Fiscal Policy

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Fiscal Policy


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What is a Fiscal Policy? : What is a Fiscal Policy? Government spending and taxation to achieve full employment without inflation © 1999 South-Western College Publishing

Legislative Mandates : Legislative Mandates Employment Act of 1946 Federal Governments responsibility to ensure price stability and full-employment Utilize Fiscal and Monetary policy to achieve this goal

Who decides to Tax or Spend?? : Who decides to Tax or Spend?? The legislative branch – It is in the Constitution – Article 1 The President proposes a budget each year during the “State of the Union address”. Congress approves/denies some or all of the budget. Increases or decreases in Taxes must be passed by the House of Representatives.

Everyone has a budget – even the Federal Govt. : Everyone has a budget – even the Federal Govt. Revenues = Spending Balanced Budget Revenues > Spending Budget Surplus Revenues < Spending Budget Deficit Revenues mainly from Taxes. Some comes from Tariffs, fees, and other levies on goods and services

Difference between Deficits and Debt : Difference between Deficits and Debt Deficit - when a budget is created and spending is greater than revenues. Approx $1.1 Trillion (2012) Debt - the accumulated borrowing to cover deficits. National Debt (estimate) - $16.2 Trillion.

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Two types of Fiscal Policies of Spending and Taxation : Two types of Fiscal Policies of Spending and Taxation Discretionary Fiscal Policy Changes in Taxes or Spending at the “option” of the Federal Government. These changes do not occur automatically- they must be legislated. Spending on the War on Terrorism, poverty programs, Student financial aid, Homeland Security, etc. Tax cuts for the “wealthy”, Capital gains taxes, change in Social Security/Medicare taxes

The Two types of Fiscal Policies Spending and Taxation : The Two types of Fiscal Policies Spending and Taxation Nondiscretionary Fiscal Policy Built-in stabilizers -automatic changes in G and T as the economy changes. These do not require new legislation – already embodied in law In a Recession – Government spending for some programs INCREASES. As the economy improves, spending for these programs DECREASES Examples: Unemployment Compensation, Food Stamps, Social Security, Medicare Progressive Tax System In a Recession– Incomes decline and people pay less of there income in taxes - retain more to spend During periods of Inflation, as incomes rise people pay more of their income in taxes – now they have LESS to spend

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PowerPoint Presentation : Opportunity Costs: If you spend, as a percent of GDP, at a relatively Constant Rate then when you have to pay more for one thing, you MUST spend less somewhere else

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PowerPoint Presentation : Here lies a big part of the Entitlement Spending “problem”

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Americans are living longer and having fewer children : Americans are living longer and having fewer children Consequently, fewer workers are available to support each Social Security recipient 1960: 5.1 to 1 Today: 3.3 to 1 2040: 2 to 1 Source: Social Security Administration, March 2006

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PowerPoint Presentation : National Debt Financed by the selling of US Treasuries---”IOU’S” that pay the lender interest on this “Financial Asset”. Backed by the Current and Future Tax Revenues These Treasuries have different names based on “Maturity Dates”

PowerPoint Presentation : The National Debt has two major components Public Deb t—external debt incurred by borrowing from Individuals, businesses, States, Pension funds (public and private), foreigners (individuals and businesses and foreign governments, etc ) 2. Private Debt- --also called “Intergovernmental debt” Borrowing from various Federal Government accounts/ Trust Funds Social Security Trust Fund, Medicare Trust Fund, and other Federal Pension Trust Funds

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PowerPoint Presentation : Progressive Income Tax System “How we pay for the operation of the Federal Government through our earnings.”

