Chapter 15 Fiscal Policy Taxes Spending and the Fe

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Information about Chapter 15 Fiscal Policy Taxes Spending and the Fe
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Published on March 5, 2008

Author: Vincenza

Source: authorstream.com

Thinking About the Numbers:  Thinking About the Numbers National debt Total amount the federal government still owes to the general public from past borrowing Budget-related figures Government outlays Tax revenues Government debt Relative to a nation’s total income The Federal Budget and Components:  The Federal Budget and Components Government outlays Total amount spent or disbursed by the federal government in all of its activities Government purchases Transfer payments Interest on the national debt Government purchases:  Government purchases Total value of goods and services that the government buys Long-term upward trend Nonmilitary purchases (percentage of GDP) Low and stable Military purchases (percentage of GDP) Trend - sharply downward Slide4:  Figure 1: Federal Government Purchases as a Percentage of GDP Transfer payments:  Transfer payments Income supplements from the government Social Security benefits Unemployment compensation Welfare payments Others Fastest growing part of government outlays 12.4% of GDP Figure 2: Major Federal Transfer Programs, 2006:  Figure 2: Major Federal Transfer Programs, 2006 Figure 3: Federal Transfer Payments as a Percentage of GDP:  Figure 3: Federal Transfer Payments as a Percentage of GDP Interest on the national debt:  Interest on the national debt Interest payments Government pays - government bonds As a percentage of GDP 1980s Rose rapidly National debt grew relative to GDP Interest on the national debt:  Interest on the national debt 1990s Fell rapidly National debt fell relative to GDP 2000s Remained low Rising debt-to-GDP ratio Interest rates dropped Figure 4: Federal Government Interest Payments: Percentage of GDP:  Figure 4: Federal Government Interest Payments: Percentage of GDP The Federal Budget and Components: Example:  The Federal Budget and Components: Example What are total federal government PURCHASES in fiscal year 2032? _______ Suppose that in fiscal year 2033, personal income taxes, corporate profits taxes, and excise taxes total $8 trillion. What is the total Social Security tax revenue in that year? ____ In fiscal year 2033, what is the budget deficit/surplus? _______ In fiscal year 2035, what is the budget deficit/surplus? ________ Total Government Outlays:  Total Government Outlays Fluctuations Trends 2001-2006 End of the “peace dividend” Continued increases in transfers Total outlays (percentage of GDP) - rising Figure 5: Total Federal Outlays As A Percentage of GDP:  Figure 5: Total Federal Outlays As A Percentage of GDP Total federal outlays have trended slightly upward relative to GDP They also tend to rise during defense buildups or recessions . . . and fall during strong expansions. Federal Tax Revenue:  Federal Tax Revenue Personal income tax Progressive tax on income Social Security tax On wage and salary Other federal taxes Corporate profits tax Excise taxes Federal Tax Revenue: Example:  Federal Tax Revenue: Example In 2005, the Social Security tax (including the Medicare portion) was 15.3% of wage or salary income, up to a maximum of $90,000 in income. Suppose an individual has wage income of $100,000. What percentage of wage income will this person pay in Social Security taxes? _________________________ Is Social Security tax progressive, regressive, or proportional (neither progressive nor regressive) __________________________ Trends in Federal Tax Revenue:  Trends in Federal Tax Revenue Upward - from 18% (1960s) to 21% (1990s) Greater total benefits relative to GDP Lower payroll taxes relative to GDP Four unpleasant alternatives: Raise the payroll tax rate/other tax rates Cut future retirement and/or health benefits Reduce other government outlays Increase budget deficit relative to GDP Figure 6: Federal Government Revenue As A Percentage of GDP:  Figure 6: Federal Government Revenue As A Percentage of GDP Federal Budget and National Debt:  Federal Budget and National Debt Budget surplus = Tax revenue - Outlays Budget deficit = Outlays - Tax revenue Federal deficit and surplus Flow variables Over a given period National debt Stock variable A point in time Figure 7 (a): The Federal Budget Deficit or Surplus: Percentage of GDP:  Figure 7 (a): The Federal Budget Deficit or Surplus: Percentage of GDP Figure 7 (b): The Federal Budget Deficit or Surplus: Percentage of GDP :  Figure 7 (b): The Federal Budget Deficit or Surplus: Percentage of GDP Federal Budget and National Debt:  Federal Budget and National Debt National debt Total value of government bonds held by the public Deficits Add to the national debt Surpluses Subtract from the national debt Federal Budget and National Debt: Example:  Federal Budget and National Debt: Example The graph shows the behavior of the budget in a South American country over a decade, in billions of pesos. (Positive numbers are surpluses; negative numbers are deficits.) Suppose that at the beginning of 1996, the country's national debt was $30 billion pesos. At the end of 2005, what was the value of the country's national debt?