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Name:______________________
Economics
Notes Packet: Ch. 15
Ch. 15: Fiscal Policy
Section 15.1: Defining Fiscal Policy
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 Types of taxes
 Three basic types of tax rates
 Proportional
 Progressive
 Regressive
 Whether a tax is progressive, proportional, or regressive depends on the
tax rate (percentage of a person’s income that goes toward taxes)
 Proportional taxes (flat rate taxes)
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 Ex: at a tax rate of 5%, a person making $25,000/year
would pay $1,250 in taxes and a person making
$2,500,000/year would pay $125,000 in taxes
 Who does this tax system benefit more? The rich or the
poor?
 Progressive taxes (tax system used right now by the US)
 Takes a larger percentage of income from high-income earners that
those of low-income earners
 Ex: at a tax rate of 10% someone making $25,000/year
would pay $2,500 in taxes and a person making
$2,500,000/year would pay $1,000,000 in taxes at a tax rate
of 40%
 Regressive taxes
 Takes a larger percentage of income from low-income earners that
those of high-income earners
 Sales taxes (taxes levied on the sale of some
products) are one kind of regressive tax
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 The rich make more money thus a tax on what they
buy does not effect them as much as it does on the
poor
 Collecting taxes
 The largest sources of tax revenue are
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 Corporate income taxes
 Social Security taxes
 Property taxes
Name:______________________
Economics
Notes Packet: Ch. 15
 Sales taxes
 Individual income taxes
 A progressive tax on a person’s income including wages or salary,
interest dividends, and tips
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 38% of federal revenues come from this tax
 Corporate Income Taxes
 The US government taxes the profits made by businesses
 10% of federal revenues come from this tax
 Social Security Taxes
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 This tax is taken out of each paycheck
 Property taxes
 State and local governments rely on property taxes that homes,
buildings, and the land these items are built on as well as
undeveloped real estates holdings
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 Sales taxes
 Mentioned previously, this tax items you purchase
 Some states do not apply their sales tax to the purchase of food,
medicine, clothing, or other necessities to help the poor
 Other taxes and Revenues
 Excise taxes, estate and gift taxes, and custom duties represent
another 6.5% of all federal tax revenues
 Excise tax: regressive tax on the manufacture, sale, or consumption
of a particular good or service
 Ex: Alcohol, tobacco, and gas taxes
 Estate tax: tax placed on the assets of a person who has died and is
paid out of the estate rather than the individual
 An estate worth $500,000 would pay $155,000 to the
government
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 Tax is paid for any gift over $10,000 in value
 Custom duty (tariff): a tax on goods that are brought into the US
from other countries
Name:______________________
Economics
Notes Packet: Ch. 15
Section 15.2: Fiscal Policy Strategies
 Supply-Side Economics
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 The government's role in the economy is limited to providing firms
with incentives to increase production
 As the supply of goods and services increases, their prices
drop
 Increased production also requires businesses to hire
additional workers lowering unemployment
 These new workers then spend more money,
increasing demand
 President Ronald Reagan supported this idea and did his best to
implement it during the 1980s
 Elements of Supply-Side Economics
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 They argue that tax cuts increase disposable incomes and
corporate profits and some of that extra money will be
invested into the growth of businesses and thus the creation
of new jobs
 Limitations of Supply-Side Economics
 The extra money gained from tax cuts is not always invested
 According to critics tax cuts seem to help the wealthy at the
expense of the poor
 Demand-Side Economics
 Focuses on achieving economic growth through the government’s
influence on aggregate demand through active government involvement
 Tools of Fiscal Policy
 The five chief tools of fiscal policy are
 Marginal tax rates
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 Government spending
 Public Transfer payments
 Progressive income taxes
 Tax rates
 To help reduce unemployment, Congress decreases taxes, which
puts more money in people’s pockets increasing their demand to
buy products
 To help limit inflation, Congress raises taxes, which reduces how
much disposable income people have reducing how much they can
buy lowering demand and prices
Name:______________________
Economics
Notes Packet: Ch. 15
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 Investment tax credit: permits firms to deduct from their corporate
income taxes a percentage of the money they spend on new capital
 This tax credit is raised when Congress want
unemployment lowered and its lowered when Congress
wants inflation reduced
 Government Spending
 To help reduce inflation, Congress decreases government spending
and increases spending to reduce unemployment
