Download Fiscal Policy - Cherokee County Schools

Fiscal Policy:
Fixing an Economy’s
Health
What is Fiscal Policy?
The use of
Government
policies in
order to
stabilize the
Business
Cycle.
Points to Remember
 Prior
to the Great Depression
(1930’s) economists believed that
the best way to stabilize the
economy was through the natural
market forces/ Adam Smith
 After the Depression: The gov’t
stepped in (FDR) to help. This action
(Fiscal Policy) is an example of
(John) Keynesian Economics.
Policy Theory in Our Govt.
 Republican/
Theory:
–
–
–
–
Small government
Generally Low taxes
Individual responsibility
Less govt. control & regulations
 Democrat/
–
–
–
–
Conservative General
Liberal General Ideas:
Progressive taxes/ make more you pay more
Social programs/ community responsibility
Govt. regulation
Larger govt. to support people
Important Concepts:

GDP: Gross domestic product is the aggregate
(total) market value of all final goods and
services produced within a country in a given
period of time.
– Sometimes the measurement is looked at on a per
person scale, which is known as…REAL GDP.
 Inflation: is a sustained increase in the
average price level of goods and services.
 Stagflation: A period of inflation combined
with high unemployment (a recession or
depression)
The 3 “tools” of Fiscal Policy:
1. Government Purchases &
Spending
2. Entitlement Programs
(also called
Transfer Payments)
3. Taxes
…these three tools impact macroeconomic
variables such as real GDP, employment,
price level, and economic growth.
Multiplier Effect


For every dollar spent by the
federal government, GDP
will increase by more than
that $1
It takes money to make
money!
How just a little Fiscal Policy can
effect our economy in a BIG way.
$150
$400
$150
$200
$50 (already in
his pocket)
$200 already in
his pocket)
Multiplier Effect: each dollar spent will tend to
generate more than 1 dollar added to GDP.
Fiscal Policy and Taxes
 An
increase in tax rates = decreased
disposable income = consumption &
real GDP decrease
A
decrease in taxes = increases
disposable income = consumption &
real GDP increase
 What
is disposable income??
Fiscal Policy and Taxes
Taxes
Disposable
Income
Consumption &
Real GDP
Taxes
Disposable
Income
Consumption &
Real GDP
So which is better HIGHER or LOWER TAXES?
WHY?
When to use Fiscal Policy?
1.
When the
economy is in a
recession or
depression the
economy has
contracted.

The government
will enact an
Expansionary
Fiscal Policy to
help boost the
economy.
Expansionary Fiscal Policy
 When
to use: (recession) supply is
bigger than demand because people
are not spending.
 What to do:
– increase gov’t purchases
– decrease taxes
– increase entitlements (transfer
payments) to stimulate economy.
Government Use of Fiscal Policy
2.
When the economy
is in an economic
boom/ peak the
economy has
expanded.
 The government
will enact an
Contractionary
fiscal policy to
help slow down
the economy.
Contractionary Fiscal Policy
 When
to use: (peak) demand
exceeds supply because people have
too much money.
 What to do:
– decrease gov’t purchases
– increase taxes
– decrease Entitlements (transfer
payments) to close expansion gap.
Sum it up...
Economy is in
a recession or
depression
Expansionary
Fiscal Policy
Economy is in
a boom/peak
Contractionary
Fiscal Policy
Problems with Fiscal Policy
 Doesn’t
work during periods of
stagflation- can’t fight
unemployment and inflation at the
same time
 Entitlements or transfer payments:
– It is difficult to estimate the natural rate
of unemployment- people lie!
 The
time lags involved in
implementing fiscal policy
(takes the
government a long time to do anything).
 AND…..
More Problems with Fiscal
Policy

Economists and policy makers question the
effectiveness of fiscal policy because of deficits.
The government experiences a budget
deficit during expansionary fiscal
policy.
GOV. +
SPENDING
TAXES =
(Revenue
for Gov.)
BUDGET
DEFICIT
(negative)
Fiscal Policy’s
Effects on Labor
Fiscal Policy’s Effects on Labor
 If the government does anything to
pump money into the economy, then
the labor supply should increase
along with the number of jobs
available.
 However, the unemployed, who
benefit from increased transfer
payments (Expansionary Fiscal
Policy), may have less incentive to
find work.
Fiscal Policy’s Effects on Labor
 Inversely, during Contractionary Fiscal Policy,
workers who find their wage reduced by the
higher tax rates may be less willing to work.
 The supply of labor could decrease as a result
of increased tax rates or increased transfer
payments resulting in aggregate supply
declining.
Which will cause an economy’s GDP to
decline.
 Simply, there is not enough workers so
wages increase.

Taxes: Who
Should Pay Less
or More?
1.) Progressive Income Tax Table
Single filers
Married filing jointly
Head of household
Tax Rate
Up to $7,150
Up to
$14,300
Up to $10,200
10%
$7,151 - $29,050
$14,301 - $58,100
$10,201 - $38,900
15%
$29,051 - $70,350
$58,101 - $117,250
$38,901 - $100,500
25%
$70,351 - $146,750
$117,251 - $178,650
$100,501 - $162,700
28%
$146,751 - $319,100
$178,651 - $319,100
$162,701 - $319,100
33%
$319,101
or more
$319,101
or more
$319,101
or more
35%
TWO THEORIES ON WHO SHOULD
PAY TAXES
1. Benefits-Received Principle
Only those who receive benefits should pay taxes.
EXAMPLE: City of Canton is building a new parkway to
limit the amount of traffic so a tax is raised to pay for it.
ONLY those who use the parkway should pay (the citizen of
Canton, NOT the citizens of Hickory Flat)
EXAMPLE: Gasoline Sales Tax goes toward road
construction (you ride on them, you pay for them)
2. Ability-to-Pay Principle
Only those with the ability to pay should pay MORE of
the tax.
EXAMPLE: Same Canton situation, but those who pay
more of the tax should be the wealthy.
TYPES OF TAXES
1. Progressive Tax (ex-income tax)
Those who make more, pay more
2. Regressive Tax
A regressive tax is a tax which takes a LARGER
PERCENTAGE of income from people whose income is LOW.
Regressive taxes, as opposed to progressive taxes, are more
burdensome on lower-income individuals than on higher-income
individuals. (EXAMPLE: SALES TAX)
3. Proportional Tax (EX: FAIR TAX)
A tax that charges the same percentage of income, regardless
of the size of income.
2) Progressive Income Tax
How it works.
DURING A
PEAK:
INCOME =
INCOME =
TAXES
GDP & AD/
consumption
INCOME =
TAXES
GDP & AD/
consumption
DURING A
RECESSION:
INCOME =
TYPES OF TAXES
2. Regressive Tax
A regressive tax is a tax which takes a LARGER
PERCENTAGE of income from people whose income is LOW.
Social Security tax is an example. For 2012, you pay 6.2% tax on
wages up to a maximum wage of $97,500. Therefore:
 A person who makes $30,000 a year pays $1,860 (30,000*.062) in
tax or 6.2% of wages.
 A person who makes $200,000 a year pays $6,045
(97,500*.062) in tax or 3% of wages.
 A person who makes $500,000 a year still pays $6,045
in tax (97,500*.062) or 1.2% of wages.
TAX APPLICATIONS:
Identify whether progressive, regressive, or proportional
1. Personal Income Tax
Progressive
2. Sales Tax
Regressive & Proportional
3. Corporate Income Tax (28% for all
corporations)
Regressive & Proportional
4. Property Taxes: Pay for CC schools & (based on
value of property) Is this fair for everyone?
Regressive & Proportional
ANY QUESTIONS?