government spending and taxation

1. Analyze the effect of each on
inflation and unemployment:
Consumers expect an economic downturn
A new president is elected and the profit expectations of
business executives rise
Power companies switch to solar energy causing electricity
prices to fall
Federal government increases the sales tax on gasoline to
balance the budget

2. What graphical explanation would
explain following conditions?
Price Level and unemployment rise
Price level falls and unemployment rises
Price level falls and unemployment stays the same
Price level remains the same and unemployment rises

3. Fiscal Policy

4. Government’s Role
Regulation of Private
Market, including
externalities & information
Provision of Public Goods
Institutional Stability,
including courts and banks
Promoting Cultural Values

5. Why Provide Public Goods?
Equity – Everyone should have access to 911 services
Efficiency – Economies of scale and easier to collectively
provide
Overcome Free Rider problem – will not be privately
provided
Provide infrastructure necessary to society and
economy, See Monty Python

6. Types of Spending
Choice or Discretionary: Funded year to year
Mandatory or Non-discretionary: Funded by existing laws
Automatic Stabilizers: Unemployment and Income support

8. Social Security and Mandatory spending increasing as
population ages and health care costs go up
Could change eligibility requirements

9. Defense
51%
Domestic
46%
International
3%

10. Goals of Federal Spending
Provide and maintain public goods (infrastructure)
Armies, parks, highways, coastlines, banks
Promote cultural values
Education, health care, income redistribution
Stabilize the national economy
Growth, full employment, low inflation

11. Stabilizing the economy
Expansionary Contractionary
Decrease taxes
Automatic rate reduction
as income falls
Tax credits or breaks
Increase spending
Automatic increase
through unemployment
and food stamps
Discretionary programs
Increase taxes
Automatic rate increase as
income rises
Tax hikes or elimination of
loop holes and breaks
Decrease spending
Automatic decrease
through unemployment
and food stamps
Discretionary programs

12. Vote, Veto, Vote again
Discretionary Changes Automatic Stabilizers
Identification of problem
Agreeing to a remedy
Time for Remedy to take
effect
No identification
Real time corrections

13. -

14. Fiscal Policy Complications
Crowding out: Deficits and debts
Regulatory lags: recognition, execution and implementation
Ricardian Equivalence: No effect

15. Taxes
The revenue side

16. 16th
amendment

17. Consider tax policies:
Current Marginal tax System
Head Tax
Flat Tax
Consumption tax

18. Tax Evaluation
Consider efficiency and equity
Efficiency – Does it distort behavior (dividend taxes)
 & is administration simple (1040 form)
Equity – Is it Fair
Define fairness
Benefits Received
Revenue from gas tax goes towards road maintenance
Ability to Pay
More one makes the more one pays

20. Tax revenues collected with each plan

21. Tax Evaluation
 Proportional
 Average tax rate same at all levels
 Regressive
 Average tax rate decreases as income increases
 Progressive
 Average tax rate increases as income increases

22. Tax breaks
https://www.nationalpriorities.org/interactive-
data/taxbreaks/2014/visualization/
2016 candidate tax plan comparison
http://apps.urban.org/features/tpccandidate/
Enter income see tax burden change with each candidate
http://www.taxpolicycenter.org/interactive-tools/vox-
presidential-tax-calculator

25. How high is too high?

27. Tax vs Spending
Taxing one-time bill on the books indefinitely – complicated
tax code
Spending annual appropriation
Spending $1 same as Taxing one less $1
Both $1 in her pocket only different politically

28. Fiscal Policy and AD-AS

29. How to move the economy:
Supply Side Demand Side
JB Say “Supply creates its
own demand”
Long run plan
Keynes need for stimulus
Can have quick effects
AS’
AD’

30. Expansionary: Increase AD
Automatic Stabilizers:
Unemployment checks + lower tax brackets
Decrease taxes
Increase Spending

31. Expansionary: Increase AS
Create business/resource incentives
Lower (certain) taxes

32. Contractionary: Decrease AD
Automatic Stabilizers:
Fewer unemployment checks + higher tax brackets
Increase taxes
Decrease spending