Download Economic Policymaking

Chapter 13
Economic Policymaking
American Government:
Policy & Politics,
Eighth Edition
TANNAHILL
Pearson Education, Inc., Longman © 2006
In This Chapter Will We Cover:
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The goals of economic policy
Tax revenues
Budget deficits and surpluses
Government expenditures
Fiscal and monetary policy
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The Goals of Economic Policy
• Fund Government Services
– In 2004, the federal government spent $2.2
trillion on government programs including
Social Security, health care, national
defense, and welfare.
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The Goals of Economic Policy
• Encourage/Discourage Private Sector
Activity
– Subsidies
• Farm price-support loans
• Low-interest student loans
– Tax incentives
• Mortgage interest deduction
• Cigarette taxes
• Gasoline taxes
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The Goals of Economic Policy
• Redistribute Income
– Involves the government taking items of
value, especially money, from some groups
of Americans and then giving items of
value, either in cash or services to other
groups of Americans. Social Security
transfers money from today’s workers to
retirees.
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The Goals of Economic Policy
• Economic Growth with Stable Prices
– Some Americans think government can
play a positive role in promoting economic
growth with stable prices.
• A depression is a severe and prolonged
economic slump characterized by decreased
business activity and high unemployment.
• A recession is an economic slowdown
characterized by declining economic output and
rising unemployment.
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The Goals of Economic Policy
• Inflation is a decline in the purchasing
power of the currency.
• Laissez-faire is an economic philosophy
holding that government intervention
impedes the free-market forces that
drive a healthy economy.
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Federal Income Tax Brackets, 2003
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Tax Revenues
• Individual Income Tax
– The single largest source of revenue for
the federal government
– Divides taxable income into brackets and
applies different tax rates to the portion of
income falling into each bracket
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Tax Revenues Policy
– A tax preference is a tax deduction or
exclusion that allows individuals to pay less
than they would otherwise.
– A tax exemption is the exclusion of some
types of income from taxation.
– A tax deduction is an expenditure that can
be subtracted from a taxpayer’s gross
income before figuring taxes owned.
– A tax credit is an expenditure that reduces
an individual’s tax liability by the amount of
the credit.
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Tax Revenues
• Payroll Taxes
– Employees pay 7.65%, employers pay 7.65%
– The second largest source of federal income
– Fund both the Social Security and Medicare
programs
– Most workers pay more in payroll taxes than in
income taxes.
– Applies to first $87,900 of salary
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Tax Revenues
• Issues in Government Finance
– Tax Incidence and Tax Fairness
• A progressive tax places a greater burden on
higher income earners.
• A regressive tax places a greater burden on
lower income earners.
– Tax Burden
• U.S. taxes are lower than many other nations.
• Some feel a tax burden that is too high hurts
economic growth.
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Tax Revenues
– Tax Reform
• The flat tax would tax income at one set
percentage with few, if any, deductions.
• A national sales tax would be a levy
assessed on the retail sale of taxable
items.
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The Bush Tax Reforms
• Reduced tax rate in each tax bracket
• Agreed to repeal inheritance tax, a tax that is
assessed on estates of $600,000 or more
• Reduced taxes on dividend income and
exempted or deferred taxes on interest
income from savings.
• Bulk of tax cuts to upper-income taxpayers
– Shifted the federal tax burden away from taxes on
dividends, capital gains, and interest to taxes on
income and payroll taxes on wages and salaries
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Budget Deficits and Surpluses
• A budget deficit is the amount of money by
which annual budget expenditures exceed
annual receipts.
• A budget surplus is the sum by which
annual budget receipts exceed expenditures.
• The national debt is the accumulated
indebtedness of the federal government.
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Receipts and Outlays as Percentage of
GDP
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Government Expenditures
(1)
(2)
(3)
(4)
(5)
In 2003, the five major expenditure
categories of the federal budget were:
Social Security 22%
Education, training, employment, social
services, and income security 19%
Health 22%
National defense 19%
Interest on the debt 7%
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Federal Expenditures, 1950-2003
(percentages do not sum to 100 because of rounding)
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Fiscal Policymaking
• Fiscal Policy
– The use of government spending and taxation (via
the federal budget) for the purpose of achieving
economic goals
– Ground rules for budgeting
– Entitlements
– Contractual commitments
– Budget agreements
– The budget process
• Mandatory spending, discretionary spending
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TANF Recipients, 1994-2003
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Monetary Policymaking
• Monetary Policy
– Control of the money supply (via the
Federal Reserve Board) for the purpose of
achieving economic goals
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Concluding Review Questions
• Why are the Social Security, Medicare,
and Medicaid programs threatened
financially by the retirement of the babyboom generation?
• What are the goals of economic policy?
• How has the relative importance of
federal tax sources changed over the
last thirty years?
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Concluding Review Questions
• Are Americans overtaxed? What is
the basis of your answer?
• On what groups does the burden of
taxation fall more heavily in the
United States?
• What are the most important
proposals for reforming the nation’s
tax system?
Pearson Education, Inc., Longman © 2006