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Spending, taxing, &
borrowing policies
Government collects
taxes to pay programs
(Roads, education,
National Defense)
 Taxes used to
influence behavior of
individuals (tobacco,
etc.)

Tax Rates – the
percentage of a person’s
income that goes toward
taxes.
 Proportional Taxes –
“flat rate tax”
 Takes same
percentage of income
from individuals at all
income levels.
 Has greater impact
on people with
lower incomes.

Progressive Taxes –
takes larger percentage
of income from a highincome person than
lower income person
 2000, $26,250 or less
= 15%
 $288,350 = 39.6%
(highest tax
bracket)
 Effected those with
the higher incomes
more than those with
lower incomes.

Regressive Taxes –
takes larger percentage
of income from people
with low incomes than
from people with high
incomes.
 Falls more heavily on
people in lowerincome groups than on
people who earn high
incomes

Individual Income Taxes – progressive
(sometimes proportional) tax on a person’s
income.
 Collected by Federal government & most state
governments
 1996, provided 38% of federal revenue & 14%
of state revenues.

U.S. government
taxes corporate
profits.
 Many corporations
pay at a reduced
rate
 1996, made up 10%
of federal tax
revenues & 3% of
state tax revenues

Money withdrawn from
workers paychecks to fund
(OASDI) Old-Age, Survivors,
& Disability Insurance &
Medicare – provides health
care to older Americans
regardless of income.
 Both proportional &
regressive
 Second largest source of
revenue for federal
government (1999 = 33.5%)


Does not take a
persons income into
account.
1% of state revenues
(25% of local
governments revenue)


Regressive tax
assigned to certain
goods and services
by state & local
governments
1996, 5% of federal
revenues & 21% of
state revenues.

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Excise tax – tax on manufacture, sale or consumption
of a particular good or service (gas, tobacco, firearms,
alcohol, telephone services, tires, & gambling)
Estate tax – tax placed on the assets of a person who
has died
Gift tax – placed on the transfer of certain gifts of
value (exceeds $10,000 annually)
Customs duty – tax on goods brought into the U.S.

Supply-Side Economics – focuses on
achieving economic stability & growth
by increasing the supply of goods &
services throughout the economy
 Governments role to provide firms
with incentives to increase
production (tax cuts & less
spending)
 Leading supporter Jean-Baptiste Say
– “Supply creates its own demand”
 Producers provide enough goods
& services to meet their own
needs – produce more in exchange
to meet their wants
1.
2.
Assumption that
economist can predict
the economic behaviors
of people
Tax cuts unfair
 Spending cuts fell
most heavily on social
programs for the poor,
unemployed, & other
disadvantaged groups.

Focuses on achieving economic growth through governments
influence on aggregate demand.
 John Maynard Keynes – “Father” of demand-side
economics
 Published “The General Theory of Employment, Interest
and Money” – marketplace forces alone were not enough
to increase aggregate demand during economic
downturns. (government needed)
 Employment Act of 1946 – pledged to promote
“maximum employment, production, and purchasing
power”


Tax Rates – used to regulate aggregate
demand in privately owned businesses
 Congress reduces taxes to help
unemployment
 Congress raises taxes to limit inflation
Tax Incentives – special tax break the
government extends to businesses to
encourage investments in new capital
 Investment tax credit – permits firms
to deduct from their corporate income
taxes a percentage of money spent on
new capital



Government Spending
 Decrease of government spending results in lower
aggregate demand & slower business activity
 Increase results in higher spending, aggregate demand &
employment opportunities
Public Transfer Payments
 Redistribution of tax dollars to nonproductive (goods or
services that are not created in exchange for government
payments) actors in the economy. “Unemployment
compensation”
Progressive Income Taxes
 Period of prosperity leads higher incomes into higher tax
brackets
 Periods of recession – taxed at lower rates

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Timing Problems
Political Pressures
 Restrictive fiscal policy – increases taxes & reduces
government spending
 Expansionary fiscal policy – decreased taxes & increased
government spending to stimulate business activity
Unpredictable economic behaviors
Lack of coordination among government policies

Federal Budget –
federal governments
plan for the use of
government revenues
 Summary of the
ways in which the
government uses
fiscal policies.



Wartime spending –
causes dramatic
increases in the level of
government
expenditures
Increased corruption
Progressive Reform
Movement


New Budget Process
 1921, Budget and Accounting Act – created the Bureau of
the Budget
 Empowered the president to formulate an annual budget
 OMB (Office of Management & Budget) replaced BOTB
Budget Process today
 President develops it & consults with the OMB,
Council of Economic Advisers, The Dept. of the
Treasury
 Focuses on the next fiscal year – 12-month finical
period that typically does not duplicate the dates of
the calendar year

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Budget deficit – government spends more than it
collects
Budget surplus – government revenues exceed
government expenditures
Deficit spending – spending more money for its
programs than it’s able to cover with it’s revenues.
National Debt – total amount of money the federal
government has borrowed (includes all deficits
from previous years)



Growth of the National Debt
 1790 = $75 million
 Civil War = $1 billion
 WW1 = $3 billion (two years later $25 billion “Roaring 20’s)
 1982 = $1 trillion
 2000 = $5.6 trillion
Debt Ceilings – legislates a limit on the size of the national
debt
 Increased each time it was set…
Impact of the National Debt
 Spending on social programs = improves quality of life
 $362 billion on interest alone in 2000

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
Increasing Revenues
 Taxation?
 1993, Omnibus Budget Reconciliation Act – raised
individual income tax rates for highest tax bracket & raised
taxes on gasoline
Decreasing Expenditures
 Closing of military bases
 Reducing defense spending
Legislating a Balanced Budget
 Balanced Budget & Deficit Reduction Act (1985) “GRH”
 Program set-up to balance budget in 5-years
 Cuts to nearly every government program