Download Questions About the National Debt

Macroeconomics, Part II
Government Taxation and Spending,
or
Why Never to Give a Congressman
Your Debit Card
Types of Taxes
• Progressive
– As incomes rise, the % of income one pays in taxes
also rises
– Ex. – the federal income tax
• Regressive
– As incomes rise, the % of income one pays in taxes
decreases
– Ex. – the state sales tax
• Proportional
– People pay the same % of income in taxes
regardless of income
Examples of the Three Tax Systems
regressive
income
$50,000
100,000
200,000
tax
% of
income
$15,000 30%
$25,000
$40,000
25%
20%
proportional
tax
% of
income
progressive
tax
% of
income
$12,500 25%
$10,000 20%
25,000 25%
25,000 25%
50,000 25%
60,000 30%
Major Sources of Gov’t Revenue
• City - property taxes
• State – state sales tax
• Federal – individual income taxes
• What does the Federal gov’t spend most of its
money on?
1. Medicaid/Medicare
2. Social Security
3. Defense/Wars
Questions About the National Debt
• What is the national debt?
• What caused the national debt?
• Where does the government get the money
when it wants to spend more than it takes in?
• What is a budget deficit?
• What is a budget surplus?
• Is a budget deficit the same as a trade deficit?
http://www.usdebtclock.org/
Fiscal Policy
• Def. – The use of government spending and
taxation to influence the economy
– Carried out by the POTUS and Congress through
the budgeting process
Demand-Side Fiscal Policy
• Focuses on increasing AD in order to increase real
GDP.
• Hero of demand-side economics is John Maynard
Keynes
– Argued that in times of recession or war, gov’t is the only
economic actor willing and able to boost spending
– Therefore it may make sense to borrow $ to boost gov’t
spending in order to stimulate the economy
GDP = C + I + G + NX
The Multiplier Effect
• Idea that $1 of gov’t spending adds more than $1 to the economy.
• Ex. –
–
–
–
–
–
–
Gov’t spends money to build a bridge …
Construction workers earn more income …
They spend their income at various businesses …
Business revenue increases …
Businesses may boost their supply by expanding and hiring more workers …
These new workers now have more money to spend …
• So an increase in G leads to an increase in C, which leads to an increase in
I.
• GDP rises by a level greater than the initial increase in G.
• Economy stimulated.
Supply-Side Economics
High
revenues
b
Tax revenues
• Supply-side economics stresses
the influence of taxation on the
economy. Supply-siders believe
that taxes have a strong,
negative influence on output.
• The Laffer Curve shows how
both high and low tax rates can
produce the same tax revenues.
Laffer Curve
Low
revenues
a
0%
Low taxes
c
50%
Tax rate
100% High
taxes
Expansionary Fiscal Policies
Effects of Expansionary Fiscal Policy
High
prices
Aggregate
supply
Higher output,
higher prices
Price level
Increasing Government
Spending
• If the federal gov’t
increases its spending or
buys more goods and
services, it triggers a chain
of events that raise output
(GDP) and creates jobs.
Cutting Taxes
• When the gov’t cuts taxes,
consumers and businesses
have more money to
spend or invest. This
increases demand and
output.
Aggregate
demand
with higher
government
spending
Lower output,
lower prices
Original
aggregate
demand
Low
prices
Low output
High output
Total output in the economy
Contractionary Fiscal Policies
Effects of Contractionary Fiscal Policy
Aggregate
supply
High
prices
Higher output,
higher prices
Price level
Decreasing Government Spending
• If the federal gov’t spends less,
or buys fewer goods and
services, it triggers a chain of
events that may lead to slower
GDP growth.
Raising Taxes
• If the federal gov’t increases
taxes, consumers and
businesses have fewer dollars
to spend or save. This also
slows growth of GDP.
Lower output,
lower prices
Original
aggregate
demand
Aggregate
demand with lower
government
spending
Low
prices
Low output
High output
Total output in the economy