Economic Policy

What is economic policy

Policy intended to affect the economy of the public; reducing inflation, taxes, unemployment, promoting economic growth.

Federal Government and economic policy

Plays a larger role in the past 90 years, like with FDR and the New Deal were watershed. There was 25% unemployment. Much more active in economic policy which became common in the 1930s.

Capitalism/mixed economy

Largely based on capitalism but heavily influenced by government regulation. The idea we should have private ownership of the means of production, and it’s the government’s job to let this work freely. Capitalism needs government involvement/enforcing the marketplace rules.

Goals of Economic Policy

• Economic growth: increase in production of goods and services, meaning people have jobs and more money in turn.

• Low unemployment: positive externalities, prosperous, stable communities; low unemployment is better for the govt bc it means more tax revenues and less expenses like with high unemployment.

• Low inflation: high inflation means constant changing prices with no growth in wages or limits people’s fixed incomes; high inflation is good only in very rare occasions.

Tools of economic policy

• Fiscal policy: tax against spending, setting budgets and how it will be spent, what taxes will be collected and used for. Think government shutdowns, typically or the PPP loans during COVID-19.

• Monetary policy: controlling amount of money done by the Federal Reserve by changing the interest rates to try and control inflation.

• Regulation: Government enforcing rules to help the market, such as monopolies, trusts, consumer harm, unfair business practices. Can also be the FDIC

Tax policy: Basic principles

Taxes, how much, and who. What about tax breaks after a certain amount? The goal is to create revenue to cover our expenses, which we repeatedly fail since there are numerous services the govt. needs to provide

Tax Policy: Personal income tax (progressivity of income tax and enforcement)

Had personal taxes established in 1916. Single largest source of revenue, at 52% from 2022-23, its personal progressive, which means based on income. Largely based on diminishing returns/lived experience of that money.

Enforcement of tax law is incredibly effective, there are $5 in revenue for every dollar spent on enforcing tax law. Both are highly controversial now.

Tax policy: Capital gains

If you own something of value and sell it for profit, then you have to pay capital gain. they’re long-term, and need to have them for over a year. These gains are taxed at a lower level to encourage investment. But benefits people who already have capital. Example: buying a house or stock and selling it for more.

Tax policy: Payroll tax

Think FICA— Federal Insurance Contributions Act— goes to Social Security and Medicare. 7.5% of your wages, along of your employer’s go there. Currently, this amount is capped.

Tax Policy: EITC

Earned Income Tax Credit: it’s a tax incentive for the working poor; depends on income, family size. it is to help the poor, and different from a standard deduction, an effective anti-poverty program.

Tax Policy: Estate tax

aka “The Death Tax,” applies for large wealthy estates that transfer upon death, and often very small groups of people. 40% on those assets, often about collecting unrealized capital gain.

Tax Policy: Corporate income tax

tax on corporations was 35% then Trump changed it to 21%; arguments against it claim it affects our revenue, although not the main source, but significant.

Tax Policy: Tax reform

the last time we had meaningful reform was in 1986, cleared out all the loopholes, but the loopholes and changes keep accumulating.

The Budget: National debt

Huge debt, but not too much of an issue. A lot of the debt is held by Americans, neutral-fund companies, and a significant part to China. We are consistently paying off the interest.

The budget: Debts vs. deficits

The debt is the cumulative total, the deficit the year on year is how much more money is being spent than made/revenue.

The budget: The Deficit Problem

As of 2023, the deficit has become a problem, we are now spending more than what we are making. Can be fixed by tax cuts or reforms; either spend less or make more revenue. Part of the problem is entitlement spending

The budget: Entitlement Spending

Programs that people are entitled to/guaranteed; like Social Security and Medicare, part of non-discretionary spending, and these often change to the cost of living changes. Most of this goes to Medicaid, Social Security, and defense. These are also often the hardest cuts.

Contemporary controversies: Debt ceiling

An arbitrary debt cap established by Congress stating the government cannot spend more, often used by Republicans to have Democrats cut certain programs — a negotiation tactic.

Contemporary controversies: Income inequality: Wealth tax and income tax rates

Wealth is often concentrated which is inefficient, high wealth inequality is inefficient. After taxes and transfers, compared to our global neighbors, we are significantly higher in income inequality. It’s practically a policy choice.

A solution to this is to tax wealth, though this is currently politically unfeasible.