_________________ Federal Budget and National Debt: Example:  Federal Budget and National Debt: Example Suppose that in 2015, the U.S. national debt in the hands of the public reaches $10 trillion. Nominal GDP that year is $25 trillion. A new forecast for the next five years shows a budget deficit of $500 billion in each of the next five years, and nominal GDP equal to $28 trillion five years from now. According to this forecast, in 2020, the national debt will be __________  From 2015 to 2020, the national debt as a percentage of GDP is forecast to change from 40% to _____________   Suppose that the annual interest rate the government must pay on the national debt is always 4%. Moreover, suppose that the United States collected a special "debt tax" on total income each year to pay the interest on the debt that year. Then, the average "debt tax" rate would change from 1.6% in 2015 to _______ in 2020.   Figure 8: Federal Debt as a Percentage of GDP:  Figure 8: Federal Debt as a Percentage of GDP Fiscal Changes in the Short Run:  Fiscal Changes in the Short Run Changes in the economy Affect the government’s outlays and taxes Changes in outlays and taxes Affect the economy Economic Fluctuations Affect Federal Budget:  Economic Fluctuations Affect Federal Budget Recession Transfers rise; Tax revenue falls Budget deficit increases; Budget surplus decreases Expansion Transfers decrease; Tax revenue rises Budget deficit decreases Budget surplus increases Economic Fluctuations Affect Federal Budget:  Economic Fluctuations Affect Federal Budget Cyclical deficit Part of the federal budget deficit Varies with the business cycle Structural deficit Part of the federal budget deficit Independent of the business cycle Economic Fluctuations Affect Federal Budget: Example:  Economic Fluctuations Affect Federal Budget: Example The graph shows government outlays and government revenue on the island of Watevah, which uses seashells as currency. During which period did Watevah most likely experience a recession?____________ Suppose that in 2001, Watevah was operating at full employment. Then, in 2001, Watevah's structural budget deficit was equal to:________ Suppose that in 2001, Watevah was operating at full employment. Also, suppose that in 2004, Watevah's structural deficit was the same as it was in 2001. Then, Watevah's cyclical deficit in 2004 was__________ Budget Affects Economic Fluctuations:  Budget Affects Economic Fluctuations Changes not caused by the business cycle Policy changes Affect the structural budget deficit Changes caused by the business cycle Occur automatically Affect the cyclical budget deficit Help make economic fluctuations milder Budget Affects Economic Fluctuations:  Budget Affects Economic Fluctuations Automatic stabilizers Recession Reduce the decline in consumption spending Rise in cyclical deficit Expansion Reduce the rise in consumption spending Decrease cyclical deficit Fiscal Changes in the Long Run:  Fiscal Changes in the Long Run Myth: “One day we will have to pay it all back” If debt grows by the same percentage as nominal GDP Debt to GDP ratio – constant Interest payments to GDP ratio- constant Government Pay interest on its rising debt Not increase the average tax rate Fiscal Changes in the Long Run:  Fiscal Changes in the Long Run National Debt - growing too rapidly Impose an opportunity cost in the future Permanently higher tax burden Period of inflation Temporary period of reduced government outlays Temporary period of higher taxes relative to GDP Fiscal Changes in the Long Run:  Fiscal Changes in the Long Run Debt approaching a national credit limit Highly unlikely Rapidly rising debt Foreign wealth portfolios - become too “dollar-heavy” Destabilizing sell-off of U.S. bonds Fiscal Changes in the Long Run:  Fiscal Changes in the Long Run Failing to account for future obligations Uncertainty over future projections Some Government - exceedingly cautious Run budget surpluses now Pay down the national debt Others Preparing for the worst - huge sacrifices Sacrifices - might be unnecessary The Bush Tax Cuts of 2001 and 2003:  The Bush Tax Cuts of 2001 and 2003 Short run: Countercyclical fiscal policy? Neither tax cut was designed for that purpose June 2001 proposed as a long-run policy measure to promote growth in potential output stroke of luck 2003 long-run reforms in the tax code The Bush Tax Cuts of 2001 and 2003:  The Bush Tax Cuts of 2001 and 2003 Short run: Countercyclical fiscal policy? After September 11, 2001 - proposed a purely countercyclical tax cut Designed as an emergency measure Prevent the sliding further into recession Debated for 6 months in the House and Senate the Fed – monetary policy reduced interest rate target four times The Bush Tax Cuts of 2001 and 2003:  The Bush Tax Cuts of 2001 and 2003 Long run: tax cuts and national debt Different assumptions Government outlays exceeded expectations Federal tax revenues grew faster than expected Behavior of GDP Table 2: Fiscal Projections After the Tax Cuts of 2001 and 2003:  Table 2: Fiscal Projections After the Tax Cuts of 2001 and 2003

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