Chapter Introduction
Section 1: Growth in the Size of
Government
Section 2: The Functions of
Government
Section 3: The Federal Budget and
the National Debt
Section 4: Taxation
Visual Summary
All levels of government use tax
revenue to provide essential
goods and services.
How does the government impact
your daily life? Highways and
bridges, as well as the taxes you
pay on gasoline, are just two
examples of government
involvement in your day-to-day
activities. In this chapter, read to
learn why the government
collects taxes and what it spends
those funds on.
Section Preview
In this section, you will learn how the size
and spending of government at all levels
have increased over the last century.
Can you name some other forces that
affect the use of resource throughout
the economy?
A. Many
B. Some
0%
C
A
0%
B
C. None
A. A
B. B
C.0%C
Government Growth
Government spending at all levels—
federal, state, and local—has increased
significantly over the years.
Government Growth (cont.)
• Today, about 22 million people work for the
government (federal, local, and state
employees combined).
• During the late 1960s, the federal
government paid for:
– National defense
– The salaries of members of Congress,
federal judges, and the employees of
executive departments
Government Growth (cont.)
– Public-works projects
• This continued until about 1970, when
federal funds started diminishing.
View: Government Purchases
Government is involved in the
following areas EXCEPT:
A. Transportation
B. Education
B
A
0%
0%
E
E. Worker Safety
D
D. Taxation
A. A
B. B
0%C.0% C0%
D. D
E. E
C
C. The Internet
Why Has Government Grown?
The level of government spending
reflects political decisions about how
much goods and services should be
provided by the public or private
sectors.
Why Has Government Grown? (cont.)
• One theory is that as the nation became
richer, especially in the late 1960s and
early 1970s, people demanded more
government services to even out certain
income inequities.
• Today, total government purchases easily
exceed one-third of the GDP.
Why Has Government Grown? (cont.)
• When the government taxes you to
provide you with a particular service, such
as Medicare, this cost of government is
included in government spending.
• Government taxing and spending have
opportunity costs.
– Government activity displaces private
economic decision making involved in
buying and selling.
Do you think that the growth of the
government has benefited or hurt
society?
A. Benefited society
B. Hurt society
0%
C
A
0%
B
C. It depends on the
situation.
A. A
B. B
C.0%C
Section Preview
In this section, you will learn about the
responsibilities of government.
Should the government make the
decision of which goods are desired
or undesired in our society?
A. Yes
B. Somewhat
0%
C
A
0%
B
C. Not at all
A. A
B. B
C.0%C
Providing Public Goods
Public goods are goods or services
that many people can use at the same
time.
Providing Public Goods (cont.)
• Public goods are a special type of good
or service that government supplies to its
citizens.
• Usually, different levels of government
share responsibility for public goods, such
as the legal system.
Providing Public Goods (cont.)
• Some goods in a society are considered to
have special merit by government leaders.
– Museums and ballets are merit goods and may
be subsidized by the government.
– Demerit goods are goods that government
officials have deemed socially undesirable.
Which of the following is a public good
that only the government can provide?
A. Merit good
B. Demerit good
0%
C
A
0%
A. A
B. B
C.0%C
B
C. The court system
Promoting the General Welfare
Government can use its power to tax
and spend to alter market outcomes.
Promoting the General Welfare (cont.)
• Another function of the government is
providing for the public well-being by
assisting specific groups, such as the
aged, ill, and poor.
• This is done through income
redistribution.
Promoting the General Welfare (cont.)
• Tax dollars are used to subsidize two
general categories of assistance:
– Social-insurance programs
• Social Security, unemployment insurance,
and workers’ compensation are examples.
– Public-assistance programs/welfare
• Supplemental Security Income
• Temporary Assistance for Needy families
• Medicaid
Do you feel that your taxes should be
used to assist individuals?
A. Always
B. Sometimes
0%
C
A
0%
A. A
B. B
C.0%C
B
C. Never
Regulation and Economic Stability
Stable growth, low unemployment, and
low inflation are the primary economic
goals of government.
Regulation and Economic Stability (cont.)
• Two other functions of government involve:
– Regulating economic activity
• The most important regulatory functions are
dealing with externalities.
– Trying to ensure economic stability—
smoothing the ups and downs in the
nation’s overall business activity.
View: Government Regulation
Regulation and Economic Stability (cont.)
• Critics of government involvement believe
that:
– Merit goods should be provided by
private organizations instead of taxpayer
dollars.
– Redistribution programs do more harm
than good.
– Government regulations raise the prices
of goods and services.
Do you feel that your tax dollars
should go toward merit goods?
A. Always
B. Sometimes
0%
C
A
0%
A. A
B. B
C.0%C
B
C. Never
Section Preview
In this section, you will learn how the
federal government prepares a budget and
borrows funds.
Do you know how the government
prepares its budget?
A. Yes
B. Somewhat
0%
C
A
0%
A. A
B. B
C.0%C
B
C. Not at all
The Budget-Making Process
Congress and the president work
together to prepare an annual
budget showing the anticipated
federal expenditures and revenues
for the coming fiscal year.
The Budget-Making Process (cont.)
• The president and various congressional
offices work together to prepare the
budget.
• About 18 months before the fiscal year,
(October 1 through September 30th) the
executive branch of the government
begins to prepare a budget.
