Fiscal Policy defined
The government’s (Congress and the President) use of ____________ and
______________ to promote economic growth and stability.
History of Fiscal Policy
____________________
(classical economics)
The Great Depression
1929-1930s
WWII
1939-1945
•No need for government
interference
•Market regulates itself
•Adam Smith, David
Ricardo, Thomas Malthus
are classical economists
•Challenged classical
economics
•FDR increased
government spending on
programs to increase
employment on public
___________ to help stop
the depression
•To prepare for war, U.S.
increased production of
war goods.
•Government spending
increased dramatically
which helped the country
out of the depression.
History of Fiscal Policy
1960s
•JFK proposed tax cuts to
personal and business
income taxes to increase
________________
demand.
•Government spending
increased due to Vietnam
War.
1980s
•Reagan passed a bill to reduce taxes by
25% over 3 years to fight stagflation (high
unemployment + high inflation).
•Demand-side policies would not work,
thus supply-side policies were introduced
– known as ____________________.
Two branches of ______________ Policy:
 Demand side
 Supply side
Demand-Side Economics
 Inspired by John Maynard __________________ during the Great Depression
and is also called Keynesian Fiscal Policy
 Looks at changing aggregate _____________ which is either increasing or
decreasing
Tools of Fiscal Policy
1. ________________ Policy of Government
2. ______________________ Policy of Government
Demand Side Fiscal Policy
 Keynes said that sometimes the market could not correct itself and the
government needs to take a more _______________ role in the economy.
 This increased role of government in the economy was something different
from the _______________ view. It was considered very radical for the
time.
Limitations of Demand-Side Fiscal Policy
1. Not coordinated with _______________ policy
2. Surplus budget unpopular and politicians lack the political will to carry it
out
3. Time ________ - Inside lags and outside lags
4. People are unpredictable - Economics is a social science so we are
dealing with human behavior.
5. Doesn’t solve ____________________
Multiplier Effect
 The _______________ effect in fiscal policy states that for every one dollar
change in taxing or government spending, it will create a ____________
change in the national income, either increasing or decreasing.
Supply-Side Fiscal Policy
•Economic policies designed to stimulate output (GDP) and lower
___________________. To achieve this you increase aggregate supply (AS).
•_________________ Supply - side was implemented in the 1980’s to deal with
stagflation and is sometimes called “Reaganomics.”
•Goal is to give incentives to businesses to produce more ( AS).
Principles of Supply Side
1.Tax cuts - encourage consumers to _________ so businesses have money to
borrow for capital investment.
2.Government spending cuts especially on transfer payments where nothing is
produced
3.Deregulate business
Overall __________ Government
Supply-Side Economics
 Stresses the ___________________ of taxation on the economy. Supplysiders believe that taxes have a strong, negative influence on output
 Arthur Laffer came up with a theory concerning tax rates and tax revenues.
It was called the _____________ Curve. Laffer said if you lower the tax rate
we will see an increase in tax revenue.
Limitations
1. Lack of _________________- hasn’t been around long enough.
2. Don’t know where we are on Laffer Curve.
3. Makes Federal Income Tax less progressive and reduces the automatic
stabilization and reduces many “_______________________” programs.
DECIDING FISCAL POLICY
Taxing & Spending
When the U.S. Government decides Fiscal Policy:
 They are deciding which __________ to address at a given time – economic
growth, stability or full employment.
 They must decide to tax or spend to ____________ the problems in the
economy.
Taxation
 Power to Tax – Article 1, Section 8, Clause 1 of the U.S. Constitution
 _________ Amendment
 Limitations:
o Purpose is for “the common defense and general welfare”
o Federal taxes must be the ____________ in every state
o Government may not tax exports
Purposes of Taxation
 Raise ________________
 Regulate the economy (fiscal policy)
 ________________________ of income (transfer payments)
 Provide positive economic incentives
 Provide negative economic incentives
Types of Taxes or Tax Structures
•________________________ - takes larger percent of income from higher
income groups- as income goes up tax rate increases
•example- Federal ______________ Tax
Types - Regressive
•_______________- takes larger percent of income from the lower income group
•Example- ____________ tax, property tax Social Security tax
Types - Proportional
•________________ - takes the same per cent of income from all income levels
•Examples - some state income taxes & proposed _______ tax
Who Bears the Burden of a Tax?
To fully evaluate the fairness of a tax, it is important to think about who bears the
final burden of the tax or the _____________________________.
Principles of Taxation
1.
_______________ received- people who directly benefit or use the good or
service should pay
• Example- _______________ tax on gasoline used to build roads
2.
_________________________- people who have more wealth or income
should pay more.
• Example- Federal __________________ Tax
Top Federal Taxes
•___________________ Income Tax
•Social Security
•Corporate Income Tax
FICA
•_____________=Social Security + Medicare
•FICA Taxable Wage Base or a cap—a maximum income level that can be
taxed. All income above that level is not taxed for FICA, tax free.
•____________________ match employee contributions.
State Taxes
•States receive most of their revenue from a _____________ Tax.
Local Taxes
•________________ Tax
Government Spending
 Goods and Services
 Transfer Payments