27 terms

Government Budget Deficit

STUDY
PLAY
Individual Income Tax
-largest source of federal revenue
-Individuals must pay this tax by April 15.
-During the year the government withholds a portion of each paycheck as tax payments.
Social Insurance Taxes
-taxes are levied on income to pay for Social Security (retirement fund for the elderly) and Medicare (health care for the elderly).
Note how these taxes has increased over time
Corporate Taxes
-tax levied on the earnings of corporations.
-This tax was an important source of revenues in the mid-20th century, but has become less important over time.
-The existence of tax shelters, laws to stimulate R&D, and complex rules regarding taxing multinational corporations have all led to a decline in the importance of corporate taxes as a source of federal revenue.
other taxes
-excise taxes
-estate taxes
-custom taxes
excise taxes
taxes that are levied on the sale of certain products such as gasoline, cigarettes, alcohol, etc
estate taxes
taxes levied on estates of individuals when they passed away
-inheritance tax
-sometimes called the "death tax"
custom duties
-levied on goods imported to the United States, such as foreign cars or wines
Discretionary Spending
Spending that has to be authorized by Congress on an
annual basis.
Examples include spending on Defense, on Governmental agencies,
etc...
Entitlement and Mandatory Spending
Spending that has been authorized by prior law.
This is government spending that has to be spent by law.
Examples include:
o Social Security: Benefits for the retired
o Medicare: Health benefits for the elderly
o Medicaid: Health benefits for the poor
Net Interest
Interest the government must pay on its debts and obligations
If T > G
budget surplus
Federal Government revenues exceeds the spending by the Federal Government
If T < G
budget deficit
Federal Government revenue is less than the spending by the Federal Government
government debt
amount of bonds that have been issued in the past to finance government deficits
debt-to-GDP ratio
(government debt/GDP)
Since a budget deficit occurs whenever the government spends more than it collects in taxes
(G > T) there are two ways a budget deficit can grow:
Deficits can occur due to an increase in government spending (G) or a decrease in taxes collected (T).
Running a budget deficit (decrease T or increase G) will
temporary stimulate the economy in the short run. However, in the long-run it has no effect on output, but leads to permanently higher prices.
national savings equation
national savings = private savings + public savings
S = (Y - C - T) + (T - G)
if government has a budget deficit then
(T - G) decreases so S decreases
key point
a budget deficit under the traditional view
1. will have a short-run effect of increase Y and increase P
2. will have no long-run effect on Y but increase P in long-run
3. will lead to slower economic growth since increase r
4. will lead to trade deficits
Ricardian Equivalence
-questions the presumption of an increase in consumption as a result of tax cuts
-assumed that consumers make spending decisions not only on current disposable income but also on their future expected income
logic of Ricardian Equivalence
-suppose taxes are cut and they are financed by budget deficits (government will issue bonds(
-households will eventually have to repay the debt at some point
-at the same point, taxes will be raised to pay down the debt
-rational households will respond to a tax cut by saving money to pay for the eventual tax increase
critics
households are not that sophisticated
problem
government budget deficits are projected to increase dramatically in the near future
demographics
life expectancy increases, birth-control, social norms reduced the number of children women have
-share of population over age 65 increasing
1950: 14% of population over age 65
2050: 40% of population over age 65
-currently 1/3 of federal budget goes to payment for elderly
-as population gets older => federal spending increase
rising cost of healthcare
as health cost increase, spending on health care programs will increase
-medicare
-medicaid
solution
-deficits can be reduced by raising taxes or cutting spending
where can spending cuts come from?
-not enough "wasteful" spending to make a difference
-demographic changes not much can be done
-might be able to limit the rising cost of healthcare
YOU MIGHT ALSO LIKE...