PowerPoint Presentation : U.S. Tax Brackets-2012 Single Taxpayer Rate $0 to $8,700 10% $8,700 to $35,350 15% $35,350 to $85,650 25% $85,650 to $178,650 28% 178,650 to $388,350 33% $338,350 and over Note: Next year the Marginal Tax Rate for the top earners will be 39.4% and the incremental amounts of income will be different too. 35.% Progressive Tax System and Marginal Tax Rates

Progressive Tax Structure and You : Progressive Tax Structure and You What this means… If you do your taxes and after Credits and Deductions your Adjusted Gross Income is $200,000 (pretty good, huh!) On your first 8,700 you pay 10% = $870 From $8,700 to $35,350 ($26,649) you pay 15% =$3,997 From $35,350 to $85,650 you pay 25% = $12,575 From $85,650 to $178,650 you pay 28% = $26,040 From $178,650 to $388,350 you pay 33% = $69,201 Anything OVER $388,351 you pay 35% = $????? To find Total Federal Income Tax owed add up the taxes owed at EACH MARGINAL TAX RATE BENCHMARK OF INCOME U.S. Tax Brackets-2012 Single Taxpayer Amount of Tax Rate $0 to $8,700 10% $8,700 to $35,350 15% $35,350 to $85,650 25% $85,650 to $178,650 28% 178,650 to $388,350 33% $338,350 and over 35%

PowerPoint Presentation : Example: Lets say your earn $450,000 per year in total income You do your taxes and after various Deductions your Adjusted Gross Income is $388,350 (pretty good, huh!) On your first 8,700 you pay 10% = $ 870 From $8,700 to $35,350 ($26,649) you pay 15% =$ 3,997 From $35,350 to $85,650 you pay 25% = $12,575 From $85,650 to $178,650 you pay 28% = $26,040 From $178,650 to $388,350 you pay 33% = $69,201 Anything OVER $388,350 you pay 35% = $????? Add up all the taxes due at each level of benchmark income Total Federal Income Taxes owed would be: $112,683 This expressed at a percent of your TAXABLE INCOME = 29% ($112,683/$388,350 X 100) Expressed as a percent of TOTAL INCOME = 25% ($112,683/$450,000 X 100) This is what is called your “EFFECTIVE TAX RATE ”. Note it is DIFFERENT than your Marginal Tax Rate that your Taxable income falls into--- 35% !!

PowerPoint Presentation : Tax Freedom Day http://taxfoundation.org/tax-topics/tax-freedom-day On average, ALL income you earn from January 1 st Through April 16 th will go to pay for one tax or another. Think about that!!

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PowerPoint Presentation : Who pays what in Taxes? Important to know the difference Between Income tax and other taxes And how policy affects BOTH.

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What is a Recessionary Gap? : What is a Recessionary Gap? The amount by which Aggregate Demand falls short of a full employment equilibrium, thus giving high unemployment © 1999 South-Western College Publishing

AggregateDemand/Aggregate Supply Recession : AggregateDemand/Aggregate Supply Recession Price Level Gross Domestic Product Full Employment (Fe) LRAS ( AS ) SRAS (Fe) ( AD) GDP1 P(1) Recessionary Gap

Fiscal policy to help solve a recessionary gap : Fiscal policy to help solve a recessionary gap Raise government spending Lower taxes Attempting to expand or stimulate the economy Remember, multiplier effects “EXPANSIONARY” REMEMBER We want to get Aggregate Demand moving to the Right – Increasing GDP AD

What is an Inflationary Gap? : What is an Inflationary Gap? The amount by which Aggregate Demand exceeds the full employment equilibrium, thus a booming economy, leading to demand pull inflation. © 1999 South-Western College Publishing

AggregateDemand/Aggregate Supply Inflation : AggregateDemand/Aggregate Supply Inflation Price Level Gross Domestic Product Full Employment (Fe) LRAS ( AS ) SRAS (Fe) (AD) Inflationary Gap P(1) This is where we want to be!!

Fiscal policy to help solve an inflationary gap : Fiscal policy to help solve an inflationary gap Lower government spending Raise taxes Attempting to contract or slow down the economy “CONTRACTIONARY” REMEMBER We want to get Aggregate Demand moving to the Left (down) – Increasing GDP AD

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