Unit 6 - Fiscal Policy

 Fiscal Policy

Governments make decisions

regarding spending and taxation.

Macroeconomics
 Unit 6 - Fiscal Policy

 Fiscal Policy and Keynes

Keynes encouraged governments to

increase spending and/or decrease
taxes during recessions,
and the opposite during expansions.

Macroeconomics
 Federal government spending:
Unit 6 - Fiscal Policy
 Fiscal Policy and Keynes

Keynes listed two types of fiscal policy:

1. Discretionary spending (needs government
approval). Examples include bills passed
to change spending on roads, highways,
stadiums, or taxation in order to stimulate
the economy.
2. Automatic stabilizers (already part of
existing programs). Examples include
welfare programs and progressive taxes.
 Unit 6 - Fiscal Policy

 Fiscal Policy and Classical Economists

The classical theory supports

government spending
only on essential functions, but
not as a way to stimulate
the economy.

Macroeconomics
 Unit 6 - Fiscal Policy
 Fiscal Policy and the Classical Theory
Classical economists
believe that government
stimulation is harmful
in the long run, because it:

1. Raises inflation
2. Raises interest rates,
3. Slows down the economy
in the long run.
4. Is subject to lags
in the implementation.

Macroeconomics
 Unit 6 - Fiscal Policy
 Fiscal Policy and the Classical
Theory

Fiscal policy
implementation lags
1. Information lag
2. Policy lag
3. Impact lag

Macroeconomics
 Unit 6 - Fiscal Policy
 United States Government Levels

Government spending and taxation

occurs at the following levels in the
United States:

1. Federal (national)
2. State
3. Local (county and city)

Macroeconomics
 Federal government spending:
Unit 6 - Fiscal Policy

 Federal Government Expenditures

See our CD, Unit 6, Section 3,

or visit:
http://www.gpoaccess.gov/usbudget/
Federal government spending:
Unit 6 - Fiscal Policy

 Federal Government Revenue

See our CD, Unit 6, Section 4.

Or visit:
http://www.gpoaccess.gov/usbudget/
 Unit 6 - Fiscal Policy
 Federal Government Tax Rates
2011 Individual Marginal Tax Rate 2011 Brackets for
Income Tax Brackets Married Households
for a single person Filing Jointly
$0 10% $0
$8,500 15% $17,000
$34,500 25% $69,000
$83,600 28% $139,350
$174,400 33% $212,300
$379,150 35% $379,150
 (Survey) Regarding our tax rates
in the United States, we should:
1. Keep them the same
2. Lower them for everyone
3. Raise them for everyone
4. Lower them for
households earning less
than $200,000 and raise
them for higher incomes
10
5. Don’t know
0 of
30
 In 2008, the top 10% of all income earners
(households) in the U.S. (income higher than
$109,000) paid approximately ___ of all federal
income taxes

1. 22%
2. 37%
3. 52%
4. 71%
5. 82%

0 of 30 :10
 In 2008, the bottom 50% of all income earners
(households) in the U.S. (incomes lower than
$32,000) paid approximately ___ of all federal
income taxes

1. 0%
2. 3%
3. 10%
4. 22%
5. 30%
6. 50%

0 of 30 :10
 Federal government spending:
Unit 6 - Fiscal Policy
 Federal Tax Burden

The top 25% (household income

higher than $65,000) paid 86% of all
federal income taxes in 2008.

For a breakdown of the burden of tax

of all income groups in the United
States, see our CD, Unit 6, Section
4.
 Federal government spending:
Unit 6 - Fiscal Policy
 Alternative Tax Plans

The Flat Tax

 All income groups pay the same tax

percentage.
 No or very few tax deductions.
 Easy to complete tax returns.
 Less need for tax accountants and tax

auditors.
 Will taxes go down for the wealthy and up for

the poor? (some plans exempt incomes below

$30,000 though)
 Federal government spending:
Unit 6 - Fiscal Policy
 Alternative Tax Plans

The Consumption Tax

 No more individual income taxes (complicated).
 Taxes on consumption only.

 Easy to administer.
 More incentive to save.
 Even drug dealers pay taxes.

 It is a regressive tax, unless essential

products are exempt.

 Which tax system do you
prefer?
1. Our current income tax
system
2. Our current income tax
system, but with lower rates
3. Our current income tax
system, but with higher
rates for some groups
4. A Flat tax system
5. A consumption tax system
6. Other 30
0 of
30
 Federal government spending:
Unit 6 - Fiscal Policy
 Effects of a Tax Cut

Let’s say Congress decides to cut taxes

across the board by 10%.
Who benefits?

Consider 4 households:
Household 1 pays $0 in taxes.
Household 2 pays $4,000 in taxes.
Household 3 pays $30,000 in taxes.
Household 4 pays $100,000 in taxes.
 Federal government spending:
Unit 6 - Fiscal Policy
 Effects of a Tax Cut

Household 1 saves $0.

Household 2 saves $400.
Household 3 saves $3,000.
Household 4 saves $10,000.

Household 1 saves nothing.

Household 4 saves the most.

Do tax cuts benefit the wealthy?

 Federal government spending:
Unit 6 - Fiscal Policy

Effects of a Tax Cut

The Laffer Curve

An increase in tax
rates at lower rates
increases government
tax revenue.
An increase in tax
rates at higher rates
decreases government
tax revenue.
 Unit 6 - Fiscal Policy
U.S. Federal Expenditures and Tax Revenue as a
Percentage of GDP
Year Revenue Expenditures

1930 4.2 3.4

1940 6.8 9.8

1944 20.9 43.7

1960 17.8 17.8

1980 18.9 21.6

2007 17.6 20.1

2009 18.5 28.3

2011 (est) 14.8 26.0

 Unit 6 - Fiscal Policy
 U.S. Federal Expenditures and Tax
Revenue as a Percentage of GDP

Website with federal government spending

and revenue information:
http://www.whitehouse.gov/omb/budget

Macroeconomics
 Federal government spending:
Unit 6 - Fiscal Policy

 State and Local Government Spending

and Revenue

For expenditure and revenue data,

see CD, Unit 6, Section 5.
 Unit 6 - Fiscal Policy
 Estimated Taxes Paid by a Typical U.S. Worker

1. Federal average income tax after deductions: 12%

2. FICA tax: 7.65%
3. Federal excise tax: .35%
4. State sales tax as % of total income: 3.5%
5. State income tax after deductions: 4%
6. Other state taxes: 2%
7. County income tax after deductions: 2%
8. County property tax as a % of total income: 3%
9. Other county taxes: .5%
10. Corporate or self employment taxes: 3%
Total estimated taxes as a % of total income: 38%.

Macroeconomics
 Unit 6 - Fiscal Policy
 Public Choice

is the analysis of the effectiveness of

government (public sector) spending.
Topics include:
 Non-profit nature of government
 Special interest groups

 Short-run versus long run considerations

 Capture theory

 End-of-fiscal year spending

Macroeconomics