fiscal policy government spending andtaxes. fiscal policy government spending government spending...
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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?