The Role of GovernmentFiscal and Monetary policySlide 3Slide 4Slide 5Slide 6Slide 7Slide 8Slide 9Slide 10Slide 11Slide 12Slide 13Slide 14Slide 15Slide 16Slide 17Slide 18Slide 19Slide 20Slide 21Slide 22Slide 23Slide 24Slide 25Slide 26Slide 27Slide 28Slide 29Slide 30Slide 31Slide 32Slide 33Slide 34Government Expenditures and RevenuesThe Role of GovernmentTaxes – Types and Recent IssuesMore Fiscal PolicyBudgets and Fiscal PolicyNational DebtInvolves taxes - decrease = more demand- increase = less demandFiscal and Monetary policyBut First…Fiscal policyInvolves spending - leads to multiplier effect- target specific areasInvolves interest rates - lower = more demand for money- increase = less demand for moneyMonetary policyInvolves money supply - more leads to lower interest rates- like German hyperinflation1970 286.9 billion1980 812.0 billion1990 1778.0 billion2000 2772.5 billionGovernment Spending% of GDP27.630.030.628.12/3 by the Federal government$ amount increases, but % is constant1929194019501970198019902000Federal• Government expenditures as a share of GDP have risen over time.The Size of GovernmentState & local2.5 7.1 9.68.4 17.49.0196026.216.3 9.932.319.1 13.233.920.6 13.333.621.2 12.429.418.2 11.221.314.7 6.6Government Expenditures as a Share (%) of GDPFederal• As is shown here, government expenditures as a share of GDP have risen over time.The Size of GovernmentState & localGovernment Expenditures as a Share (%) of GDP19301940195019701980199020003.0 6.5 9.48.4 15.77.3196024.116.5 7.630.219.4 10.932.821.0 11.834.221.6 12.631.919.0 12.921.114.7 6.3200334.320.6 13.7How the Government SpendsEducation 14 % Misc. expenditures 13 % Transportation 4 % Public safetyand judicial 5% Environmentand housing 5 % Interest 10 % Nationaldefense 11% SocialSecurity 13 % Othertransfers 13 % Healthcare 12 % Sources: U.S. Census Bureau, Summary of State and Local Government Finances of Government, and Office of Management and Budget, Budget of the United States Government.How the Federal Government SpendsSources: Economic Report of the President, 2004, and Statistical Abstract of the United States, 2003.• A breakdown of the government expenditures at the federal level in 2003 are listed above.18.8%7.1%TransportationOther22%Income SecurityMedicare and healthDefenseNet InterestSocial Security3.1%11.8%21.7%15.5%How State & Local Government Spends • Government expenditures at the state and local level in 2000Sources: Economic Report of the President, 2004, and Statistical Abstract of the United States, 2003.Insurance trustsPublic welfare & HealthPolice &Fire ProtectionTransportationUtilities &liquor storesEducationAdministration & otherInterest on debt22.3% Public welfare & Health7.7%32.2%12.2%4.3%7.1%6.3%7.9%1. Purchases 27%Government Spendinga. Public Goods - people can’t be excluded from using- can be consumed jointly- lighthouses, national defenseb. Quasi-Public Goods - not produced in enough quantity- police protection, parks, fire departments•Examples of public goods: •national defense•radio and television broadcast signals•clean air.1. Which of the following are public goods? (using the definition of a public good.)a. An anti-missile system surrounding Washington.b. A fire department.c. Tennis courts.d. Shenandoah National Park.e. Elementary schoolsa. An anti-missile system surrounding Washington.2. Transfer payments 43% - Social Security -Unemployment -Veterans benefits3. Money to State and Local 13% Governments4. Interest payments on 14% borrowed money (bonds)5. Government enterprises 3%Sources of Government Revenuesat the federal, state, and local level, are listed below.Misc. revenue 12 % Individualincometaxes 14 % Corporate incometaxes 12 % Propertytaxes 8 % Salestaxes 11 % Usercharges 14 % Payrolltaxes 14 % Sources: U.S. Census Bureau, Summary of State and Local Government Finances of Government, and Office of Management and Budget, Budget of the United States Government.Individual Income Tax 50 %Social Insurance 32 %Corporate Income Tax 10 %Excise Tax 3 %Customs, Estate, Gift Tax 2 %Misc 2 %Federal Government Revenue1997 1994Federal taxes:State & local taxes:How Government Taxes:Taxes vary by stateCorporate income 12%Excise taxes 4%Customs duties 1%Corporate income 2%Other 4%Other 3%Property 15%Payroll 12%Personal income 10%User charges a24%Sales and excise 17%From federal government 16%Payroll 34%Personal income 46%FL. MI, NH, DE (?) – no Income TaxNH motto: Live free or die...but they have a tax on parachute jumpsA. Types of Taxes or how the tax changes with income changesProgressive tax is one in which the average tax rate rises with income.- tax bracketsProportional tax is one in which the average tax rate stays the same across income levels. - flat tax, sales tax?Regressive tax is one in which the average tax rate falls with income. - sales tax – higher income spend lower proportion on taxable goodsTaxes!!!!!A sales tax of 7 % on medicineA state income tax with 3 tax bracketsA property tax of $2.85 per $100 of assessed property valueA tax of $8 on room occupancy in all city hotelsA tax of 3 % on all wages earned in the cityA sales tax of 5% on utilitiesA federal tax of $2 per pack of cigarettes.1 side: keep taxes to provide more armed forces, police patrols,…B. Tax Reform1 side: reduce taxes, encourage business investments1. Arguments1981: Economic Recovery Act – adjusted income for inflation1986: Tax Reform Act- lowered max tax from 50% to 39.12. 1980s Tax ReformsTax base: the level of the activity that is taxed.PropertySalesIncomeTax BaseTax rate:the rate (%) at which an activity is taxed.Tax Ratedeclining/eroding tax base:people are moving from urban to rural or suburbs.abatement:tax incentives to lure businesses (lower rates).Tax rate/base issues:Speed things up: - increase government purchases- increase transfers- decrease taxesTo review…Fiscal policySlow things down - decrease government purchases- decrease transfers- increase taxesDiscretionary: adjustments in spending levels or tax rates- actions by President or CongressTypes ofFiscal policyAutomatic - rates are set- increased consumer spending increases revenues- decreased consumer spending reduces revenuesAutomaticallyTypes of budgets: 1.