Economy

Unit 5 vocab review

Sin Tax

Sin Tax

A relatively high tax on "bad" products such as alcohol or tobacco.

Taxes

raise the price of a good or service for the consumer, which means people will buy less.

Why do we need taxes?

So the government can pay for its spending.

Effective taxes

Fair, simple, and easy to manage

Proportional Tax

Places the same percentage rate of taxation on everyone, regardless of income.

Progressive Tax

A tax that charges a higher percentage rate of taxes on higher incomes than on lower ones.

Regressive Tax

Percentage rate of taxation is higher on low incomes than it is on high incomes.

Benefit Principal

People who benefit from government goods and services should pay according to how much they receive.

Ability to pay

The government should tax people based on their ability to pay, regardless of the benefits they receive.

How does the federal government make money?

Individual income taxes (½ of all revenue)

Borrowing

Payroll Taxes

Corporate income taxes

Excise tax

Estate tax

Gift tax

What does the federal government spend money on?

Social security

national defense

Medicare

Medicaid

How do state governments make money?

Intergovernmental Revenues

Employee Retirement

Sales Tax

Individual Income Taxes

Other, Ex: Colleges, taxes on corporations, and hospital fees.

What do state governments spend their money on?

Intergovernmental Expenditures

Public Welfare

Ex: cash support and medical care

Higher Education

Employee Retirement

Other, Ex: gas, water, hospitals, parks and recreation.

How do local governments make money?

Intergovernmental Revenues

Property Taxes

Tax on possessions like real estate, buildings, furniture, farm animals, stocks, bonds, and bank accounts.

Sales Tax

Utility Revenues, Ex: public water, electricity, and telecommunications.

What do local governments spend money on?

Elementary and Secondary Education

Utilities

Hospitals

Police and Fire Protection

Other, Ex: Roads

National debt

If we add up all outstanding federal notes, bonds, and other debts (which is the total amount borrowed).

Trust Funds

Sometimes the government can be in debt to itself by borrowing money from itself to put into trust funds that pay for Social Security and Medicare. (About 5 trillion dollars)

Private Debt

Debt individual citizens owe. When people pay debts, they give up purchasing power because they have less money to buy goods and services

Public Debt

When the government borrows it doesn't think much about repayment. They just print new bonds to pay off the old bonds.
The federal government does not always give up purchasing power because it does not pay out money. It just transfers the taxes collected from some groups to others.

Transferring Purchasing Power

Purchasing power is taken from private citizens and given to the public sector due to high taxes.

Reducing Economic Incentives

If the government buys things that taxpayers don't want to pay for, it reduces incentives to work on big projects.

Crowding Out Effect

The government competes with private borrowers for the supply of available funds and squeezes private borrowers out of the market.

Fiscal Policy

The federal government's attempt to help the economy through taxes and government spending.

Keynesian Economics

This is a method to lower unemployment and raise output by stimulating aggregate demand. (demand has a better ability to change the economy than supply.)

John Maynard Keynes

Wrote from Britain during 1936 (The Great Depression), created the GDP equation.
He thought that the problem during the great depression was the lack of spending.
He reasoned that the government was the only section of GDP big enough to cancel out changes in the investment spending from businesses. If the government spends more money, they could end the depression. (Demand Side Economics)

"Pump Priming"

Economists thought that only a small amount of government spending was necessary to initiate a bigger round of overall spending.

Automatic Stabilizers

Programs that automatically trigger congress to approve benefits if changes in the economy threaten income. They keep purchasing power from falling below the lower limit.
Unemployment insurance
Entitlements

Limitations of Demand side economics

In practice, the government has not been able to respond as quickly or as flexibly as it needed to.
The recognition lag
It takes time to see the problem
The legislative lag
It takes time to agree on a solution
The implementation lag
The amount of time it takes for an improved spending project to actually pump money into the economy.

"Tipping point"

People might realize that the burden of taxes needed to fund the government's spending will outweigh the benefits.