Chapter 14 – Taxes and Government Spending Section 1 – What are Taxes?

• Tax – a required payment to a local, state, or national government– Income, sales, property, capital gains, etc.

• Revenue – income received by the government from tax collection

• Tax Base – income, property, good or service that is subject to a tax

Chapter 14 – Taxes and Government SpendingSection 1 – What are Taxes?

• Proportional Tax – % of income taxes remains the same for all income levels (Flat tax)It’s the same percentage for all. $40,000 income vs. $140,000 income10% on $1000 = $100, Who has more in the end?

• Progressive Tax – % of income paid in taxes increases as income increases (Federal Income Tax) “The more you make the more they take”

• Regressive Tax - % of income paid in taxes decreases as income increases (Sales Tax)6% tax on a can of beans for the $25,000 and the $125,000. Who does this impact more?

Tax Structures

1. Simplicity – easy to understand, keep records, prepare tax forms, anticipate amount of taxes

2. Efficiency – easy to collect, taxpayers should not pay too much or take too much time to pay

3. Certainty – clear due dates, amount to be paid, how to pay

4. Equity – fair, so not one person bears too much or too little of the tax burden

Characteristics of a Good Tax

• “Pay-As-You-Earn” Taxation – taxes are paid based on annual income; individuals pay income taxes throughout the year

• Tax Withholding – tax payments taken out of employees pay before they receive it; ensures annual payment

• Tax Return – form used to file income taxes; declare income and taxable income

Individual Income Taxes

• Taxable Income – A person’s gross income minus exemptions and deductions

• Personal Exemptions – set amounts that you subtract from your gross income – 0, 1, 2, 3, 4, 5, 6, etc.

• Deductions – amounts you can subtract, or deduct from your gross income.– Interest on a home, children, charity, religious, education, etc.

• Tax Bracket – scheduled rate at which you are taxed based on your annual income


• FICA (Federal Insurance Contributions Act) – funds Social Security and Medicare.

• Social Security – funds people of old-age, survivors and disabilities, established in 1935, originally to provide old-age pensions of workers

• Medicare – national health insurance program that helps pay for people over age of 65 or with certain disabilities

• Medicaid – national health insurance for people within the poverty threshold

• Unemployment – insurance for workers laid off through no fault of their own

Corporate Income Taxes

• Excise tax – tax on gasoline, cigarettes, alcohol, phone service, cable, internet, etc.

• Estate tax – “death tax”, tax on estate or value of money and property of a person who has died

• Gift tax – tax on money or property that one living person gives to another; a person can give up to $10,000 a year tax-free per individual

• Tariff – import tax on foreign goods brought into the country

Other Types of Taxes

*Answer in complete sentences*1. How did taxes affect early American colonists?2. What gives the government the right to tax U.S.

citizens?3. What is the purpose of taxation?4. What are some things that are provided by the

government through revenue?5. Where is the power to tax found in the Constitution?6. What are the two limitations of taxes found in the

taxation clause?7. What is Congress unable to tax?8. What is a tax base?9. List the items that could be included in the tax base.

Daily Assignment Questions – Ch. 14 Section 1 pgs. 359 – 360

• Fiscal Policy – the use of government spending and revenue collection to influence the economy

• Federal budget – a written document indicating the amount of money the government expects to receive and how they will spend it– Released the first Monday in February each year

• Fiscal year – 12 month period, October 1 – September 30

Fiscal Policy and The Federal Budget

• Step 1 – Federal agencies request money; spending proposals are sent to the Office of Management and Budget (OMB)

• Step 2 – The OMB works with the President to create a budget, President presents to Congress

• Step 3 – Congress makes changes to the budget and sends the amended budget to the President

• Step 4 – The President signs the budget into law

Creating The Federal Budget

Step 1 → Step 2 → Step 3 → Step 4

http://upload.wikimedia.org/wikipedia/commons/f/fa/United_States_Department_of_the_Army_Seal.svg

• Mandatory Spending – programs that lawmakers are required by existing laws to spend money on (Social Security, Medicare, Medicaid, etc.)

• Discretionary Spending – spending that government can adjust; increase or decrease (Defense, environment, scientific research, etc.)

