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2013-11-11 Fiscal Policy.docx

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Political Science
Political Science 2211E
Adam Harmes

Fiscal Policy November 11, 2013 Today’s Topics 1. Key Types of Taxes 2. Key Types of Government Spending Reasons for Taxation 1. Raise revenue for government spending 2. Affect the macro-economy through aggregate demand a. Can be used to affect demand 3. Change incentives at the micro level a. –i.e. carbon tax b. Affect behaviour (e.g. tax cigarettes, tax junk food, etc.) Personal Income Taxes -Tax on an individual’s income Progressive Tax System -The more money you make, the higher a percentage of your income you pay in taxes -Tax brackets: (example) -$0-10,000: pays 10% -$10-20,000: pays 15% -$20-50000: pays 25% -$50,000 +: pays 40% -e.g. Income of $60,000 pays 40% = $24,000 Marginal Tax Brackets -$ first 10,000: pays 10% $1000 -$10-20,000: pays 15% $1500 -$20-50,000: pays 25% $7500 ($30,000) -$50,000+: pays 40% $4000 -Income of $60,000 pays: $14,000- Profgressive Tax System -Canadian marginal tax bracket: -first $41,544: pays 15.5 -$83,088: pays 22% -$128,800: pays 26% -$128,800: pays 29% -pay provincial income tax as well 1 -What is taxable income? -income left with after deduction -e.g. you make $100,000 a year -your taxable income may not be near $100,000 -tax credits, tax writeoffs -business trips (charge on company, deduct from individual) -take advantage of those deductions -RESPs, tuition = reduce taxable income Regressive Income Tax System -Everyone pays the same absolute amount of money regardless of income -Is mainly theoretical: applies to user fees -those who make less money are paying a higher percentage of their income in taxes -used when countries move away progressive income tax system and move towards user fees Regressive Income Tax System -i.e. everyone pas $5000 -For person making $20K =25% -For person making $50K = 10% -For person making $100K = 5% -Lower incomes end up paying higher percentage Flat Income Tax System -Everyone pays the same PERCENTAGE of their income in taxes -i.e. Everyone pays 10% -For person making $20K = $2000 -For person making $50K = $5000 -For person making $100K = $10,000 Flat Income Tax System -Strong fiscal conservatives advocate flat tax -No developed country has a flat tax -e.g. Rick Perry advocated for a flat tax of 20% -it shifts tax burden down -wealthy pay more, but not as much more compared to progressive tax system 2 -if a country were to implement this, it would be a massive tax increase or a cut in social services Flat Income Tax System -Is said to make tax code much less complicated -Complications come from deductions not tax brackets -Rick Perry, Steve Forbes: advocates of flat tax income -simplifying tax code has nothing to do with flat income tax -detail in tax code is the massive amount of deductions that government give (e.g. Renovation tax program) -politically trying to court votes by implementing deductions -Canada and other developed world use progressive income tax system 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 -e.g. Herman Cain: Cain Plan -9% corporate tax, 9% personal income tax, 9%national sales tax -people who are neoliberal, conservative advocate for this -every single person paying same percentage regardless of income -left favour income taxes; right favour consumption taxes Wealth Taxes -Tax assets rather than income -Capital gains tax (portion of gain that must be counted as income) -e.g. if you own stocks in your investment portfolio -if your stocks go up, government will tax your capital gain -e.g. selling house -price of house goes up = government tax your capital gain on house -Inheritance tax -a.k.a. estate tax -also known as death tax -Canada does not have inheritance tax, but the U.S. has it Corporate Taxes -Corporate Tax: -On the income, or profits, of a corporation -Capital Tax: 3 -On corporate assets rather than income -tax evasion (doing under the table work and not reporting it) vs tax avoidance (trying to get your accountant to go through every single tax break/credit to get your taxes down) Taxes and Demand -Taxes go down = Demand go up -people have more money = more likely to spend money -Raise taxes = Demand goes down -people have less money = less likely to spend money -government can use taxes to stimulate economy or slow it down Purposes of Government Spending 1. Public goods 2. Affect macro-economy a. Can use taxes to affect macro-economy in terms of influencing aggregate demand 3. Social programs -public good: those goods and services government has to provide because market cannot provide them Public Goods -Goods/services market won’t provide -National Defense Infrastructure Spending to Influence Demand -Spending goes up = demand goes up -give more money to people = people will use them to buy stuff -Spending goes down = demand goes down Spending and Demand -Automatic stabilizers -Discretionary spending Automatic Stabilizers -Employment insurance and welfare -Automatically increase spending when unemployment rises 4 -Decreases spending when unemployment falls -helps stimulate demand and growth by giving people money -when economy picks up, government spending will automatically decrease (remove stimulus or scale it back from the economy) -$1,200/month x 1 million unemployed = $1.2 billion/month -$1,200/month x 2 million unemployed = $2.4 billion/month Discretionary Spending -Specific decision to increase spending -Stimulus package -i.e. a new infrastructure construction program -e.g. Economic Action Plan implemented by Harper government -universities got new buildings, road repair fixes to get people to work Budget Deficits -Spending is greater than revenue -Forces government to borrow money -Borrows by issuing bonds -Deficits most likely during recessions -Tax revenues go down -Spending on auto stabili
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