UNIT 3B KEYNESIAN ECONOMICS AND FISCAL POLICY THE ROLE OF GOVERNMENT IN THE ECONOMY

The slides with the s include information not covered on the AP Exam and thus will not be on the unit test.

AD = C + I + G + X How does the government affect the GDP? Collect taxes Purchases good and services Makes transfer payments

TAXES

TAXES Taxes are required contributions, levied by the government on personal income and business profits or added to the cost of some goods, services, and transactions. Raise revenue to finance government operations and redistribute income. Public goods-highways, defense, employee wages Fund programs- welfare, social security Influence economic behavior of firms and individuals. Ex: Excise taxes on tobacco raises tax revenue and discourages the use of cigarettes.

Tax Principles 1.Benefits Received -Those who benefit from government goods and services should pay in proportion to the amounts of benefits received 2.Ability to Pay - People should be taxed according to their ability to pay, regardless of the benefits they receive.

TAX STRUCTURES Proportional % of income paid in taxes is fixed as income changes Flat tax, Medicare tax

TAX STRUCTURES Progressive % of income paid in taxes as income U.S. federal income tax, estate taxes

TAX STRUCTURES Regressive % of income paid in taxes as income Sales tax, Social Security taxes

Income Proportional Tax of 10% Disposable Income Progressive Tax Rate Taxes Paid DI Regressive Tax of $2,500 10,000 1,000 9,000 0.1 1,000 9,000 2,500 7,500 30,000 3,000 27,000 0.15 4,500 25,500 2,500 27,500 80,000 8,000 72,000 0.25 20,000 60,000 2,500 77,500 150,000 15,000 135,000 0.28 42,000 108,000 2,500 147,500 250,000 25,000 225,000 0.33 82,500 167,500 2,500 247,500 400,000 40,000 360,000 0.35 140,000 260,000 2,500 397,500 DI

WHAT KIND OF TAXES ARE THESE? (THINK % OF INCOME) 1.Toll road tax ($1 per day) 2.State income tax where richer citizens pay higher % 3. $.45 tax on cigarettes 4.Medicare tax of 1% of every dollar earned 5. City of Berkeley levies a penny-per-ounce soda tax.

HOW MUCH SHOULD THE FOLLOWING INDIVIDUALS PAY IN TAXES? If an individual makes. $12,000/yr How much (% of income) do you think they should be taxed? $60,000/yr $600,000/yr $1,000,000/yr

2016 TAX SCHEDULE If you made $44,000, how much will you pay in taxes? 10% of $1 - $9,275 = $928 15% of $9,276-$37,650 = $4,256. 25 % of $37,651 44,000 = $1,587 You will pay $6771 $928 + $4,256 + 1,587 Average/effective tax rate = 15.4% (6771/44,000)*100

THE OBAMA S 2015 TAXES adjusted gross income of $436,065 paid $81,472 in total tax. effective federal income tax rate is 18.7 percent. Taxable income is not = earned income. Deductions included: Donated $64,066 or about 14.7 percent of their adjusted gross income to 34 different charities. Paid $16,017 in state income tax.

Taxable income income after tax exemptions and deductions have been applied. Exemptions Amount that taxpayers can claim for themselves, their spouse, and eligible dependents. Deduction A part of a person s or business s expenses that reduces income subject to tax Must choose to take the standard deduction of $6,300/$12,600 OR itemized deductions The most common itemized deductions are: Mortgage interest. Student loan interest Charitable contributions (50% of your income). Property taxes. State and local income taxes. Medical expenses that exceed 7.5% of your adjusted gross income. IRA (individual retirement account) contributions Exemption $ 2016: $4,050 2015: $4,000 2014: $3,950 2013: $3,900 2012: $3,800 2011: $3,700 2010: $3,650 2009: $3,650 2008: $3,500 2007: $3,400 2006: $3,300 2005: $3,200 2004: $3,100 2003: $3,050 2002: $3,000 2001: $2,900 2000: $2,800

How do exemptions and deductions work? $44,000 Income for 2015 - $4,050 Personal exemption - $5,500 Retirement Savings $34,450 Taxable Income

Credit A dollar-for-dollar reduction in the tax paid. $1,300 - tax owed -$300 - tax credit $1000 - amount you actually have to pay The most common credits are: Child Tax Credit (under 17) Child and Dependent Care Tax Credit (under 13) Earned Income Tax Credit

How does the government collect income taxes?

Federal Insurance Contributions Act (FICA) Social Security Taxes = retirement and disability fund 6.2% on income up to $118, 500. Medicare Taxes = national health insurance for people over 65 and people with disabilities. 1.45% Unemployment Taxes = paid for by employers (3.4%) and used to help workers who are laid off from work at no fault of their own.

W-2 Form W-2 reflects all taxable wages you received during the calendar year and all taxes withheld from those wages. The form serves as an annual report that enables you to file your personal income tax return with the Internal Revenue Service.

THE LAFFER CURVE Lower taxes alter an individual s incentive to work. Argues that higher taxes discourage economic activity and thus result in less federal revenue. SUPPLY-SIDE ECONOMICS By lowering tax rates for the wealthy and corporations, more money is available to create jobs to stimulate the economy.

FEDERAL SPENDING

https://www.natio nalpriorities.org/v ideos/2015/5/4/2 015-us-federalbudget-budgetprocess/

Mandatory spending is spending on certain programs required by existing law. Discretionary spending is spending Congress can adjust on a yearly basis.

