Session 11 Fiscal Policy
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Transcript of Session 11 Fiscal Policy
Session 11Fiscal Policy
Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.
TEKS
(15) Economics. The student understands the economic impact of fiscal policy decisions at the local, state, and national levels. The student is expected to:(A) identify types of taxes at the local, state, and national levels and the economic importance of each;(B) analyze the categories of revenues and expenditures in the U.S. federal budget; and(C) analyze the impact of fiscal policy decisions on the economy.
(6) Economics. The student understands the basic characteristics and benefits of a free enterprise system. The student is expected to: (D) analyze the costs and benefits of U.S. economic policies related to the economic goals of economic growth, stability, full employment, freedom, security, equity (equal opportunity versus equal outcome), and efficiency.
Teaching the Terms
Fiscal Policy
• Government spends money to provide goods and services
• Government pays for those expenditures through taxation and borrowing
Externalities
• Benefits or costs from a transaction extend beyond the buyer or seller
• Positive externalities– Education– Technology spillovers or patent protection
• Negative externalities– Pollution
Rival in Consumption?
Yes No
Excludable?
Yes Private Goods Natural Monopolies
No Common Resources Public Goods
Potential Market Failures
Catagorize
• Cable TV• Clothing• Congested non-toll roads• Congested toll roads• Environment• Fire protection
• Fish in the ocean• Ice cream• National defense• Tornado siren• Uncongested non-toll roads• Uncongested toll roads
Rival in Consumption?Yes No
Excludable
?
Yes
Private Goods• Clothing• Congested non-toll
roads• Ice cream
Natural Monopolies• Fire protection• Cable TV• Uncongested toll
roads
No
Common Resources• Fish in the ocean• Environment• Congested toll
roads
Public Goods• Tornado siren• National defense• Uncongested non-
toll roads
Potential for Market Failure
• Public goods are subject to a free-rider problem– Lighthouse, basic research
• Common resources can lead to the tragedy of the commons– Clean air and water, congested cities
• Role of property rights
Federal Government: Receipts
• Individual income taxes• Social insurance taxes• Corporate income taxes• Other
Federal Government: Spending
• Social Security• National defense• Income security• Medicare• Health• Net interest• Other
Federal Government Revenue
Individual income taxes43%
Corporation income taxes7%
Social insur-ance and
retirement receipts
42%
Excise taxes3%
Estate and gift taxes1%
Customs duties1%
Federal Reserve deposits of earnings2%
Other miscellaneous receipts1%
Source: Final Monthly Treasury Statement for FY2009
Federal Government Funding
Deficit40%
Individual income taxes26%
Social insurance and retirement
receipts25%
Corporation income taxes4%
Other taxes and receipts5%
Source: Final Monthly Treasury Statement for FY2009
Federal Government Expenditures
Health and Human Services
21%
Social Security Administration
19%
Defense-Military17%
Interest on the public debt10%
Treasury8%
Labor4%
Agriculture3%
Veterans Affairs3%
Other15%
Note: “Other” includes many agencies, such as Transportation, Housing and Urban Development, Education, Homeland Security, Justice, Energy, State, NASA, International Assistance Programs, Interior, Commerce, EPA and Corps of Engineers
Source: Final Monthly Treasury Statement for FY2009
State Government Revenue
Borrowing 7%
Sales taxes and gross receipts
18%
Licenses2%
Individual income taxes13%
Corporate income taxes2%
Property taxes1%
Other taxes1%Charges and miscellaneous
13%
From federal government
21%
From local governments 1%
Utility revenue 1%
Insurance trust revenue
19%
http://www.census.gov/prod/2009pubs/10statab/stlocgov.pdf
Texas Revenue
Federal Gov-ern-
ment24% Local governments
1%
Sales taxes28%
Motor vehicle license 1%
Other taxes 6%
Higher education 5%
Hospitals 3%
Highways 0%
Interest earnings3%
Other general revenue 7%
Insurance trust revenue
23%
Insurance trust includes unemployment, retirement
and workers comp funds
State Government Expenditures
Education31%
Public welfare
24%
Health 3%
Hospitals 3%
Highways6%
Police protection 1%
Corrections3%
Natural resources 1%
Housing and community de-velopment
1%
Other 13%
Utility expenditure 2%
Insurance trust expenditure11%
http://www.census.gov/prod/2009pubs/10statab/stlocgov.pdf
Texas Expenditures
Social services and income
maintenance34%
Higher edu-cation17%
Elementary & secondary0%
Other education2%
Libraries0%
Insurance trust expenditure13%
Capital outlay11%
Highways10%
Public safety5%
Other and unallocable3%
