APGOV - Economic, Social, and Domestic Policy

Fiscal Policy

Government decisions about taxing and spending

Monetary Policy

Government policy that affects the economy through interest rates, money supply, and lending

Property Tax

Tax based on property/land value; mainly supports local public schools

Federal Income Tax

Tax on salary/earnings; uses a progressive tax system

Payroll Tax

Tax taken from workers' paychecks to fund programs such as Social Security and Medicare

Social Security Tax

6.2% payroll tax, matched by the employer

Medicare Tax

1.45% payroll tax

Social Security Wage Cap (2026)

$184,500

Two Largest Federal Tax Revenue Sources

Income taxes and payroll taxes

Flat Tax

Everyone pays the same percentage

Progressive Tax

Higher earners pay a higher percentage

Regressive Tax

Lower earners pay a larger percentage of their income

Social Security Tax Type

Regressive

Federal Income Tax Type

Progressive

PA/Local Income Tax Type

Generally flat

16th Amendment

Allows the federal government to tax income

Republican Tax Position

Generally favors lower taxes

Democratic Tax Position

Generally favors higher taxes to fund government programs

Tax Deduction

Reduces taxable income

Tax Credit

Directly reduces the amount of taxes owed

GDP

Total value of goods and services produced by a country in a year

Balanced Budget

Government spending equals government revenue

Federal Deficit

When government spending is greater than government revenue in a year

Federal Debt

Total amount the federal government owes from accumulated borrowing

1990s Budget Balance

Spending cuts and slight tax increases on higher incomes helped produce balanced budgets

Reagan Deficit Policies

Lower income taxes and increased military spending

George W. Bush Deficit Policies

Homeland Security, Medicare, bank bailout, and increased military spending

Obama Deficit Policies

American Recovery Act, ACA, tax cuts, and military spending

Trump Deficit Policies

Income/business tax cuts, COVID spending, and payroll tax cuts

Biden Deficit Policies

Pandemic support

Trump's Big Beautiful Bill

Policy listed in the study guide as increasing the deficit

Supply-Side Tax Cut

Cutting taxes to encourage spending, investment, and economic growth

Republican View of Supply-Side Tax Cuts

Lower taxes encourage economic growth

Keynesian Economics

Government should actively manage the economy

Keynesian Deficit Spending

Government spends more during downturns to stimulate the economy

Reaganomics

Supply-side tax cuts, domestic spending cuts, increased military spending, and a smaller federal government

Current Federal Deficit/Debt

About $40 trillion

Good Debt-to-GDP Ratio

60% or lower

U.S. Debt-to-GDP Ratio in Study Guide

About 125%

Major Causes of Deficits

Entitlement costs, tax cuts, borrowing costs, stagnant wages, and emergency spending

Why Balanced Budgets Are Difficult

Political parties disagree, voters focus on short-term effects, and long-term changes are difficult

Three Largest Federal Expenses

Social Security, Medicaid/aid, and interest

Entitlement Program

Mandatory government spending established by law

Mandatory Spending

Spending required by existing laws/programs

Discretionary Spending

Spending that Congress can choose to increase, decrease, or eliminate

Federal Spending Breakdown

About 66% mandatory and 33% discretionary

OMB

Office of Management and Budget; helps the President prepare the federal budget proposal

CBO

Congressional Budget Office; analyzes spending and helps Congress evaluate budget proposals

Federal Budget Process

The President proposes a budget, Congress evaluates and changes it, and Congress and the President approve the final budget

Executive Branch Budget Role

Estimates spending and prepares the President's proposal

Congressional Budget Role

Analyzes, changes, and approves spending

President and Congress

Have the final say over the federal budget

Federal Reserve

Central bank that manages monetary policy

Federal Reserve Board

Changes interest rates, controls money circulation, regulates bank reserves, and buys/sells federal securities

Federal Reserve Board’s Main Goals

Limit inflation and achieve maximum employment

Federal Reserve Board’s Tools

Interest rates, bank reserves, and buying/selling government bonds

Stimulate the Economy

Lower interest rates and lower reserve requirements

Slow the Economy

Raise interest rates and raise reserve requirements

Current Federal Reserve Board Chairman

Kevin Warsh

Adam Smith

Scottish philosopher and economist whose ideas helped shape modern economic thought

The Wealth of Nations

Adam Smith's major economic work, published in 1776

Free Market

Economic system where individuals and businesses make decisions with limited government control

Division of Labor

Workers specialize in particular types of work

Specialization

Focusing on one type of work to become more skilled and productive

Three Benefits of Division of Labor

Greater worker skill, less time switching tasks, and invention/use of machines

Productivity

Amount of goods or services produced; specialization increases productivity

Self-Interest

Desire to pursue one's own needs, wants, or advantages

Exchange

People trade because both sides expect to benefit

Adam Smith's Butcher/Brewer/Baker Example

People provide goods because serving their own interests through exchange also helps others

Invisible Hand

The idea that pursuing self-interest can unintentionally benefit society

Public Interest

The well-being or benefit of society as a whole

Adam Smith and the Public Interest

People do not need to intend to help society for their actions to benefit society

Competition

Rivalry among buyers and sellers that affects prices and production

Supply and Demand

Market forces that influence prices and production

Commodity

A good that is bought and sold

Effectual Demand

Demand from people who are both willing and able to pay

Natural Price

The normal or sustainable price under ordinary market conditions

Market Price

The actual price of a good in the market

Shortage and Prices

When supply is too low to meet demand, prices rise

Surplus and Prices

When sellers have more goods than buyers want, prices fall

Competition and Resource Allocation

Competition helps determine what gets produced and how resources are used

Business Special Interests According to Adam Smith

Businesses may pursue policies that benefit themselves even when they hurt the public

Why Businesses May Reduce Competition

Less competition can allow businesses to raise profits

Why Reduced Competition Can Hurt Consumers

Less competition can lead to higher prices

Smith on Business Regulations

Government should be cautious about regulations proposed by industries because businesses may try to reduce competition

Natural Liberty

Individuals should be free to pursue their own interests as long as they follow the laws of justice

Smith's View of Government

Government should have a limited but important role rather than control the economy

Three Responsibilities of Government

Protect society from violence/invasion, protect people from injustice/oppression, and maintain public works/institutions

Smith and Government Regulation

Government should set basic rules and protect society but should not control ordinary economic decisions

Smith and Competition

Limited government control allows individuals to compete and pursue their interests, helping the economy function

Smith's Overall Economic Idea

Self-interest, specialization, exchange, and competition can increase prosperity while government performs essential responsibilities

Means Test

Requirement that a person have a low income to qualify for a program

Medicaid

Government health insurance for low-income people; means-tested

SNAP/ACCESS/Food Stamps

Assistance for buying food and groceries

WIC

Assistance providing food, formula, and baby food for eligible families

Head Start

Free preschool program for eligible low-income children

TANF/Welfare

Temporary assistance for needy families

Most Widely Used Low-Income Programs

Medicaid and SNAP/ACCESS

Social Security

Federal program providing benefits for retirement, disability, and survivors