Government Budgets and Fiscal Policy

Flashcards covering vocabulary and key concepts for government budgets, taxation, national debt, and fiscal policy implementation.

Mandatory Spending

Federal spending required by law, including programs such as Social Security, Medicare, and Medicaid, which accounted for $21.8\%$ of GDP in $2020$.

Discretionary Spending

Spending that goes through the annual appropriations process, including defense and nondefense programs like education and transportation, totaling $\$1.6$ trillion in $2020$.

Individual Income Tax

A tax based on the income, of all forms, received by individuals, which provided $\$1.6$ trillion in federal revenue in $2020$.

Payroll Tax

A tax based on the pay received from employers that provides funds specifically for Social Security and Medicare's Hospital Insurance program.

Corporate Income Tax

A tax imposed on corporate profits, which accounted for $1.0\%$ of GDP in $2020$.

Excise Tax

A tax on a specific good, such as gasoline, tobacco, and alcohol.

Estate and Gift Tax

A tax on people who pass assets to the next generation, either after death or during life in the form of gifts.

Proportional Tax

A tax that is a flat percentage of income earned, regardless of the level of income.

Progressive Tax

A tax that collects a greater share of income from those with high incomes than from those with lower incomes, such as the U.S. income tax.

Regressive Tax

A tax in which people with higher incomes pay a smaller share of their income in tax, examples of which include sales taxes and taxes on tobacco or gasoline.

Marginal Tax Rate

The tax rate an individual would pay on one additional dollar of income; representing the tax percentage on the last dollar earned.

Budget Deficit

Occurs when the federal government spends more money than it receives in taxes in a given year.

Budget Surplus

Occurs when the government receives more money in taxes than it spends in a year.

Balanced Budget

A state where government spending and taxes are equal.

National Debt

The total accumulated amount the government has borrowed over time and not yet paid back, representing the sum of all past deficits and surpluses.

Debt-to-GDP Ratio

A measure used to think about debt changes over time by comparing the total debt to the size of the nation's economy.

Fiscal Policy

The use of government spending and tax policy to influence the path of the economy over time.

Expansionary Fiscal Policy

Also known as Fiscal Stimulus, this policy increases the level of aggregate demand through increases in government spending or cuts in taxes.

Contractionary Fiscal Policy

Also known as Fiscal Contraction, this policy decreases the level of aggregate demand through cuts in government spending or increases in taxes.

Discretionary Fiscal Policy

When the government passes a new law that explicitly changes overall tax or spending levels with the intent of influencing economic activity, such as the $2009$ stimulus package.

Automatic Stabilizers

Tax and spending rules that slow down the rate of decrease in aggregate demand when the economy slows and restrain it when the economy speeds up without additional legislation.

Standardized Employment Budget

The budget deficit or surplus adjusted for what it would have been if the economy were producing at potential GDP (full employment).

Crowding Out

A phenomenon where government borrowing and spending result in higher interest rates, which reduces business investment and household consumption.

Recognition Lag

The time it takes for policymakers to determine that a recession has occurred.

Legislative Lag

The time it takes to get a fiscal policy bill passed through the political process.

Implementation Lag

The time it takes for funds relating to fiscal policy to be dispersed to the appropriate agencies to implement the programs.