Governmental administration2%
Environment and housing1%
Interest on general debt1%
Local Governments Revenue
Property taxes44%
Sales taxes and gross receipts 10%
Individual income taxes3%
Corporate income taxes1%
Other taxes4%
Education charges3%
Hospital charges7%
Sewerage4%
Interest earnings4%
Special assessment1%
Utility revenue 14%
Insurance trust revenue7%
http://www.census.gov/prod/2009pubs/10statab/stlocgov.pdf
Local Government Expenditures
Education39%
Public welfare 3%
Health 3%Hospitals
5%Highways
4%
Police protection 5%
Corrections2%
Sewerage3%
Solid Waste1%
Parks and Recreation2%
Housing and community development
3%
Administration5%
Interest4%
Other9%
Utility expenditures11%
Insurance trust expenditure2%
http://www.census.gov/prod/2009pubs/10statab/stlocgov.pdf
Structure of Taxes
• % of income paid in taxes ↓ as income ↑
Regressive
• % of income paid in taxes ↑ as income ↑
Progressive
• % of income paid in taxes is fixed as income changes
Proportional
Structure of Taxes
• Sales tax, Social Security taxes
Regressive
• U.S. federal income tax, estate taxes
Progressive
• Flat tax, Medicare tax
Proportional
Budget Lingo
• Revenues = Expenditures
Balanced budget
• Revenues < Expenditures
Budget deficit
• Revenues > Expenditures
Budget surplus
• Sum of all deficits – Sum of all surpluses
Government debt
Deficits and Debt
• Government must borrow money when it runs a budget deficit
• Government borrows from– Individuals– Corporations– Financial institutions– Foreign entities or foreign governments
Fiscal Policy and Economic Goals
• National economic goals include – Growth– Stability– Full employment– Freedom– Security– Equity – Efficiency
• Using government spending and taxation programs to achieve goals
What is the Goal?
Taxes
• Capital gains • Tariffs
Deductions
• Mortgage interest
• Student loan interest
• Charitable donations
Spending
• Social Security
• NASA• Food stamps• Defense
Spending
Business CycleReal GDP
Time
Long Run Growth Trend
Recession
Expansion
Price Level
Real GDPYFFull Employment Level of Output
Aggregate Supply
PL1
Aggregate Demand
Expansionary Fiscal Policy
• Response to a recession (economy is operating below full employment)
• Seeks to stimulate production (and consumption)– Directly (expenditures ↑)– Indirectly (taxes ↓ to encourage household
spending or investment spending)
Fiscal Responses to 2008 Recession
Emergency Economic
Stabilization Act of 2008
Established the Troubled Assets Relief Program
(TARP)
American Recovery and Reinvestment
Act of 2009Renewable energy
and weatheriz
e buildings
New infrastructure (roads,
bridges, and mass transit)
Fund Pell
Grants
Making Work Pay tax credit and Child
Tax Credit
Contractionary fiscal policy
• Response to inflation (economy is operating above full employment and prices are rising)
• Seeks to reduce production (and consumption) – Directly (expenditures ↓)– Indirectly (taxes ↑ to discourage household or
investment spending)• Politically difficult
Measuring Fiscal Policy’s Effects
• Effects are not limited to the initial dollar value of the change in policy
• The eventual effects may be larger or smaller, depending on:– Multiplier effect– Crowding-out effect
Multiplier Effect
• Spending and tax policies create a chain reaction in the economy as people spend new income
• Many factors complicate the multiplier– Taxes– International trade– Differing consumption patterns among various
segments of the population
Crowding Out
• Investment or consumption spending that is lost because government borrowing drives up interest rates
• Government is entering the same market for funds as investors
Two Types of Fiscal Policy
• Discretionary fiscal policy– Policymakers change tax policies or spending
programs in response to fluctuations in the business cycle (at their discretion)
• Automatic stabilizers– Implemented without any deliberate action from
policymakers– Found in the tax system and spending programs
Automatic Stabilizers – Tax System
• Taxes are linked to economic activity– Progressive income tax rates (individual and
corporate)– Payroll taxes– Sales and excise taxes
• Recessions → automatic “tax cut”• Expansion → automatic “tax increase”
Automatic Stabilizers – Spending
• Government spending responds to the business cycle– Unemployment insurance benefits– Welfare benefits– School lunch programs– Other income-support programs
• Recessions → more spending• Expansion → less spending
Challenges Related to Fiscal Policy
• Political factors • Time lags– Time required to create and pass legislation– Time required to implement legislation
• Supply side impacts• Forecasting difficulties• Monetary policies may reinforce or offset
fiscal policies
Questions?