Download Chapter 15 Fiscal Policy

CHAPTER 15
FISCAL POLICY
Government Spending, Borrowing,
and Taxation
Fiscal Policy: Government Spending
• 1 Samuel 2:7 and Mark 12:17
• Fiscal Policy: refers to the actions the government takes to affect output
(gross domestic product) and employment through the way it spends,
taxes and borrows.
• To understand fiscal policy, you must understand the business cycle, the
perpetual increase and decrease in real GDP (Chp 12). The goal of fiscal
policy is to keep the cycle of economic decline and prosperity in check.
• Keynesian Economics: British economist John Maynard Keynes theory
that because there are alternating periods of excessive and insufficient
demand for the nation’s production cause the peaks and troughs in the
business cycle. Therefore, the government should intervene in the
economy to regulate demand. During periods of economic expansion,
the government should seek to reduce its own purchases of goods and
services and increase taxes, thereby decreasing consumers purchasing
power and weakening demand.
Fiscal Policy: Government Spending
15A
• Governmental spending: The first tool the government
can use in its effort to control the economy is to manage
its own spending. There are (3) three issues when it comes
to government spending: the size of the national budget
(currently $3.6 Trillion), the programs that the
government supports, and the way the dollars flow
through the economy after they leave the government’s
hands.
• The National Budget: pg 305, Fig. 15-2 Fed Government
Spending 2007. www.usdebtclock.org (updated info).
Largest portion (35%) of federal spending goes to income
maintenance and other transfer payments.
Fiscal Policy: Government Spending
15A
• The Expenditure Multiplier: remember the Money
Multiplier effect? See Figure 15-3 pg 306.
• Marginal Propensity to Consume (MPC): The portion
of each dollar that the average person spends. If the
average person spends 85 cents of each dollar he
earns (85% of his income), the MPC is 0.85.
• Marginal Propensity to Save (MPS): The percentage
of each dollar that the average consumer saves. The
MPS will always be 1 minus the MPC.
Problems with Governmental
Spending as a tool of Fiscal Policy
• Four critical problems that make it difficult for the
government to control the economy:
• Problem #1. Time Lags
• Problem #2: An Uncertain Multiplier
• Problem #3: Politics
• Problem #4: The Source of Additional Spending
• Fleecing the Nation: Reading pg 308: Read and discuss
• In God We Trust? Pg 309 Psalm 118:8-9
• Section Review 15A Questions 1-5 pg 310
Taxation 15B
• Sources of Fed Tax Revenues (4 main types): Figure 15-4
pg 311
• Personal Income Taxes: The greatest source of tax
revenue for the federal government.
• Federal Insurance Contribution Act: (FICA): requires social
security taxes, and the government also deducts these
from paychecks before workers receive them.
• Corporate taxes. Company taxes
• Excise taxes: a tax the government levies on the sale of
certain targeted consumer goods, such as gasoline,
alcohol and cigarettes.
Types of Taxes
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Proportional Taxes: is a tax in which all people, no matter how small or great
their income, pay the same percentage of their earnings. An example of this
would be a flat tax.
Progressive Taxes: is one that takes a greater percentage of a person’s income as
his income increases.
The ability-to-pay principle: defines a tax as being fair if the taxing authority
levies it on those who have the ability to pay, regardless of who receives the
benefits.
Laffer Curve: pg 312 read and discuss. Increases in the tax rate may not lead to
increases in tax revenue for the government.
Regressive Taxes: is one that takes a smaller percentage of a person’s income as
his income rises. For example, a gasoline tax is a regressive tax. Figure 15-5 pg
313
The benefit principle: states that a tax should be paid by those who receive the
benefits of the tax revenue.
Problems with Taxation as a Tool of
Fiscal Policy
• Problem #1. Effect on the National Work Ethic
• Problem #2: Confusion in the Marketplace
• John Maynard Keynes Biography: pg 314 Read
and discuss his contribution to Economics
(which was in Fiscal Policy). The most basic
need for is for government to regulate demand.
• Pork Barrel: Government spending legislated
for political gain.
Governmental Borrowing 15C
• Pump Priming: according to a Keynesian analogy, the government would
use debt to “prime” the economy (borrowing and spending), much as
the old-time farmer primed a water pump with a bucket of water. After
the pump began working, the farmer refilled the bucket and set it aside.
• Problems with Governmental Borrowing (Pump Priming) as a Tool of
Fiscal Policy:
• Problem #1: There is no reserve bucket of Idle Money: for every dollar
borrowed by the government there is one less dollar available to borrow
by businesses
• Problem #2: Governmental Borrowing becomes “Addictive”.
• Problem #3: Governmental Borrowing Destroys a Nation’s Future
Productivity. Opportunity benefit vs. Opportunity Cost.
• Paying Down the Debt: Government spending and tax cuts pg 317 Read
and Discuss.
• Section Review 15C: pg 318 questions 1-2 and Content Questions 1-5 pg
319
QUESTIONS?