Fiscal Policy Unit

3 reasons we have taxes

Public Good → A commodity or service that every member of a society can use without reducing its ability to all others (Ex: Defense, Police, Justice system, Highways)

Help People → funds programs and services that only benefit certain citizens (Social Security, etc.)

Correct Problems → Water or air pollution, Workplace hazards, Safe products

What are the main areas in which the federal government gets its revenue?

Individual income tax, social security tax, and corporate income tax.

What is the difference between discretionary and mandatory spending?

How the funds are allocated. Discretionary spending is determined annually by Congress and the President through appropriations. Mandatory spending, on the other hand, is governed by existing laws and programs.

Discretionary spending

The portion of a budget that can be allocated to non-essential expenses, like entertainment, travel, or shopping, after paying for necessities.

Mandatory spending

 Government spending required by existing laws, such as for programs like Social Security and Medicare

Benefit

Those who benefit from where the money is spent should pay (Ex: Gas tax, state park fees, hunting licenses)

Ability to Pay

Those who can afford to pay the tax should pay the most (rich pay more. Ex: Federal income tax) 

Simplicity

Taxes should be easy for taxpayers to pay and easy for governments to administer and collect (Ex: Fuel taxes are higher for heavy vehicles)

Progressive

Takes a larger % of higher incomes and a smaller % of lower incomes (goes with ability to pay principle. Ex: Federal income tax) 

Regressive

Takes a larger % of lower incomes and a smaller % of higher incomes, burdening those with less income more heavily (Ex: Sales taxes).

Proportional

Takes the same % from everyone’s incomes (Ex: State income tax - 4.25% of income)

Direct Tax

 Paid by the person against whom the tax is levied (Ex: Federal income tax, real property tax, personal property tax)

Indirect Tax

 Can be shifted, at least in part, to someone other than whom the tax is changed. (Ex: Sales tax, service tax, fuel tax, excise tax, value added tax)

Federal income tax

A tax imposed on individuals or taxpayers in respect of the income or profits earned by them

State income tax

 A tax enforced by a state’s government that applies to any money earned in a certain state

Sales tax

A tax on sales or the receipts from sales

Excise tax

A tax imposed on specific goods, services, or activities, often at the point of production or sale

Property tax

A tax levied on the value of real property, such as land and buildings

Social security tax

A tax in the US that funds the social security program

Medicare tax

A tax that funds the medicare program, a federal health insurance program for people 65 or older and people with disabilities

Estate and gift tax

 A unified system of federal taxes on the transfer of wealth, either during a person’s lifetime or upon their death

W-4

Form that tells your employer how much tax to withhold from your paycheck (Be4 you start working)

W-2

Form that reports earnings from your place of work (down to the penny) 

1099

Form from the bank that reports how much interest you earned in your investments (All the money you earn, you are taxed on)

1040

Main tax form that reports earnings and how much tax is paid 

Fiscal policy definition

The government’s use of spending and taxation to influence the economy 

Expansionary

when the government uses increased spending or tax cuts to stimulate the economy, especially during economic downturns (make bigger)

Restrictive

government measures taken to slow down the economy, often used when inflation is high or the economy is overheating (make smaller)

budget deficit

the amount by which spending exceeds tax revenue in a certain year.

Surplus

having more money available than you need for your planned expenses

national debt

the amount of money the Federal government owes.

who is in charge of fiscal policy?

congress and the president