Government Spending, Taxes, and Fiscal Policy

mandatory spending

spending on programs that are not determined annually; already set in law

discretionary spending

spending that congress appropriates annually; only accounts for 30% of Federal government spending

state governments

these governments provide employment, income support, higher education, and health care

local governments

these governments provide primary and secondary education, bus services, water, trash collection, police, etc.

payroll taxes

taxes on earned income

Medicare

takes 2.9% withheld from your paycheck

social security

takes 6.2% withheld from your paycheck

income taxes

taxes collected on all income regardless of its source

sales tax

a tax on purchases

excise tax

a tax on a specific product (gas, cigs, alc)

property tax

a tax on based on the value of property

regressive tax

a tax where those with less income tend to pay a higher share of their income on tax

tax expenditures

special deductions, exemptions, or credits that lower your tax obligations, to encourage you to engage in certain kinds of activities

regulation

____ allows the government to require spending, while other pay the bill

hidden government spending

tax expenditures, government regulation

fiscal policy

the government’s use of spending and tax policies to attempt to stabilize the economy

Expansionary fiscal policy

if output in the economy is weak, then the government increases spending and lowers taxes in order to boost aggregate demand for output, and thus, raise GDP

Contractionary fiscal policy

if the economy is overheating, then the government decreases spending and raises taxes in order to weaken aggregate demand for output and lower GDP

direct government spending

Spending on military equiment, vaccine development, and highways directly increases aggregate expenditure, thus boosting GDP

indirect government spending

Transfer payments (like social security checks) don’t directly add to GDP since nothing is purchased or produces

the multiplier effect

describes the possibility that an initial boost in spending will set off ripple effects

crowding out

the decline in private spending - particularly investment– that follows from a rise in government spending

Expansionary fiscal policy

____ _____ ____ leads to higher real interest rates, which reduces private spending

Automatic stabilizers

fiscal policy that adjusts as the economy expands and contracts without policymakers taking any deliberate action

unfunded liability

a commitment to incur expenses in the future without a plan to pay for them