 Public transfer payments
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 Ex: Unemployment payments, veterans benefits, Medicare
or Medicaid
 Progressive Income taxes
 During economic prosperity, people and firms earn more money
and thus pay more in taxes
 During recessions, people and firms make less money and thus pay
less in taxes
 Limitations on Fiscal Policy
 Timing Problems
 To be effective, fiscal policy must be used in proper doses and at
the proper time
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 Significant delays may occur between the time that
government identifies an economic problem and the
time that stabilization policies have an impact on
the economy
 Political Pressures
 Both political (the need to be reelected) and economic (fixing
economic problems) concerns can influence the formulation of
fiscal policy in a free-enterprise economy
 Political Pressures
 Restrictive fiscal policy
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 Higher taxes and the lose of certain government
programs tend to upset voters making this option
very difficult to make
Name:______________________
Economics
Notes Packet: Ch. 15
 Expansionary fiscal policy
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 Increased government spending leads to higher
government debt and Americans upset at the size of
the debt may vote against politicians that practice
this policy
 Lack of coordination
 The Fed in charge of monetary policy must be working
closely with the Federal government and its fiscal policy to
effectively help the economy, which is difficult to manage
as the Fed and National Government are large and complex
 Also the fiscal polices of the federal government
need to be matched by state and local governments
for the best possible outcome and depending on
which party is in control of either group almost
impossible
Sec. 15.3: Fiscal Policy & the Federal Budget
 The federal budget is the federal government’s plan for the use of government
revenues
 Creating the Federal Budget
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 Wartime Spending
 Always causes dramatic increases in the level of government
spending and that increases usually is maintained even after the
war ends
 Ex: Federal spending was $63 million before 1861 and was
over $1 billion after the civil war ended in 1865
 Increased corruption
 A second factor favoring the creation of an orderly federal budget
process was political and financial corruption
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 Progressive reform
 The Progressive Movement of the early 1900s wanted to make the
government more accountable to the people and believed a formal
budget would help do that
 A new budget process
 In 1921, Congress passed the budget and Accounting Act
Name:______________________
Economics
Notes Packet: Ch. 15
 This legislation created the Bureau of the Budget and
empowered the president to formulate an annual budget and
present it to Congress
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 The budget process today
 First the budget is developed by the president and his advisors such
as the OMB
 The budget focuses on the next fiscal year (a 12-month
financial period that typically does not duplicate the dates
of the calendar)
 Second the Congress analyzes the president’s budget and then
votes on the budget and either rejects it or approves it and sends it
to the president for his signature
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 Federal Budget Deficits
 When the government spends more money than it collects, a budget
deficit occurs
 A budget surplus, on the other hand occurs when government
revenues exceed government spending
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 The federal government uses this policy during national
emergencies (like war), to providing public goods (social
programs like Medicare), and to stimulate the economy
during recessions or depressions
 The National Debt
 The total amount of that the federal government has borrowed and
includes all deficits from previous years
 Current US debt: ~$14.3 trillion
 Growth of the National
 In 1790, the debt was $75 million under Washington
 Since Washington, the debt has risen and decreased
 US debt passed a billion dollars during the Civil War
 After WWI, the debt was over $25 billion
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 Impact of the National Debt
 Some economists argue that the benefits achieved from deficit
spending (an increasing the debt) have exceeded the costs
Name:______________________
Economics
Notes Packet: Ch. 15
 Other economists argue that deficits and high debt should be
reduced to lower the large amount of interest we have to pay on the
debt
 Balancing the federal Budget
 Increasing revenues
 The quickest way for government to make more money is to raise
taxes, but raising taxes can have bad impacts on the economy such
as reducing demand and thus reducing employment
 Decreasing expenditures
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 Legislating a balanced Budget
 Gramm-Rudman-Hollings Act
 Legislation designed to force Congress and the president to
reduce the growing budget deficits
 Balanced Budget Amendment
 Many want a federal amendment added to the Constitution
requiring the government to always maintain a balanced
budget
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