Fiscal Policy
Taxing, Spending, & Borrowing
Policies of the Federal Government—
done by Congress
Types of Taxes:
Determined by the percentage of a person’s
income paid to taxes
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Federal tax revenues are controlled by the Internal Revenue
System…part of the Department of Treasury
Proportional (flat tax) same % of income of all income earners
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$100,000 X 5% = $5,000; $10,000 X 5% = $500
Ex. Is social security—up to $106,800 after that amount, it is
regressive
Ex. Is property tax—in California 1.05% of assessed value
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Ex. Is income tax, estate tax, gift tax
$24,000 X 15% = $3600; $263,000 X 39% = $102,570
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Ex. social security after $106,800
Ex. excise tax, sales tax
Ex. sales tax (spend a higher portion of their income on necessities)
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Progressive (or graduated)--% of income taxed increases as
income rises
Regressive--% of income taxed decreases as income rises
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purchase of $100 X 7.25% = $7.25; $7.25/$100,000=.00725%
purchase of $100 X 7.25% = $7.25; $7.25/$10,000 = .0725%
The most progressive taxes
Graduated Tax Brackets for Federal
Income Taxes
If you are single:
10%--$0-$8350
15%--$8350-$33,950
25%--$33,950-$82,250
28%--$82,250-$171,550
33%--$171,550-$372,950
35%--$372,950 and greater
This is just the percentage of the federal
income tax you pay. You still pay many
other taxes.
In 1954 the highest tax bracket was 91%
Taxes Collected:
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Income tax—became constitutional under the Sixteenth Amendment in 1913
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automatically deducted from paycheck
progressive
IRS is in charge of collecting
accounts for 43.6% of federal tax receipts
First passed in 1913 as the 16th Amendment
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deducted from paycheck
employer must match it
funds social security, unemployment compensation, Medicare
accounts for 36.9%
fastest growing source of federal tax income-created in 1933 under New Deal
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accounts for 9.3% of tax receipts
critics argue it results in double taxation
Payroll tax (Social Security)
Corporate Income tax—levied on corporations after all expenses have been paid
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see handout
tax on corporation; tax on dividends when paid out
stockholders pay at personal level and corporate level
Other Taxes
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excise taxes-imposed on manufacturers of certain items who then pass it on to the customer--tobacco, cigarettes, gas, car tax…aka sin tax
tariffs or custom duties—imposed on imports
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discourages Americans from buying imported goods
high tariffs can result in trade war
Federal Revenues
Fiscal Policy Strategies
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Supply-side economics—achieving economic stability by increasing the
supply of goods/services.
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Milton Friedman fathered the theory and Ronald Reagan made famous as “trickledown economics” or “Reaganomics”
Done by lower taxes to businesses and wealthy to encourage business
investment. Increased supply lowers price. Leads to increases production,
meaning more workers need hired. Creating more jobs leads to increased
spending and lower unemployment.
Also done by reduced regulation on business “laissez-faire” because it leads to
increased production costs
What if businesses/ wealthy individuals don’t invest, but spend? Increase
demand leading to inflation
Favored by Republicans
Demand-side economics—increasing economic growth through the
government’s influence on aggregate demand.
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John Maynard Keynes fathered this theory in 1936 designed to increase
government spending and was made famous by FDR.
Can lead to high national debts if not done correctly
Involves gov’t drastically increasing spending and cutting taxes during a
recession and cutting spending and raising taxes when recession ends.
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Which part do you think rarely happens?
Favored by Democrats
Tools of Fiscal Policy
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Tax Rates
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Recession—lower taxes to increasing spending, aggregate demand
Inflation—raise taxes to decrease spending, aggregate demand
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Investment tax credit—deduct new capital spending from corporate
taxes
Recession—increase tax incentives
Inflation—decrease tax incentives
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Recession—increase government spending, aggregate demand
Inflation—decrease government spending, aggregate demand
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Recession—increase unemployment compensation, aggregate demand
Inflation—decrease unemployment compensation, aggregate demand
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Recession—drops people into lower income bracket, paying less taxes
Inflation—puts people into higher income bracket, paying more taxes
Tax Incentives—special tax break to businesses to encourage
investment spending
Government Spending
Public Transfer Payments
Progressive Income Taxes
Limitations on Fiscal Policy
 Timing Problems
 identifying problem
 compromising a solution
 economic actors reaction of policy
 Political Pressures—determined by elected officials
 restrictive fiscal policy—increases taxes, reduce gov’t
spending
 expansionary fiscal policy—decreases taxes,
increases gov’t spending
 Unpredictable economic behaviors
 Lack of Coordination among gov’t policies
 dealing with monetary policy
 dealing with local/ state gov’t taxing policies
Federal Budgets
 Federal Budget Deficits—refer to pg. 494
 Find any surpluses
 What have the largest deficits occurred?
 Budget deficit—gov’t spends more than it collects
 Budget surplus—gov’t spends less than it collects
 Deficit spending—spending more money for its
programs than is able to be covered by taxes
 Reasons for Deficit Spending
 National emergencies
 Providing public goods
 Stimulate the economy
Federal Spending
National Debt
 National Debt—total amount of money the
gov’t has borrowed
 Growth of Debt—refer to chart on pg. 496497
 When did largest growth occur? Why?
 How long did it take to get $1 trillion in debt?
 How long did it take to add another $4 trillion?
 Debt Ceilings—largest amount debt can
reach; always adjusted when it approaches
 Impact—in 2008 $240 billion paid on
interest alone
National Debt
Holders of our National Debt
Foreign Holders of National Debt
Balancing the Federal Budget
 Increasing Revenues—raising taxes
 Decreasing Expenditures—cutting
spending
 Why will this never happen?
Review Questions
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What category of taxes are hardest on the poor? Give examples.
What category of taxes are hardest on the wealthy? Give examples
Which specific tax accounts for the largest share of federal revenue?
Explain Supply-side economics? Who developed it? Who championed it?
What party supports it?
Explain Demand-side economics? Who developed it? Who championed it?
Which party supports it?
What is restrictive fiscal policy? Which economic problem is it designed to
correct?
What is expansive fiscal policy? Which economic problem is it designed to
correct?
Who enacts fiscal policy?
There are five fiscal policy tools. What would Congress do to each if
practicing expansive fiscal policy? Restrictive fiscal policy?
What is the approximate federal debt? What caused it?
What is deficit spending and why do we do it?