Professional Documents
Culture Documents
the tools of fiscal policy are taxes (T, t, and τ) and government
purchases (G)
A. Government Outflows
1
it is just a one-way transfer of wealth
2
(1) after spiking in the 1940s, government purchases (G) have
actually steadily decreased since 1960
B. Government Inflows
1. Taxes
4
this category of inflows has increased steadily since WW II
2. Government Outflows
5
and out of this 30 percent, almost 2/3 is strictly spending on
national defense
3. Government Inflows
but at the state and local levels, income tax is only 20 percent of
inflows
6
and at the federal level, only 4 percent of revenue is from import
and excise taxes
this is the reason why the central bank must be legally separated
from the federal treasury!
7
mainly, these were caused because the federal government had
much higher levels of consumption than investment
8
3. Classicals and Keynesians disagree about using fiscal policy
to stabilize the economy
9
1. Fiscal policy affects the economy through the formation of
government capital
the health of the economy depends not only on how much the
government spends, but also on how it spends its resources
$ 0 - $ 10 000 = 0 %
above $ 10 000 = 25 %
11
the panel recommended the following changes:
(1) streamline the entire tax system, and make filing taxes easier
for everyone
(2) reduce marginal tax rates for everyone, yet retain the
progressive nature of the current system
(3) extend tax benefits from owning a home and from charitable
giving to everyone (not just to those who itemize their
deductions)
despite their best efforts, the panel failed to agree to one specific
plan, and a comprehensive tax reform bill was killed in summer
2006
3. Supply-Side Economics
although this theory was popular in the 1980s, there has been
very little empirical support for supply-side economics
it is better to keep the tax rate constant over time than to raise it
or lower it
13
for example, keeping the tax rate at a steady 15 % is better than
having it at 10 % one year and 20 % the next, since the
distortions in the second year are much higher
14
B = nominal value of government bonds outstanding
to be more optimistic, the system may not be able to pay the full
amount of promised benefits
15
in the private sector, this is called a “Ponzi scheme”—and it is
illegal!
(1) abolish it
16
(5) let people invest their own funds in individual accounts (but
this still doesn’t solve the problem of what to do with the current
retirees who were promised full benefits)
(1) if tax rates have to be raised in the future to pay off the debt,
the higher tax rates could be distortionary
some numbers:
18