• Eventually, the president approves this
budget plan, and submits it to Congress by
January.
View: Federal Taxation and Spending
The Budget-Making Process (cont.)
• Next, congress is supposed to pass two
resolutions that set binding limits on
spending and taxes for the upcoming year.
• Due to delays, the fiscal year sometimes
starts without a budget.
View: Steps in the Budget Process
According to the graph in Figure 16.3,
where does the smallest chunk of federal
spending go?
A. Health
B. National defense
C. Income security,
Social Security,
and Medicare
D. International affairs
0%
A
A.
B.
C.
0%
D.
B
A
B
C
0%
D
C
0%
D
The National Debt
A budget deficit results when
government expenditures exceed
revenues collected, and the difference
is financed through borrowing, which
adds to the national debt.
The National Debt (cont.)
• Most years, the government spends more
than it collects causing a budget deficit.
– The government must raise extra funds
through borrowing—or selling government
securities to individuals, businesses, and
foreign governments.
• Government overspending is called
deficit financing.
The National Debt (cont.)
• Each year the federal government creates
new debt by issuing securities. At the
same time, old debt is retired by paying off
bonds, notes and bills as they come due.
• The total amount of outstanding debt
remaining is the national debt.
• A budget surplus applies when government
revenues exceed expenditures.
View: The National Debt
View: The National Debt Equation
The national debt is a result of which two
factors?
A. Total of all yearly
deficits minus any
yearly surpluses
0%
D
A
B
0%
C
D
C
D. Any yearly surpluses plus
total of all yearly deficits
0%
A
C. Total of all yearly deficits
plus any yearly surpluses
A.
B.
0%
C.
D.
B
B. Any yearly surpluses
minus total of all yearly
deficits
Section Preview
In this section, you will learn about the
major principles and forms of taxation in the
United States.
Do you believe that all Americans should
pay the same percentage of their income
to federal income tax?
A. Yes
B. No
0%
C
A
0%
A. A
B. B
0%
C. C
B
C. Not sure
Principles of Taxation
Taxes are usually justified according
to either one’s ability to pay or the
benefits received.
Principles of Taxation (cont.)
• Taxes are usually justified according to
one of two major principles:
– The benefits-received principle
– The ability-to-pay principle
National defense falls under which
principle?
A. Benefits-received
B. Ability-to-pay
A. A
B. B
0%
B
A
0%
Forms of Taxation
Taxes are classified as regressive,
progressive, or proportional, depending
on whether the tax as a percentage of
income declines, increases, or remains
the same as income increases.
Forms of Taxation (cont.)
• Three classifications of taxation:
– Proportional tax
– Progressive tax
– Regressive tax
View: Major Taxes
The federal individual income tax
system is an example of which class
of taxes?
A. Proportional
B. Progressive
0%
C
A
0%
A. A
B. B
0%
C. C
B
C. Regressive
Government spending at all levels—
federal, state, and local—has increased
significantly over the years.
Under the American free-enterprise system,
the government regulates certain aspects
of the economy.
The goal of the government’s budgetmaking process is to balance what the
government takes in with what it spends.
Economic Concepts
Transparencies
Transparency 10 Income
Distribution
Transparency 11 Market Failures
Transparency 12 The Role of the
Government
Select a transparency to view.
public-works projects: publicly used
facilities, such as schools and
highways, built by federal, state, or
local governments with public money
Medicare: government program that
provides health care for the aged
public goods: goods or services that
can be used by many individuals at
the same time without reducing the
benefit each person receives
income redistribution: government
activity that takes income from some
people through taxation and uses it to
help citizens in need
social-insurance programs:
government programs that pay
benefits to retired and disabled
workers, their families, and the
unemployed
Social Security: federal program that
provides monthly payments to people
who are retired or unable to work
workers’ compensation:
government program that extends
payments for medical care to workers
injured on the job
public-assistance
programs/welfare: government
programs that make payments to
citizens based on need
Supplemental Security Income:
federal programs that include food
stamps and payments to the disabled
and aged
Temporary Assistance for Needy
Families: state-run program that
provides assistance and work
opportunities to needy families
Medicaid: state and federal publicassistance program that helps pay
health care costs for low-income and
disabled persons
externalities: economic side effects
or by-products that affect an
uninvolved third party; can be
negative or positive
fiscal year: year by which accounts
are kept; for the federal government,
October 1 to September 30 of the
next year
budget deficit: situation when the
amount of government spending
exceeds its receipts during the fiscal
year
deficit financing: government policy
of spending more money than it is
able to bring in through revenues
national debt: total amount of
outstanding debt for the federal
government
budget surplus: situation when the
amount of government receipts is
larger than its expenditures during the
fiscal year
benefits-received principle: system
of taxation in which those who use a
particular government service support
it with taxes in proportion to the
benefit they receive; those who do not
use a service do not pay taxes for it
ability-to-pay principle: principle of
taxation in which those with higher
incomes pay more taxes than those
with lower incomes, regardless of the
number of government services they
use
proportional tax: tax that takes the
same percentage of all incomes; as
income rises, the amount of tax paid
also rises
progressive tax: tax that takes a
larger percentage of higher incomes
than of lower incomes; justified on the
basis of the ability-to-pay principle
regressive tax: tax that takes a
larger percentage of lower incomes
than of higher incomes
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