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Fiscal Policy.doc

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Western University
Political Science
Political Science 2211E
Adam Harmes

November 21 - Fiscal Policy - Definition of a depression, either a sharp drop in gross domestic product of 10% within a couple of quarters, or you have a recession that isn’t that deep (shrinking a tiny bit) and goes on and on and on (for over 3 years) Today’s Topics 1) Key types of taxes 2) Key types of gov’t spending Reasons for taxation - Raise revenue for the gov’t spending - Affect Marco-economy through aggregate demand - Change incentives at the Micro level o I.e. carbon tax Personal Income Taxes - Tax on an individual’s income Progressive Tax System - The more money you make, the higher percentage of your income you pay to taxes - Marginal tax Percentage you pay according to your salary is divided in different section (pay 10% on first $10,000, 15% on second $10,000 and 25% on $20,000 - What is taxable income? o Your income minus deduction and write-offs Regressive Income Tax System - Everyone pays the same absolute amount of money regardless of income o Almost like taxes are a set fee - Is main theoretical: applies to user fees - I.e. everyone pays $5,000 o For a person making 20k= 25% o For person making $50k+10% o For person making $100K=5% - Lower income end up paying higher percentage Flat tax - Everyone pays the same percentage of their income in taxes o Basically means there is only 1 tax bracket o I.e. everyone pays 10%  20K= $2000 - Strong fiscal conservatives advocate flat tax - No developed country had flat tax - Is said to make tax code much less complicated - Complications come from deduction not tax brackets Consumption Taxes - Taxes on consumer goods and services - Like a flat tax - I.e. GST and PST and HST - Used to lower income and corporate taxes Wealth Taxes - Tax assets rather than income - Capital gains tax (portion of gain that must be counted as income) o On actual assets, stock o Have to pay tax on capital gain  I.e. if you buy stocks at a low price and it increases by the time you sell them, you have to pay taxes on the capital gain that was achieved - Inheritance tax o No inheritance tax in Canada o Everything after %1.5 million inherited in Canada, becomes taxes Corporate Taxes - On the income, or profits, of a corporation - Capital Tax: o On corporate assets Taxes and Demand - If taxes go down, aggregate demand will increase - Taxes go up, aggregate demand will go down Purposes of Gov’t Spending - Public goods in the technical sense of the term o Good or service that a government had to provide because the free market system is unable to provide this  National defense, roads, and bridges  Infrastructure - Affect macro-economy o Spending goes up, demanding goes up o Spending goes down, demand goes down - Social programs o Everything else the government provides as it is trying to achieve some sort of public goal - Spending and demand o Automatic stabilizers:  Gov’t does not have to pass a new policy  I.e. employment insurance or welfare  Automatically increase spending when unemployment rises  Decreases spending when unemployment falls  If a person get $1200 for employment insurance, the more people that are unemployed the more money the government has to spend, gov’t doesn’t have to change public policy o Discretionary spending:  Specific de
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