Economics

1. Economics Unit 6 Chapter 14

2. Taxes A tax is a required payment to a local, state, or national government. The income government receives from taxes And other sources is Called revenue. The first power granted to Congress was the power to tax (Article 1, Section 8, Clause 1)

3. Taxes The limits on taxes are that govt. can collect taxes only for the: 1. The common defense and general welfare, and 2. It cannot tax church services and exports. It also has to divide up the taxes among the states according to population.

4. Taxes Base and Structures Tax Base: Income, Property, Good/Service that is subject to a tax Ex: Individual Income Tax (16th amendment) on earnings, Sales tax (goods/services), Property Tax, Corporate Income Tax

5. Taxes Structures Tax Structures: • Proportional: % of income is same for all levels • Progressive: % of income paid in taxes increases as income increases (more you make/more you pay) • Regressive: % of income paid in taxes decreases as income increases (less you make/more you pay)

6. Characteristics of a “Good” Tax: • Simple-predictable schedule/easily understood • Efficiency-collection of taxes is easy, not expensive or time consuming • Certainty-clear when it is due, how much is due, etc • Equity-fair so no one bears too much or too little burden

7. Characteristics of a “Good” Tax: When passing taxes, the government tries to consider the incidence of a tax, or who bears the final burden of a tax. Often times, this ends up always being the consumer.

8. Individual Income Tax We use a “pay-as-you-earn” system that allows for the government to have money constantly coming in for regular expenses to keep it running. Also, it would be a burden to try to collect all the taxes at once.

9. Individual Income Tax Withholding: taking payments out of your pay before you’re paid Tax Return: form used to file taxes Taxable Income: Income on which tax is paid (minus exemptions/ deductions) Personal Exemptions: set amount you subtract from your gross income for yourself/spouse or dependents Deductions: variable amounts that you can subtract, or deduct from your gross income

10. Individual Income Tax Our federal income tax is a progressive tax, so one’s tax rate rises as their income rises. The goal is to deduct as much off of your gross income so as to be in a lower tax bracket so you pay less.

11. Corporate Income Tax Like Individuals, corporations must file their taxes in a progressive tax structure. They too look for deductions.

12. Social Security, Medicare, Unemployment Taxes Corporations withhold money for income tax and also for taxes authorized by the Federal Insurance Contribution Act (FICA) which funds Social Security and Medicare

13. Social Security, Medicare, Unemployment Taxes Social Security Administration uses FICA taxes to fund old-age, survivors, and disability insurance (OASDII)

14. Social Security, Medicare, Unemployment Taxes Medicare: a national health insurance program that helps pay for health care for people over age 65 or with certain disabilities

15. Social Security, Medicare, Unemployment Taxes Corporations also contribute an unemployment tax to pay for unemployment insurance for workers who lost their jobs.

16. Other Types of Taxes Excise Tax: revenue tax on the production of a good to discourage its use Estate Tax: tax on the total value of the money and property of a person who has died Gift Tax: a tax on money or property one living person gives another (currently $13,000)

17. Other Types of Taxes Tariffs: a tax on an imported good *The basic goal of taxes is to create revenue, but the government uses tax policy to encourage certain behaviors and discourage others. This is called a tax incentive.

18. Federal Spending The federal government receives tax revenue and then must spend it on various things. There are 2 categories: • Mandatory Spending: spending on programs required by law • Discretionary Spending: spending on categories government planners can make choices on.

19. Mandatory Spending Except for interest on the national debt, most of the mandatory spending is for entitlement programs(welfare programs people are “entitled to” if they meet certain eligibility requirements) such as: Ex: Social Security, Medicare, Medicaid, Food Stamps, Supplemental Security Income (SSI), and child nutrition, retirement benefits/insurance for federal workers, as well as veteran’s pensions. Makes up nearly 60% of government spending

20. Discretionary Spending A wide range of categories: Defense Spending: ½ of all discretionary spending, Other Examples include: Education, Training, Scientific Research, student loans, technology, national parks/monuments, law enforcement, environmental cleanup, housing, land management, transportation, disaster aid, foreign aid, farm subsidies, etc.

