySECTION 1

3

Role taxes play in fiscal policy:Role taxes play in fiscal policy: fund government programs influence individuals’ behavior

Defining Fiscal PolicyDefining Fiscal PolicySECTION 1

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Types of tax rates:Types of tax rates:proportionalprogressive regressive

Defining Fiscal PolicyDefining Fiscal PolicySECTION 1

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Most profitable taxes:Most profitable taxes: individual income

taxes corporate income

taxes Social Security taxes property taxes sales taxes

Defining Fiscal PolicyDefining Fiscal PolicySECTION 1

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2006 IRS Collections Data2006 IRS Collections Data

 

Number ofReturns

 

AGIncome(millions)

 

IncomeTaxesPaid

(millions)

Group's %Share ofTotal AGI

 

Group's %Share of

Total Taxes 

Group'sAvg. TaxRate (%)

 

IncomeFloor for

Group 

AllTaxpayer

s 135,719,000 $8,122,040 $1,023,739 100% 100% 12.6% (NA)

Top 1% 1,357,000 $1,791.87 $408,369 22.06% 39.89% 22.79% $388,806

Top 5% 6,786,000 $2,977,714 $615,680 36.66% 60.14% 20.68% $153,542

Top 10% 13,571,000 $3,843,144 $724,740 47.32% 70.79% 18.86% $108,904

Top 25% 33,930,000 $5,535,830 $883,153 68.16% 86.27% 15.95% $62,068

Top 50% 67,860,000 $7,105,599 $993,176 87.49% 97.01% 13.98% $30,881

Bottom 50% 67,860,000 $1,016,441 $30,563 12.51% 2.99% * 3.01% (NA)

* The average tax rate for the bottom 50% is drawn from a related IRS spreadsheet.

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Objectives:Objectives:How do supply-side and demand-side

theories differ?What are the chief tools of fiscal policy?What factors limit the success of fiscal

policy?

Fiscal Policy StrategiesFiscal Policy StrategiesSECTION 2

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Differences between supply-side and Differences between supply-side and demand-side theoriesdemand-side theories Supply-side economics:

focuses on achieving economic growth and stability by increasing product supplies

calls for limited government economic involvement

Demand-side economics: focuses on achieving economic growth and stability by

increasing aggregate demand calls for active government economic involvement

Fiscal Policy StrategiesFiscal Policy StrategiesSECTION 2

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Tools of fiscal policy:Tools of fiscal policy:marginal tax rates tax incentivesgovernment spendingpublic transfer paymentsprogressive income taxes

Fiscal Policy StrategiesFiscal Policy StrategiesSECTION 2

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Limitations of fiscal policy:Limitations of fiscal policy: timing problemspolitical pressuresunpredictable economic behaviors lack of coordination among government

policies

Fiscal Policy StrategiesFiscal Policy StrategiesSECTION 2

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Objectives:Objectives:How is the federal budget developed?What role does deficit spending play in the

U.S. economy?What methods can the government use to

balance the federal budget?

Fiscal Policy and the Federal BudgetFiscal Policy and the Federal Budget

SECTION 3

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2006 Federal Budget2006 Federal Budget

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Steps in the development of the Steps in the development of the federal budget:federal budget:1.1. prepared by the president, who consults with

the OMB, the Council of Economic Advisers, the Department of Treasury, and other presidential advisers

2.2. analyzed, amended, and approved by Congress

3.3. signed or vetoed by president

Fiscal Policy and the Federal BudgetFiscal Policy and the Federal Budget

SECTION 3

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Role of deficit spending in the U.S. Role of deficit spending in the U.S. economy:economy:provides economic support during national

emergenciesprovides social programs stimulates the economy during recessionspromotes citizens’ economic well-being

Fiscal Policy and the Federal BudgetFiscal Policy and the Federal Budget

SECTION 3

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Possible methods to balance the Possible methods to balance the federal budget:federal budget: increase revenuesdecrease expenditures

Fiscal Policy and the Federal BudgetFiscal Policy and the Federal Budget

SECTION 3

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1.1. Explain why federal, state, and local governments collect taxes, and provide an example of each of the following: proportional tax, progressive tax, regressive tax.

2.2. How did John Maynard Keynes influence economic thought?

3.3. What tools do lawmakers use to enact fiscal policy?4.4. Describe the process of developing and approving

the federal budget,5.5. What actions might the government take to balance

the federal budget?

Wrap-UpWrap-Up

CHAPTER 15