econ chapter 22: government spending, taxes, and fiscal policy

“the federal government is a insurance company with a military”

this saying is true because the federal government spends most of its money on social insurance programs and the military

social insurance

are government provided insurance against bad outcomes such as unemployment, illness, disability, medicare and health, or outliving your savings

states provide services such as

income support, education, and health care and spend most of their budget into education

key points to know about the government sector

1. local government provides most of the government services you’ve interacted with so far in your life

2. evaluate government spending as a share of available resources

3. the federal government has expanded over time

4. government social insurance spending has grown over time

5. much of the future federal government spending is already determined

mandatory spending

spending on programs that does not get determined annually; instead it is set in law

discretionary spending

spending that congress appropriates annually

government spending is _ in the us than in other rich countries

lower

federal government tax revenue comes primarily from

income and payroll taxes

income tax

taxes collected on all income, regardless of its source

payroll tax

taxes on earned income

earned income

wages from an employer, or net earnings from self-employment

income taxes

are progressive

progressive tax

a tax where those with more income tend to pay a higher share of their income in taxes

taxable income

the amount of your income that you pay taxes on

marginal tax rate

the tax rate you pay if you earn another dollar

key features on tax

1. corporate taxes are paid by people

2. state and local governments collect sales, property, and income taxes

sales tax

a tax on purchases that’s typically a percentage of the purchase price goods and services

excise tax

a tax on a specific product

property taxes

a tax on the value of property, usually real estate

regressive tax

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

tax expenditures

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

hidden government spending features

1. tax expenditures are a hidden form of government spending

2. tax expenditures have a lower political cost

3. tax expenditures encourage spending on certain goods and services

3 reasons why tax expenditures primarily benefit the wealthy

1. the value of tax exclusions and deductions is higher when your income tax rate is higher

2. higher-income people tend to buy more tax-preffered goods and services

3. most tax expenditures don’t provide much help if your income tax bill is zero

key features of regulations

1. regulation allows the government to require spending, while others pay the bill

2. regulation changes incentives

fiscal policy

the government’s use of spending and tax policies to influence economic conditions

expansionary fiscal policy

higher government spending and/or lower taxes to increase aggregate expenditure in response to output below potential

higher spending and lower taxes will

boost output

lower spending and higher taxes will

reduce output

contractionary fiscal policy

lower government purchases and/ or higher taxes to decrease aggregate expenditure in response to output above potential

government spending can add to gdp directly and indirectly

there is two types of government spending

2 types of government spending are

1. government purchases

2. transfer payments

discretionary fiscal policy

policy that temporarily changes government spending or taxes to boost or slow the economy

the 3 T’s for fiscal policy are

1. timely

2. targeted

3. temporary

crowding out

the decline in private spending and particularly investment that follows from a rise in government borrowing

automatic stabilizers

spending and tax programs that adjust as the economy expands and contracts, without policymakers taking any deliberate action

key notes on monetary and fiscal policy

1. monetary policy is more nimble

2. fiscal policy can be more targeted

3. fiscal policy is particularly important at the zero lower bound

budget deficit

the difference between spending and revenue in a year in which spending exceeds revenue

budget surplus

the difference between spending and revenue in a year which revenue exceeds spending

4 things to notice about federal government spending and revenue

1. federal government typically runs budget deficits

2. persistent large budget deficits are a relatively recent phenomenon

3. wars and pandemics require a sudden surge of spending that results in budget deficits

4. business cycles create budget deficit cycles

government run deficits when

1. reflects a short-run political incentives

2. requires a balanced budget would make cycles worse

3. deficit debates reflect both economic forces and value judgements

gross government debt

the total accumulated amount of money the government owes

net government debt

the debt that the government owes to individuals, businesses, and other governments both there and abroad

key points about government debt include

1. evaluate a country’s debt relative to a country’s gdp

2. government debt is currently high, relative to our history

3. us government debt is comparable to that of other advanced countries

4. government debt is expected to grow rapidly over coming decades

unfunded liability

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

reasons not to worry about government debt

1. most of our government debt is money owed by americans to americans

2. future generations can help repay the debt

3. it would not take a big adjustment to repay the debt

4. the government never really needs to repay the debt

5. the government has options that you do not

reasons to wworry about government debt

1 slower economic growth

future fiscal choices are constrained

the risk of a crisis of confidence

a debt crisis becomes more likely