Federal Spending

1. Which President had the smallest budget deficit’s in recent history?

2. Which President had the largest budget deficit in recent history?

3. Other than our current President, which three presidents had the largest budget deficits?

4. What do you have to do when you spend more than you can afford?

Budget Deficits and the National Debt

• Balanced budget – money going into the U.S. Treasury is the same amount of money going out– Revenue = Spending– The last balanced budget occurred in 1997 under

President Bill Clinton

Budget Deficits and the National Debt

• Budget Surplus – occurs when the government takes in more than it spends– Revenue > Spending

• Budget Deficit – occurs when the government spends more than it takes in– Revenue < Spending

Balancing the Budget

• Create money – the government can print or inject money into economy

• Borrow money – government borrows money by selling bonds– Bond is a type of loan with a promise to repay with interest– Bonds sold domestically or globally– China owns 1 trillion dollars in U.S. bonds

Dealing with a Budget Deficit

• National debt – the total amount of money the federal government owes to bondholders

• Budget deficit – the amount of money the government owes to bondholders in one fiscal year

• Who does the United States owe money to?http://www.ritholtz.com/blog/wp-content/uploads/2011/03/who-owns-us-national-debt-30-sept-2010.png

• US Debt Clockhttp://www.usdebtclock.org/

The National Debt

http://www.ritholtz.com/blog/wp-content/uploads/2011/03/who-owns-us-national-debt-30-sept-2010.png

http://www.ritholtz.com/blog/wp-content/uploads/2011/03/who-owns-us-national-debt-30-sept-2010.png

http://www.usdebtclock.org/

http://www.usdebtclock.org/

Mandatory and Discretionary Spending Chart pgs. 371-373Mandatory Spending Description

Entitlements

Social Security

Medicare

Medicaid

Other Mandatory Spending Programs

Discretionary Spending

Description

Defense Spending

Other Spending

Social welfare programs that people are “entitled to” if they meet certain eligibility requirements.

The largest category of federal spending. More than 50 million retired or disabled people and their families and survivors receive monthly benefits.

Serves around 40 million people, most over 65 years old. Pays for hospital care and the costs of physicians and medical services.

A program that benefits low-income families, disabled and elderly people in nursing homes. Largest source of funds for medical and health related services for people within the poverty threshold.

Food stamps, supplemental security income and child nutrition, retirement benefits and insurance for federal workers, veterans pensions and unemployment.

Pays the salaries of people in the army, navy, air force, marines and civilian employees. Largest portion of discretionary spending.

Education, training, scientific research, student loans, technology, national parks and monuments, law enforcement, environmental cleanup, housing.

Expansionary and Contractionary Fiscal Policies, pgs. 389-390

Word Definition Description

Expansionary Fiscal Policies

1. Purpose2. Increase in

government spending

3. Cutting Taxes

Contractionary Fiscal Policies

1. Purpose2. Decrease in

government spending

3. Increasing Taxes

Tools of Fiscal Policy ChartFiscal Policy Expansionary/

ContractionaryExplanation

1. The government cuts business and personal income taxes and increases its own spending.2. The government increases the personal income, Social Security and corporate income tax.3. Government spending goes up while taxes remain the same.4. The government reduces the wages of its employees while raising taxes on consumers and businesses.



1. The government cuts business and personal income taxes and increases its own spending.

Expansionary Decreased taxes increase C & I. Increase in government spending increases G.Shifts AD to the right.

2. The government increases the personal income, Social Security and corporate income tax.3. Government spending goes up while taxes remain the same.4. The government reduces the wages of its employees while raising taxes on consumers and businesses.





2. The government increases the personal income, Social Security and corporate income tax.

Contractionary I & C decrease because of the tax increase.Shifts AD to the left.

3. Government spending goes up while taxes remain the same.4. The government reduces the wages of its employees while raising taxes on consumers and businesses.







3. Government spending goes up while taxes remain the same.

Expansionary Higher government spending without a corresponding rise in tax receipts increases G.Shifts AD to the right.

4. The government reduces the wages of its employees while raising taxes on consumers and businesses.







3. Government spending goes up while taxes remain the same.

Expansionary Higher government spending without a corresponding rise in tax receipts increases G.Shifts AD to the right.

4. The government reduces the wages of its employees while raising taxes on consumers and businesses.

Contractionary Reduction in government spending results in a decrease in aggregate demand.Increases in taxes reduces C.Increased business taxes reduce I.Shifts AD to the left.

Model of aggregate demand & aggregate supply

Model used to explain short-run fluctuations in economic activity around its long-run trend

Aggregate - sum of all supply and demand in an economy Two variables:

Economy’s output of goods and services Average level of prices (CPI or GDP Deflator)

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PriceLevel

Quantity ofOutput

Equilibriumprice level

Aggregate supply (AS)

Aggregate demand (AD)Equilibrium

output

Aggregate Demand

Aggregate-demand curve – Sum of C+I+G+NX (real GDP) at each price level– Downward sloping– Low price levels increase the quantity of goods and

services, vice versa

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PriceLevel

Quantity ofOutput



output

Why is the AD Curve Downward Sloping?