2016 FISCAL YEAR (OCT 1, 2015 SEPT 30, 2016)

BUDGET DEFICITS AND SURPLUS

http://www.usdebtclock.org/ Current Federal Debt as of 10/2/16: $19.5 trillion 2016 Q2 nominal GDP: $ 18,450.1

Debt-GDP ratio the gov t debt as a percentage of GDP Allows us to assess the U.S. ability to pay their debt Indicator of potential taxes History of Debt-GDP-ratio: http://research.stlouisfed.org/fred2/series/gfdegdq188s

THE FEDERAL DEFICIT AND DEBT Causes of the Deficit entitlement programs that people depend on are expensive national emergencies usually require massive spending beyond normal budget building public goods and services is expensive, work takes years public projects to stimulate, stabilize weak economy need large sums

SOCIAL SECURITY BENEFITS Provides a lifetime of retirement income to people who have paid FICA for at least 10 years, are 62 and have applied for the benefit. The payment is based on when an individual retires and how much they have put into the system. The average payment is $1,181/month (as of 2011) In 2011, 55 million (1 in 6) collected SS. For 22% of retired married couples and 43% of unmarried retires, SS is 90% of their income. In 2008, approx. 10% of seniors were living in poverty. Without SS, it would 45% http://www.ssa.gov/retire2/retirechart.htm

SOCIAL SECURITY ELIGIBILITY Yearof Birth* Full Retirement Age 1937 or earlier 65 1938 65 and 2 months 1939 65 and 4 months 1940 65 and 6 months 1941 65 and 8 months 1942 65 and 10 months 1943--1954 66 1955 66 and 2 months 1956 66 and 4 months 1957 66 and 6 months 1958 66 and 8 months 1959 66 and 10 months 1960 and later 67 *If you were born on January 1st of any year you should refer to the previous year. (If you were born on the 1st of the month, we figure your benefit (and your full retirement age) as if your birthday was in the previous month.)

MEDICARE BENEFITS Provides insurance for people 65 and older. Medicare helps with the cost, it does not cover 100% of medical bills. In 2010, the average benefit was $11,762. It is estimated that Medicare increased the survival rate of the elderly by about 13%.

In 2008, there were 31 retirees receiving benefits for every 100 workers paying into the system In 2030, 46 : 100 In 2050: 50 : 100 In 2080: 51 : 100

HOW DO WE FUND OUR DEFICITS? THE DEBT LIMIT Is the amount of bonds the Treasury is allowed to issue. Has been raised 78 times since 1960. If it is not raised, the U.S. will not have enough money to pay its outstanding obligations. If the U.S. defaults Those owed will not be paid less to spend economic slowdown. There is a risk that the investors could demand a higher interest rate. our interest rates are tied to the rate the nation pays so the cost of borrowing for mortgages, school loans, etc. will be more costly. https://www.youtube.com/watch?v=kibkoop4aye http://www.youtube.com/watch?v=kxvetvexkbm

HOW WOULD YOU FIX THE DEBT CRISIS? RAISE THE DEBT LIMIT? REQUIRE AN ANNUAL BALANCED BUDGET? SEQUESTRATION? INCREASE TAXES? PAYGO? CUT TAXES AND STARVE THE BEAST? ENTITLEMENT REFORM?

RECENT BUDGET REFORMS SEQUESTRATION The Balanced Budget and Emergency Deficit Control Act of 1985 (aka Gramm-Rudman-Hollings Act) In response to a deficit that had grown from $128 billion in 1982 to $212 billion in 1986. Attempted to reduced deficit by cutting 36 billion per year over 6 years and put in place automatic spending cuts (1-2%) to enforce the deficit limit (as a last resort mechanism). Would not be enforced in times of war or recession. The deficit in 1985 was $212 billion. The deficit target for FY1991 was $64 billion and would require a sequester if the deficit exceeded $74 billion. 1986: Ruled unconstitutional on the grounds that Congress was given too much enforcement power. 1987: Was revised to transfer that power over to the OMB. Replaced by The Budget Enforcement Act of 1990.

RECENT BUDGET REFORMS The Budget Enforcement Act of 1990 In 1991, the deficit for FY1991 was $147.3 billion and with the threat of sequestration, GHW Bush and Congress agreed to a 5-year, $500 deficit reduction plan PAYGO: Any new spending legislation would require a revenue increase and a cut in spending elsewhere. Created discretionary spending limits; when breached, sequestration would occur. Expired in 2002

RECENT BUDGET REFORMS Pay-As-You-Go Act of 2010 the law includes lots of exemptions, including a provision that allows Congress to declare the spending as "emergency" Republicans > cut-as-you-go CUTGO - mandatory spending increases can't be offset by tax increases -- only by spending cuts. Budget Control Act of 2011 Create a committee to create a solution to lower the debt by $1 trillion over the course of the next 10 years or else face sequester cuts of 8-10%. Sequestration went into effect on March 1, 2013

BUDGET REFORM PROPOSALS Balanced Budget Amendment (2011) Prohibits spending (except those for repayment of debt principal) that exceeds total revenue. Requires a three-fifths roll call vote of each chamber to increase the public debt limit. Directs the President to submit a balanced budget to Congress annually Prohibits any bill to increase revenue from becoming law unless approved by a majority of each chamber by roll call vote. Authorizes waivers of these provisions when a declaration of war is in effect or under other specified circumstances involving military conflict. House fell 23 votes short of the two-thirds majority that is required to advance an amendment to the U.S. Constitution; in the Senate, the amendment garnered only 47 votes, well short of the 67 votes needed for passage. http://thomas.loc.gov/cgi-bin/bdquery/z?d112:hj00002:@@@d&summ2=m&