FISCAL POLICY
What government can do for the
economy
Fiscal Policy and the Economy
How does the President and Congress affect
the economy?
Control of tax rate.
Proportional taxes (flat tax) – say 5% of everyone’s
income whether you or Bill Gates.
Progressive taxes – Richer should pay more. Luxury
taxes.
Regressive taxes – Taxes the poor tend to pay more.
Lottery tickets, cigarette taxes.
Taxes
Majority of revenue for
the US is through
income tax. 45.2%
Second is Social
security taxes and
contributions. 35%
Third is corporate taxes.
11%
Recession
People have the money
but don’t spend it.
Unemployment goes
up.
GDP slows.
Fiscal Cures for Recession
Change the tax rates.
Puts more money in the economy for
Consumption and Investment.
Government Spending. Unemployment benefits,
money for projects like roads, building
improvements.
Fiscal Cures for Recession
Change the tax rates.
Puts more money in the economy for
Consumption and Investment.
Government Spending. Unemployment benefits,
money for projects like roads, building
improvements.
Problem of Fiscal Policy in 2006:
The Deficit
When government
SPENDS (outlays)
more than they TAKE
IN (receipts) in taxes
for the year –
DEFICIT.
Projected 2006 deficit
is “around” $300billion.
When a government increases
spending and cuts taxes
DEFICIT!
More outlays than
receipts of money
More going out than
coming in.
DEBT v. DEFICIT
Deficit = yearly
budget problem
Debt = YEARS of
deficit
Current Debt????
http://www.brillig.com/debt_clock/
OR
Google: “debt clock”
Projected Deficits According to
the Congressional Budget Office
What is causing the deficit?
Higher government
expenditures
Social Security /
Medicare
War in Iraq
War on terrorism
Government needs
Lack of taxes being
collected due to
Too many tax cuts?
How do we pay for the debt?
US Savings Bonds
IOUs for the
government.
Two Terms for Fiscal Policy
Expansionary Policies
Government policy
actions that lead to
increases in output
Contractionary
Policies
Actions that
government does that
leads to a decrease in
output
Expansionary Policies
Government lowers
taxes and spends more
to get people jobs and
provide services.
Increases debt
Keeps voters happy
More working means
more we can tax
Contractionary Policy
To reduce the debt
government either/or
Raises taxes
Reduces government
spending.
People lose jobs
– Govt. employees
– Govt. purchases
People lose services
– Notice schools?
What is Government to do?
IF nothing is done, by
2020, 45% of taxes
will be used to pay the
interest off the debt.
Where will money
come from for medical
research? Roads?
Police? Etc?
Nebraska’s Situation?