Download Introduction to Macroeconomics

Introduction to Macroeconomics
Chapter 25
Taxes, Deficits, and the Debt
Taxes, Deficits & the Debt
1. Tax Structures
2. Discretionary vs Automatic Fiscal Policy
3. Fiscal Policy and the Budget
4. Deficits, Debt, and Fiscal Policy
1. Tax Structure
Types of Taxes - Average Tax Rates
• Regressive Tax - average tax rate
declines with increases in income
• Porportional Tax - tax rate is a fixed
percentage of income
• Progressive Tax - average tax rate
increases with increases in income
1. Tax Structure
Average Tax Rates
Regressive Tax
Income
Proportional Tax
Progressive Tax
$1,000 $10,000 $1,000 $10,000 $1,000 $10,000
Tax Paid
$100
$100
$100
$1,000
$100
$2,000
Average
Tax Rate
10 %
1%
10 %
10 %
10 %
20 %
1. Tax Structure
Marginal Tax Rates
Marginal Tax Rate - tax rate that applies
to each additional dollar of income
• Regressive Tax
marginal tax rate < average tax rate
• Proportional Tax
marginal tax rate = average tax rate
• Progressive Tax
marginal tax rate > average tax rate
1. Tax Structure
Marginal Tax Rates - Income Tax
But not over -
Enter on Form
1040 line 40
Of the
amount
over
$0
$26,250
…………..15%
$0
$26,250
$63,550
$3,938 + 28%
$26,250
$63,550
$132,600
$14,382 + 31%
$63,550
$132,600
$288,350
$35,787 + 36%
$132,600
$288,350
…………
$91,857 + 39.6%
$288,350
If the amount on
line 39 is over -
2. Discretionary vs Automatic Policy
Definitions
• Discretionary Fiscal Policy
– government spending or taxes that can
be changed by policy makers
• Automatic Fiscal Policy
– desirable automatic changes in
government spending or taxes that
occur without policymakers taking
action
2. Discretionary vs Automatic Policy
Automatic Stabilizers
Automatic Stabilizers - Automatic fiscal
policy changes that reduce the strength of
upswings or downswings in the economy
(i.e., are countercyclical)
Examples:
• income taxes
• unemployment benefits
2. Discretionary vs Automatic Policy
Automatic Stabilizers
Economy moves into:
Recession
Inflation
Desired Policy:
G
Government Spending
Increase
Decrease
T
Taxes
Decrease
Increase
Actual Policy Outcome:
G
Defense Spending
No change
No change
G
Unemployment Comp
Increases
Decreases
T
Income Tax
Decreases
Increases
3. Fiscal Policy and the Budget
Definitions
• Budget Surplus / Deficit
– amount by which government tax
revenues exceed / fall short of
government spending
• Debt
– total accumulated value of budget
surplus or deficit
Government Spending as percent of GDP
3. Fiscal Policy and the Budget
Government Expenditures Share of GDP
60%
50%
40%
30%
20%
10%
0%
1929
1939
1949
1959
1969
1979
1989
Source: Bureau of Economic Analysis, National Income and Product Accounts
www.bea.doc.gov
1999
Percent of Total Government Spending
3. Fiscal Policy and the Budget
Where Federal Spending Goes
60%
50%
Defense
Retirement
Other Domestic
40%
30%
20%
10%
International
0%
1962
1967
1972
1977
1982
1987
1992
1997
3. Fiscal Policy and the Budget
Deficits Over Time
U.S. Budget Surplus (+) or Deficit (-)
300
billions of dollars
200
100
0
-100
-200
-300
-400
1929
1939
1949
1959
1969
1979
1989
1999
3. Fiscal Policy and the Budget
Deficits as a Percentage of GDP
U.S. Budget Surplus (+) or Deficit )(-)
10%
Percent of GDP
5%
0%
-5%
-10%
-15%
-20%
-25%
-30%
1929
1939
1949
1959
1969
1979
1989
1999
3. Fiscal Policy and the Budget
Total U.S. Debt
6000
4000
3000
2000
1000
0
19
39
19
44
19
49
19
54
19
59
19
64
19
69
19
74
19
79
19
84
19
89
19
94
19
99
billions of dollars
5000
3. Fiscal Policy and the Budget
Total U.S. Debt as a Percentage of GDP
140%
Percentage of GDP
120%
100%
80%
60%
40%
20%
0%
1939
1949
1959
1969
1979
1989
1999
3. Fiscal Policy and the Budget
External Debt as a Percentage of GDP
External debt as a share of GDP for 195 countries
250%
200%
100%
50%
United States
150%
0%
Source: CIA World factbook
3. Fiscal Policy and the Budget
Budget Balancing Options
Cyclically Balanced Budget
– budget deficit during recessions
– budget surplus during inflationary booms
– budget balances over full business cycle
• Benefits
– allows use of discretionary policy
• Costs
– reduces budget discipline
– deficits crows out investment
3. Fiscal Policy and the Budget
Budget Balancing Options
Balanced Budget Amendment
• Benefits
– no crowding out of investment
– less price inflation
• Costs
– inhibits use of discretionary policy
– eliminates benefits of automatic
stabilizers
4. Deficits, Debt, and Fiscal Policy
Deficits and Crowding Out
Crowding Out - government deficit
spending increases the real interest rate,
which reduces (crowds out) investment
spending
• deficit financed by borrowing money (sell
bonds to public)
• price of bonds falls
• interest rate rises
• reduction in investment demand