21. State/Local Taxes and Spending The federal budget has just one budget for all kinds of spending, but the states have 2 budgets: • Operating Budget (day-to-day expenses) • Capital Budget (major capital or investment expenditures) States have laws that require a balanced budget

22. State/Local Taxes and Spending Tax Revenue in the states are spent on: • Education • Public Safety • Highways and Transportation • Public Welfare (hospitals/clinics) • Arts and Recreation • Administration

23. State/Local Taxes and Spending There are some limits on taxation: Can’t tax imports/exports, federal property (military bases),Tax Exempt (Not subject to a tax) charities/churches/organizations, etc, States collect taxes from: Sales tax, state income tax, corporate income tax, license fees, severance tax (on natural resources), property tax (real and personal

24. Economics Unit 6 Chapter 15

25. The Federal Budget Fiscal Policy: the use of government spending and revenue collection to influence the economy *How much to spend and how much to tax are among the most important decisions the government makes

26. The Federal Budget Fiscal Year: A 12 month period that can begin on any date. Our government’s fiscal year is from Oct 1st-Sept 30th

27. The Federal Budget • Federal Agencies request money for the upcoming fiscal year to the Office of Management and Budget (OMB) • The OMB works with the White House to combine all the agency requests into one budget along with the priorities for the White House before sending it to Congress • Congress considers, debates, and modifies the budget, along with adding their own spending. They use figures from the Congressional Budget Office (CBO) that is independent of the OMB. • Committees in both houses of Congress submit appropriation bills to authorize specific spending. • The President can sign it into law, or veto it which would force it back to Congress to rework it into something the president will sign unless they can override the veto.

28. The Federal Budget The total level of government spending can be adjusted to increase/decrease the output of the economy. Fiscal policies, like higher spending and tax cuts, that encourage economic growth and output are called Expansionary Policies. Fiscal policies, like lower spending and higher taxes that reduce economic growth and output are called Contractionary Policies.

29. Limits of Fiscal Policy • It’s difficult to change spending levels. Especially due to 60% mandatory spending by law. • Predicting the future is tough so more time is needed to study the economy (inside lag) to figure out the real problems and where we are on the business cycle. Most solutions also presume people will react a certain way based on history. • Delayed Results (outside lags) make it tough to know what is working. • Political Pressures-elected officials often don’t do what is best for the country, but what will help those who elected them in their district/state. • It’s tough to coordinate fiscal policy at the federal, state, and local levels so it works more cohesively.

30. Fiscal Policy Options: There are 3 main schools of thought that we will look at that guide how we pursue Fiscal Policy. • Classical Economics • Keynesian/Demand-Side Economics • Supply-Side Economics

31. Fiscal Policy Options: • Classical Economics: the idea that free markets can regulate themselves (Adam Smith, David Ricardo, Thomas Malthus) The Great Depression challenged this thinking because it exposed the fact that Classical Economics doesn’t address how long it would take for the Market to return to equilibrium.

32. Fiscal Policy Options: • Keynesian Economics: a form of demand-side economics that encourages government action to increase or decrease demand and output John Maynard Keynes believed his theory would help tell economists and politicians How to avoid crises like the Great Depression.

33. Fiscal Policy Options: • Keynesian Economics: • Focused on the economy as a whole • Looked at Productive Capacity (maximum output you can have without big increases in inflation) • Believed in Govt. Spending to stimulate the economy • By spending, it furthered demand and thus would increase output and hiring • Said there were 3 Sectors: Individuals, Businesses, Govt. • There are 2 fundamental Macroeconomic problems: periods of recession/depression & inflation.

34. Fiscal Policy Options: • Keynesian Economics: • Argued you can anticipate a recession by measuring spending and have the govt. increase its spending until the private sector did, helping to return it to a higher level. • Govt. can use a contractionary fiscal policy to fight inflation • Fiscal policy has a multiplier effect

35. Fiscal Policy Options: • Supply-Side Economics: A school of economic thought that believes tax cuts can help an economy by raising supply. Tries to increase economic growth by increasing aggregate demand. Argues tax cuts increase total employment so much that more revenue is brought into the govt coffers at the lower rate because there are more tax payers.

36. Fiscal Policy Options: • Supply-Side Economics: Most supply-siders use a Laffer Curve which shows the relationship between the tax rate set by the govt. and total tax revenue that the govt. collects. Ronald Reagan’s administration was the first to follow this fiscal policy at a national level.

37. Budget Deficits & the National Debt When the federal government’s revenues are equal to its spending, it is called a balanced budget. It is never perfectly balanced and either runs a: • Deficit: spend more than revenue you bring in • Surplus: brings in more revenue than is spent

38. Budget Deficits & the National Debt To deal with a deficit, the government can: 1. Create Money-can lead to hyperinflation 2. Borrow Money-usually by selling bonds Running a budget deficit can lead to borrowing money which can lead to a national debt*. *The debt is all of the money owed to bondholders and can accumulate across multiple fiscal years, where a deficit is only during that fiscal year. Deficits not paid off at the end of the fiscal year become part of the national debt.

39. Budget Deficits & the National Debt Problems with the national debt: • It reduces the funds available for businesses to invest because investors can find a better rate with the government bonds. (Crowding-Out Effect) • The government must pay back the principle plus interest. This takes away from other priorities in the budget since we are “servicing the debt”.