Download Chapter 16- Government Spends, Collects, and Owes

Government Spends,
Collects, and Owes
Growth in the Size of
Government
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The number of government workers and
functions has increased dramatically.
The federal government paid for national
defense, the salaries of members of congress,
federal judges, and employees of executive
departments.
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The government also paid for public-works
projects.
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Public-works Projects: publicly used facilities such as
schools and highways built by federal, state, or local
governments with public money
The government paid for these things until
about 1970 when federal funds diminished and
state and local governments began paying for
these items.
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During the depression, more government
services were needed.
Financing World War II caused more
government growth.
The country’s increasing wealth may have led
to demands for evening out inequities through
more government services.
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Total government purchases represent 18
percent of GDP, and all government spending
is more than one-third of GDP.
Government spending includes services to the
people paid for by their taxes.
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The true size of government may be greater
than most estimates because of required
“private sector” spending.
Whether the growth of government is good or
bad is unknown.
Keep in mind opportunity costs and the
displacement of private economic decision
making.
The Functions of Government
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Public Goods: goods or services that government
supplies to its citizens
Public goods can be used by many individuals
at the same time without reducing the benefit
each person receives.
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National defense is one of the few public goods
only provided by the national government.
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Different levels of government share responsibility
for other types of public goods.
The most important public good provided only
by the government is a sound system of
property rights.
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Individuals have the right to own factors of
production, risk investments, and discover new
ways of production.
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Merit Goods
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Merit goods are those considered socially desirable
by government leaders.
Sometimes the government will subsidize merit
goods so that all citizens can enjoy them.
Demerit Goods
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Demerit goods are those considered socially
undesirable, and are often taxed, regulated, or
prohibited.
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Income Redistribution: Government activity that
takes income from some people through
taxation and uses it to help citizens in need
Groups in “need” refer to groups including the
aged, ill, and the poor.
Tax dollars are used to subsidize two general
categories of assistance: social insurance
programs and public assistance programs.
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Social Insurance Programs: government
programs that pay benefits to retired and
disabled workers, their families, and the
unemployed
Examples of social insurance programs include
Social Security, Medicare, and workers’
compensation.
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Social Security: federal program that provides
monthly payments to people who are retired or
unable to work
Workers’ Compensation: government program
that extends payments for medical care to
workers injured on the job
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Public-Assistance Programs: government
programs that make payments to citizens based
on need
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Often referred to as welfare
Public-Assistance programs include
Supplemental Security Income, Temporary
Assistance for Needy Families, and Medicaid.
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Supplemental Security Income: federal programs
that include food stamps and payments to the
disables and aged
Temporary Assistance for Needy Families: staterun program that provides assistance and work
opportunities to needy families
Medicaid: state and federal public-assistance
program that helps pay health care costs for
low-income and disabled persons
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The government can implement laws to curb
the negative side effects of the production
process, known as externalities.
Externalities: economic side effects or byproducts that affect an uninvolved third party
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Can be negative or positive
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Governments try to ensure economic stability
by smoothing the ups and downs in the overall
economy so that people do not feel the harmful
effects of economic shifts.
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Critics feel public goods should be provided by
private organizations.
If people pay less tax, they can use that money to
choose which goods they want.
Redistribution programs discourage personal
progress, incentives, and self-development.
Government regulations raise the prices of goods
and services; seek market solutions instead.
The Federal Budget and
the National Debt
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The Federal Budget is prepared about 18
months before the fiscal year.
The President and the Office of Management
and Budget (OMB) work together to outline a
budget plan.
The President approves a budget and then
submits it to Congress.
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Congress then examines and discusses the budget,
and should pass it before the coming fiscal year.
Often the budget is not passed until after the fiscal
year has already begun.
The largest category in state and local budgets is
education.
Other large categories include public assistance,
hospitals, health maintenance, and highways.
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Budget deficits are created when the
government spends more than its revenues.
In order to make up the difference in funds, the
government borrows the money, known as
deficit funding.
The government borrows money by selling
securities.
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The national debt is the total amount of money
the federal government owes.
A budget surplus occurs when the government
spends less than its revenues.
Taxation
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Taxes are usually justified according to one of
two major principles.
Benefits-received principle states that people
who use a service should support it with taxes
in proportion to the benefit they receive.
Ability-to-pay principle states that people
support programs based on their incomes, not
their usage of the programs.
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Actual taxes are classified according to the effect
they have on those who are taxed.
Proportional taxes are based on a proportion or
percentage of a person’s income.
Progressive taxes are taxes where a person pays a
higher percentage of income in taxes as that
income rises.
Regressive taxes are taxes where a person pays a
lower percentage of income in taxes as that income
rises.