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Fiscal Policy and The Federal Budget • 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 Creating 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 Step 1 → Step 2 → Step 3 → Step 4 Federal Spending • 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.) Mandatory Spending Programs • • • • • • • Social Security – $730 billion •Medicare – $491 billion •Medicaid – $297 billion TARP – $11 billion Jobs Programs – $25 billion Health Care Reform – Budget reduction of $17 billion All other mandatory programs – $619 billion. These programs include Food Stamps, Unemployment Compensation, Child Nutrition and Tax Credits, Supplemental Security for the Disabled and Student Loans. Mandatory and Discretionary Spending Mandatory Spending Description Entitlements Social welfare programs that people are “entitled to” if they meet certain eligibility requirements. Social Security The largest category of federal spending. More than 50 million retired or disabled people and their families and survivors receive monthly benefits. Medicare 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. Medicaid Other Mandatory Spending Programs Food stamps, supplemental security income and child nutrition, retirement benefits and insurance for federal workers, veterans pensions and unemployment. . Discretionary Spending Description Defense Spending Pays the salaries of people in the army, navy, air force, marines and civilian employees. Largest portion of discretionary spending. Other Spending Education, training, scientific research, student loans, technology, national parks and monuments, law enforcement, environmental cleanup, housing. Discretionary Spending Programs • • • • • • • • • • • • • $495.6 billion for the base budget. The President also requested $85.4 billion to wind down the War in Afghanistan. It's funded by Overseas Contingency Operations and is outside the Budget Act. Health and Human Services - $73.7 billion. Education - $68.6 billion. Veterans Administration - $65.3 billion. State Department - $42.6 billion. Homeland Security - $38.2 billion. Housing and Urban Development - $32.6 billion. Energy Department - $27.9 billion (includes $11.7 billion for the National Nuclear Security Administration). NASA - $17.5 billion. Justice Department - $27.3 billion (includes $17.6 billion for the FBI and cybersecurity) Transportation - $14 billion. Treasury - $12.4 billion. Interior - $11.5 billion. 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 Balancing the Budget • 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 Dealing with a Budget Deficit • 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 The National Debt • 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 Clock http://www.usdebtclock.org/ Expansionary and Contractionary Fiscal Policies, pgs. 389-390 Word Definition Description Expansionary Fiscal Policies 1. Purpose 2. Increase in government spending 3. Cutting Taxes Contractionary Fiscal Policies 1. Purpose 2. Decrease in government spending 3. Increasing Taxes Tools of Fiscal Policy Chart Fiscal Policy Expansionary/ Contractionary Explanation 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 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. Expansionary Higher government spending without a corresponding rise in tax receipts increases Taxes and Government Spending 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 Tax Structures • 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 income 10% 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? Characteristics of a Good Tax 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 Individual Income Taxes • • • “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 Corporate Income Taxes • • • • • 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 Other Types of 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 taxfree per individual Tariff – import tax on foreign goods brought into the country • Out of the 3.5 Trillion dollars of U.S. federal budget, break down in percentages the amount that you think should go towards the following areas of the economy: Category Percentage Allocated Dollars Social Security 19.63 $ 695 billion National Defense 18.74 $ 664 billion Unemployment/ Welfare 16.13 $ 571 billion Medicare 12.79 $ 453 billion Medicaid 8.19 $ 290 billion Interest on Debt 4.63 $164 billion Education 1.32 $ 46.7 billion Other 18.0 $ 635 billion