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• Wealth effect – consumers are wealthier, which stimulates the demand for consumption goods

• Interest rate effect – interest rates fall, which stimulates the demand for investment goods

• Exchange Rate effect – currency depreciates, which stimulates the demand for net exports, vice versa

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PriceLevel

Quantity ofOutput



output

Why the AD Curve Might Shift?

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• Shifts arising from changes in consumption– Decreases in spending – people become more concerned with saving

for retirement– Increases in spending – stock market boom increases disposable

income• Shifts arising from changes in investment

– Change in firm investing – tax policy, pessimism about economy in future, interest rates

• Shifts arising from changes in government purchases– Congress increases/decreases spending

• Shift arising from changes in net exports– Global recessions would cause a decrease in demand for U.S. products

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What Shifts the Aggregate Demand Curve?PriceLevel

Quantity ofOutput

A B C

Situation Change in AD New AD Curve

Congress cuts taxes

Business spending decreases

Government spending increases; no new taxes

Survey shows consumer confidence jumps

Stock collapses; investors lose billions

President cuts defense spending by 20%; no increase in domestic spending

CACCAA

Effects of Fiscal Policy ChartScenario Expansionary/

Contractionary

Effect on Federal Budget

Objective for Aggregate Demand

Action on Taxes

Action on Gov’tSpending

Effect on the National Debt

1. National unemployment rate rises to 12%

2. Inflation is strong at a rate of 14% per year.

3. Surveys show consumers are losing confidence in the economy, retail sales are weak and business inventories are increasing rapidly

4. Business sales and investment are expanding rapidly, and economists think strong inflation lies ahead.

Expansionary

Contractionary

Expansionary

Contractionary

Move toward a deficit

Move toward a surplus

Move toward a deficit

Move toward a surplus

Chapter 15 Practice Worksheet3. If policy makers were to use fiscal policy to actively stabilize the economy, in

which direction should they move government spending and taxes?

a. A wave of optimism boosts business investment and household consumption causing price levels to increase.• Decrease spending, increase taxes

b. To balance its budget, the government raises taxes and reduces expenditures causing a slowdown in the economy.• Increase spending, decrease taxes

c. OPEC raises the price of crude oil causing people’s disposable income to reduce.• Increase spending, decrease taxes

d. The taste for the country’s products amongst the residents of other countries declines.• Increase spending, decrease taxes

e. The stock market falls.• Increase spending, decrease taxes

1. What does a states operating budget pay for? List examples.

2. What does a state’s capital budget pay for? List examples

3. How do the state budgets differ from the federal government?

4. Where are taxes spent? List and describe each of the following:1. Education2. Public Safety3. Highways and Transportation4. Public Welfare5. Arts and Recreation6. Administration

Daily Assignment QuestionsState and Local Taxes and Spending, pgs. 375-376

Flow Chart Types of Taxes, pgs. 365-369



Social Security, Medicare and

Unemployment Taxes


Types of Taxes

1. Pay-As-You-Earn Taxation

2. Tax Withholding

3. Tax Return

4. Taxable Income

5. Personal Exemptions

6. Deductions

7. Tax Brackets

1. Impact on Federal Budget

2. Deductions

3. Progressive structure of Corporate taxes

1. FICA

2. Social Security

3. Medicare

4. Unemployment Taxes

1. Excise Taxes

2. Estate Taxes

3. Gift Taxes

4. Import Taxes (Tariffs)

5. Tax Incentive

Flow Chart Types of Taxes, pgs. 365-369



Social Security, Medicare and

Unemployment Taxes


Types of Taxes

1. Pay-As-You-Earn Taxation

2. Tax Withholding

3. Tax Return

4. Taxable Income

5. Personal Exemptions

6. Deductions

7. Tax Brackets

1. Impact on Federal Budget

2. Deductions

3. Progressive structure of Corporate taxes

1. FICA

2. Social Security

3. Medicare

4. Unemployment Taxes

1. Excise Taxes

2. Estate Taxes

3. Gift Taxes

4. Import Taxes (Tariffs)

5. Tax Incentive

Consumers Expect a RecessionFall in AD – Prices fall, real GDP falls

Foreign Income RisesRise in AD – Prices rise, real GDP rises

Government Spending IncreasesRise in AD – Prices rise, real GDP rises

Foreign price levels fallFall in AD – Prices fall, real GDP falls

Workers Expect Future Inflation, Negotiate Higher Wages NowFall in AS – Prices rise, real GDP falls

Technological Improvements Increase ProductivityRise in AS – Prices fall, real GDP rises

Extra Credit1. What is the name of the economist that supported government

intervention to stabilize the economy?2. What is the primary way that a state budget differs from the federal

budget?3. Around what amount is the national debt?

Documents

Chapter 14 – Taxes and Government Spending Section 1 – What are Taxes?