The Federal Government

Taxes, Spending,

and National Debt

I. What is the role of the government in free enterprise economies?

A. To enforce private property rights- to establish the rules of the game

B. To monitor external costs and benefits- economic side effects of production (extern.)

C. To ensure market competition- enacting antitrust laws to keep mkts open

D. To protect consumers- from faulty products and false advertising

E. To manage the economy

Sometimes the govt must intervene- WHY??

_____________________________________

1. Monetary policy- regulating the money supply / Which government agency is responsible for doing this?? _____________________

• Federal reserve ratio

• Discount rate

• Open market

operations

2. Fiscal policy- changes in the expenditures or tax revenues of the federal govt.

• Expansionary fiscal policy: an increase in govt spending &/or a decrease in taxes; designed to increase demand (spending by consumers) in the economy

Under what circumstances would the govt practice exp fiscal policy? _______________________________

• Contractionary fiscal policy: a decrease in govt spending &/or an increase in taxes; designed to decrease demand (cut spending) and to control inflation

Inflation- rising prices; purchasing power declines

Why would the govt ever need to raise taxes?

Which policy is our govt practicing now- contractionary or expansionary? _________

• Demand-side fiscal policy: when govt policies affect consumers

• Supply-side fiscal policy: when govt policies target suppliers

List some examples: ___________________

___________________, __________________

In which phase would we practice expansionary?

In which phase would we practice contractionary?

Effects of expansionary fiscal policy:

1. Govt buys more G/ S

2. Businesses earn

more profit

3. Business haveMore money

to spend

4. Increased Spending leads to

Hiring moreWorkers

5. More jobsLeads to more

OutputIncreasing

GDP

Predict the steps in contractionary fiscal policy:

1. Govt …__________

2. _____________________________

3. ________________________________

4. _______________________________

5. ___________________________________

Which one works better?• Classical economics (monetarists)- says the

govt should rarely if ever interfere in the economy; it works least effectively at the extremes of the business cycle

• Keynesian economics- the govt should intervene in the economy b/c instability is inherent; fiscal takes longer to implement and take effect which means the economy could be over-corrected

II. Taxes• This is how the

govt takes in money

• This money is then used to pay for the various programs and projects we receive

Federal Government Revenue, in Billions, by Major Source, 1965 2008 �

Government revenue has soared by more than $1.75 trillion since 1965, in part because top marginal income, capital gains, and corporate tax rates were cut.

A. Types of taxes (2007 est.)

1. Income taxes (personal and corporate)- taken out of our paychecks; accounts for 56.2% of total receipts = $1,357billion

2. Social insurance & retirement- 36.6% of ttl receipts = $884.1 billion (social security, medicaid, etc.)

3. Excise taxes- 3.1 % = $74.6 billion

4. Other receipts- 4.1% = $100.2 billion

B. Principles of taxation (what is fair?)

1. benefits received

2. ability to pay

Type of Taxes as a Percentage of Total Federal Revenue, 2007

Social insurance taxes, which fund programs such as Social Security and Medicare, are now the second-largest source of revenue. Yet without reforms, dramatically higher taxes will be needed to pay for these programs.

C. Tax structures:

1. Proportional- percentage paid is the same for everyone (flat tax)

2. Regressive- the percentage of income paid in taxes decreases as income increases

ex- sales tax

3. Progressive- as your income increases, so does your tax rate or vice-versa

ex- federal income tax

Levels of Household Income Earners and their Proportion of the Federal Income Tax in 2005

                                                                                                                                                                                    

The U.S. tax system is highly progressive. The top 1 percent of income earners, by household, paid 39 percent of all federal income taxes in 2005, whereas the bottom 50 percent paid a little over 3 percent. Further, 32 percent of all tax returns filed in 2005 were from people who paid no federal income tax at all.

Are taxes an incentive?

_________________________________

Why do we tax certain products or industries?

Why do we want to raise cigarette taxes?

What other products/ industries are taxed differently? Why?

Do we ever use positive reinforcement in our taxation policies? How so?

III. Federal SpendingFY 2007

A. Mandatory- money that lawmakers are required to spend by existing law; most of it is for entitlements- social welfare programs that people are entitled to if they meet certain requirements such as FICA, medicare and medicaid , and other welfare programs

B. Discretionary- spending in which govt can make choices on what and how much to spend such as defense and education.

• Social Security is #1 expense at 21% of the govt’s budget

• National defense is #2 at 19%

• Medicare 14%, Welfare 13.3 %

• Interest on the natl debt 8.9%

• Education is 3.2%

If you total all human resources, it is 64.5% of the budget

(2007 est. numbers)

National Defense Spending as a Percentage of GDP, 1962-2007

IV. National DebtA. Budget surplus- when we take in more

revenue than we spend

B. Budget deficit- when we spend more money than we take in

C. National debt- the sum of the budget deficits from year to year = all the money we owe with interest

• Where do we get this money from?

• Who do we owe it to?

• What is our national debt?

• Will we go bankrupt?