Essential Questions Fiscal Policy

Transcription

1 Essential Questions Fiscal Policy -What is the role of Government in the Macro Economy? -What are the basic causes of Business Fluctuations? -What is fiscal policy and how does gov t use fiscal tools to remedy fluctuations -What are the shortcomings of fiscal policy intervention in the marketplace?

2 Key Objectives Part 1 -compare and contrast differences between classical and keynesian theories -define discretionary and non-discretionary fiscal policy -draw a business fluctuation and illustrate how government uses fiscal policy with tax and spending tools -identify the key roles of government intervention in the macro economy

3 The Birth of Fiscal Policy The Great Depression pointed to market imperfections and capitalist instability. New economic ideas were developed to deal with the crisis.

4 Does Supply create Demand? Does Demand create Supply?

5 John Maynard Keynes develops concept that changes in aggregate demand cause fluctuations. (demand creates supply) -A new thought is developed (Keynesian approach) and demand side economics takes place. THE GENERAL THEORY OF EMPLOYMENT, INTEREST AND MONEY

6 FISCAL POLICY Government Intervention to Cure Capitalist Fluctuations Fiscal Policy - The governments use of taxes, government spending, and transfer payments to promote growth and stability. Stability vs. Productivity

7 Employment Act of designed to promote maximum employment, production, and purchasing power. Gives gov t the right to use fiscal policy to stabilize or regulate the economy.

8 Post Great Depression and Roosevelt s New Deal changes the role of government. What is the role of government then? 1. Promote competition -FTC, Sherman and Clayton Anti-trust acts 2. Providing public goods -roads, education, and defense 3. Promoting economic well being -redistribution of tax revenue to meet specific needs (social security, unemployment compensation, subsidies, TANF) *4. Stabilizing economy - Use of fiscal and monetary policy

9 Fiscal Policy Discretionary Non-Discretionary Discretionary - Use of Government to alter aggregate demand by adjusting taxation or spending. 1. Taxation A. To fight inflation -Gov t will raise taxes to decrease disposable income (less money chasing goods and services) B. To fight unemployment -Gov t will reduce taxes to add excess money in your pockets -increased spending by consumers and investors. 2. Government Spending A. To fight inflation -Gov t reduces spending to reduce money in the economy B. To fight unemployment -Gov t increases spending to jump start the economy

10 Non - Discretionary Fiscal Policy (Automatic Stabilizers) -often called automatic stabilizers because they provide constant injection or removal of money into the economy to affect aggregate demand. Public Transfer Payments (Social Programs) 1. Unemployment compensation (payments to the temporarily unemployed) 2. TANF (Temporary Assistance for Needy Families) 3. Social Security (does not follow cycles; stabilizer?)

11 Progressive Income Taxes -personal income and corporate income tax -incomes are taxed at different rates ( the more you make the more you re taxed as a percent of income) -serve as an automatic stabilizer to inject or remove money from the economy

12 Key Objectives Part II -Compare and contrast major tax collections by computing simple math functions -Define effective tax rate, tax incidence, and marginal rates of taxation -Identify payroll tax deductions and their functions

13 What is the total tax paid if one s taxable income were $35,000? What % of income is paid in taxes? Or in other words what is the effective rate? EFFECTIVE TAX RATE Tax Paid (tax incidence) INCOME Earned

14 Other forms of taxation Regressive taxation - taxes imposed equally on each purchase; ex. sales, gas. (the less you make the more you pay as a percentage of income) $6, per day If both purchase 25 gallons of gas and the tax per gallon is.25, what is the amount of tax paid? What % of their daily income is paid in taxes? $ per day

15 Proportional taxation - taxed at same rate of Income (flat tax rate on income) $1,700,000.2 Income tax rate $340,000 tax $50,000.2 Income tax rate $10,000 tax

16 Payroll Taxes (FICA or Federal Insurance Contribution Act) -Reductions from your check to pay for SS (6.2% up to $117,000 earned) and Medicare (1.45% on all dollars earned). Employer must match the amount. Statutory Payroll Tax Deductions * Federal income tax withholding (based on withholding tables in Publication 15) * Social Security tax withholding (6.2% up to the annual maximum) * Medicare tax withholding (1.45%) * State income tax withholding * Various local tax withholdings (such as city, county, or school district taxes, state disability or unemployment insurance). -which of the above is regressive? What about estate taxes?

17 Voluntary Payroll Deductions Voluntary payroll deductions are withheld from an employee's paycheck only if the employee has agreed to the deduction. Voluntary deductions pay for various benefits which the employee has chosen to participate in. Voluntary payroll deductions include the following: * Health insurance premiums (medical, dental, and eyecare) * Life insurance premiums * Retirement plan contributions (such as a 401k plan) * Employee stock purchase plans (ESPP and ESOP plans) * Meals, uniforms, union dues and other job-related expenses

18 Key Objectives Part III -Evaluate growing inequality trends by defining the Lorenz curve -Examine causes of inequality by defining positive and normative statements and observing data

19 Are Tax Changes a Source of Income Inequality?

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29 Positive Economics vs. Normative Economics Positive statements are objective statements that can be tested, amended or rejected by referring to the available evidence. Positive economics deals with objective explanation and the testing and rejection of theories. For example: -An increase in the minimum wage will cause unemployment. Normative statements are subjective statements rather than objective statements i.e. they carry value judgments. For example: -Government needs to increase the minimum wage to solve poverty.

30 Key Objectives Part IV -identify fiscal policy shortcomings -compare and contrast deficit and debts -examine characteristics of government spending and who owns US debt -define supply side economics and its shortcomings

31 Problems with Fiscal Policy 1. Timing issues a. economic forecasting is worse than trying to predict the weather. (dismal science) b. time lags involved with getting Tax and Spend measures through congress. 2. Political constraints a. restrictive fiscal policy (increasing taxes or reducing spending) is political suicide. 3. Over or underestimation of external factors a. Is MPC or MPS affected by threat of War? By what percentage? 4. Expansionary Fiscal Policy and Growing Debt a. Budget Deficits surge and so does the national debt (remember, tax cuts and increased spending) Budget deficits - expenditures in excess of tax revenue in a given time period National Debt - Accumulation of debt due to reoccurring budget deficits

32 Budget Deficits

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38 Debt Ownership

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40 Alternatives to Keynes Aggregate Demand Fiscal Policy SUPPLY SIDE - The use of fiscal policies to alter aggregate supply (supply creates demand) Based upon 4 basic principles 1. Tax cuts on corporate and personal income taxes to spur long range growth (allows excess money to be invested in capital goods to increase supply) 2. Spending cuts on Social Programs -programs create security for those who don t need it. Programs are expensive and add to the tax burden while slowing productivity and growth. 3. Less Gov t Intervention -regulation increases the cost of production and limits growth 4. Use of the Laffer Curve -describes how increases in taxation affects tax revenue.`

41 Art Laffer

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43 Critics of Supply Side theory 1. Increases in productivity & investment?, savings marginal? 2. Fairness of tax cuts? Look at results of Tax Incidence 3. Huge budget deficits and National Debt (Increased tax revenue from tax cuts? Laffer debunked) 4. Problems with costs of regulation exceeding deregulation (In other words, deregulation or unfettered markets allow corruption to take place - Investment Banking)