Download Fiscal Policy - Cherokee County Schools

Fiscal Policy:
Fixing an Economy’s
Health
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.
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)
What is Fiscal Policy?
The use of
Government
policies in
order to
stabilize the
Business
Cycle.
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
slump (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
has picked up the
pace (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?
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.
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%
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?