Taxes Fiscal Policy and Macroeconomic Concepts TAXES Our

Taxes, Fiscal Policy, and Macroeconomic Concepts

TAXES � “Our new Constitution is now established, and has an appearance that promises permanency; but in the world nothing can be said to be certain except death and taxes. ” – Ben Franklin

What are taxes? � Tax Required payment to a local, state, or national government › Primary source of revenue for government � Two limitations › Common defense and general welfare › Federal taxes must be the same in every state

Tax bases and tax structures � Tax base income, property, good, or service that is subject to tax › Individual or corporate Income tax, sales tax, property tax � Proportional taxes % of income remains the same for all income levels › Ex. “Flat tax” 15% � Progressive taxes % of income paid in taxes increases as income increases › Ex. Income Tax � Regressive taxes % of income paid in taxes decreases as income increases › Ex. Sales Tax

Characteristics of a Tax � 4 characteristics › Simple, efficient, certain, fair � Benefits-received principle › People pay based on level of benefit � Ability-to-pay › Pay according to ability � Tax Incidence › If a product is inelastic, a tax will be paid by the consumer › If a product is elastic, a tax will be paid by the producer �Eventually paid by workers

Six types of taxes � Individual income tax � Corporate income tax � Social insurance tax � Excise tax � Estate and gift taxes � Import tax

� Individual and Corporate Income Tax Individual Amount each person owes to the federal government each year › 45% of government revenue › Corporate less than 10% › Pay-as-you-earn �Pay weekly/monthly from check � Employers withhold money from your pay › Estimate of how much you will owe the government � Tax return form used to file income taxes › Deductions and exemptions › May owe the government, or they may owe you � Income tax is progressive tax brackets › Rate schedule published each year

Taxable income is between The tax is: $0 - $9, 275 10% $9, 276 - $37, 650 15% $37, 651 - $91, 150 25% $91, 151 - $190, 150 28% $190, 151 - $413, 350 33% $413, 351 – $415, 050 35% $415, 051 or greater 39. 6%

Social insurance taxes � FICA taxes that fund Social Security and Medicare › Majority to Social Security › $780 billion annually � Social security benefits to people over 65 and disabled � Medicare national health insurance program for people over 65 and disabled � Unemployment tax › Paid for by employer

Other taxes � Excise Tax general revenue tax on the sale or manufacture of a good � Estate Tax tax on the estate or value of money and property of a person who had died › Less than $1. 5 mil not taxed � Gift Tax Keep people from avoided estate tax � Import Tax on imported goods (Tariff) � Tax incentive Tax on goods to discourage purchase

Government Spending

Types of spending � Mandatory Spending › Money that is required by law to be spent on certain programs & interest on debt › Most goes to “entitlement programs” �Continue to rise �Ex. Social Security and Medicare � Discretionary Spending › Spending that government planners can make choices on its use �Ex. Defense and Education

Discretionary Spending � Defense spending dropped since Cold War (20%) › Troops and civilian workers � Everything else › Education › Scientific research › Student loans › Technology › National Parks › Housing › Environment clean-up › Disaster relief › Foreign aid

Defense spending

Federal Aid to State and Local Governments � State and federal governments share costs of: › some social programs › highway construction › Education › housing,

� State Government Revenue and Spending Money from federal and local governments are main source of revenue for state government › Sales tax and Individual income taxes also large contributor › The Georgia (GA) state sales tax rate is currently 4. 0%. Depending on local municipalities, the total tax rate can be as high as 8%. › No federal sales tax � Where the money goes: › Education (majority), Public Safety, Highways, Public welfare, Arts and recreation, Administration

State Budgets � Operating Budget for day-to-day expenses �Salaries for state employees, office supplies, maintenance � Capital Budget for major capital, or investment › New facilities, highways › Borrowing � All states but Alaska require a balanced budget › Take in as much as they spend › Revenue = Spending

Local Government revenue and spending � Local governments earn revenue from federal and state governments › Also collect from property taxes to pay for schools and road construction and maintenance � Local governments pay for: › Public schools (majority), Law enforcement and fire protection, Libraries, airports, hospitals, Parks and beaches, Public health & transportation, Elections

Fiscal Policy

Classical Economics � Classical Economics free markets can regulate themselves › Adam Smith, Friedrich Hayek, Thomas Malthus � Challenged by the Great Depression › Prices fell demand fell � Classical economics didn’t address length of time for market to reach equilibrium � Led to new thinking Keynesian Economics

Keynesian Economics � John Maynard Keynes (pronounced Canes) � Demand-side economics government spending and tax cuts help an economy by raising demand � Keynesian Economics demand-side economics that encourages government action to change demand output

New Role for Government � Three parts to an economy › Business, consumers, and government � If consumers and businesses aren’t spending, then the third part needs to spend (government) � Government spending encourage production increase employment spend wages more production › Continuous cycle › Government would eventually reduce spending

Epic Rap Battle of Economics VS Friedrich Hayek John Maynard Keynes

Supply-Side Economics � Supply-side economics tax cuts can help the economy by raising supply � Laffer Curve shows effects of taxes › Governments earn no revenue with 0% or 100% taxation � Reducing taxes may encourage workers to work more and may bring in more revenue than with higher taxes

Fiscal Policy � Fiscal Policy use of government spending and revenue (taxing) to influence the economy � Government spends about $400 million per hour, and $3. 5 trillion (2013) � Reasons for spending: › Stimulate demand, increase production, create jobs, increase GDP, avoid recessions, control inflation, stabilize economic growth

Federal Budget � Federal Budget plan for federal government’s spending and revenues for a year › Fiscal year October 1 – Sept. 30 � Office of Management and Budget (OMB) manages federal budget � Appropriations bills bill that sets money aside for specific spending › President can sign or veto

Expansionary Fiscal Policies � Expansionary policies encourage economic growth › Higher spending and tax cuts � Spending › Buy more goods and services cause prices to rise increases production creates jobs � Lower Taxes › Individuals have more money to spend businesses earn more profit more $ to invest in capital create jobs

Contractionary Fiscal Policies � Contractionary Fiscal Policies Reduce economic growth › Less Spending and higher taxes › Goal is to decrease inflation � Less Spending › Decrease in spending decrease in demand lower prices less production lay off workers � Higher taxes › Individuals have less money to spend prices fall and firms have less to spend on capital less jobs

Budget Deficit and National Debt

Federal Budget � Raising government spending can lead to budget deficits which add to the national debt › Deficit amount of $ the government borrows in a year › Debt sum of deficits from previous years � Balanced Budget Revenue equals spending � Budget Surplus Revenue more than spending � Budget Deficit Revenue less than spending

Problems of National Debt � Reduces funds available for businesses to invest › High interest rates � Government spending on interest on debt is less money that can be spent elsewhere