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Economics (157)
ECON 0110 (84)

Section 21 Notes.doc

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ECON 0110

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SECTION 21: GOALS OF TAX POLICY AND THE BUDGET DEFICIT SOME GOALS OF TAX POLICY 1. Generate revenue 2. Redistribute income 3. Reallocate resources 4. Influence the economy via fiscal policy How tax policy can cause a redistribution of income High income households pay a much greater amount in taxes than low income households. Low income households receive a much greater amount in unemployment compensation, welfare benefits, food stamps, etc., than high income people. Thus, the tax policy leads to a redistribution of income away from high income households to low income households. How tax policy can cause a reallocation of resources A tax on a specific item or activity makes that item or activity more expensive Thus, people purchase less of that item or activity. A tax on cigarettes & alcohol increases the prices of those items. Thus, people reduce their purchases. Recently, Allegheny County imposed a 7% tax on any alcohol purchased at restaurants. Reportedly, this has lead to a sizeable decrease in restaurant revenue. Tolls on the Pennsylvania Turnpike increase the cost of travel. Thus, people reduce their travel on the Turnpike. Tax exemptions make some activities less expensive. Thus, people spend more on those activities Interest on home mortgages is tax deductible. This makes owning a home less expensive. Money invested in an IRA and any interest earned from the investment is not taxed until it is withdrawn after age 59. This encourages households to increase their current saving and causes a reallocation from current consumption to current saving. Charitable contributions are tax deductible. This encourages people to contribute more to charity. BUDGET DEFICITS AND THE NATIONAL DEBT We incur a budget deficit when government spending (on goods, services and transfer payments) exceeds tax revenue. Deficit years: 1961 – 1968, 1970 – 1997, 2002 – Present We have a budget surplus when tax revenue exceeds government spending. Surplus years: 1969 and 1998 – 2001 We have a balanced budget when gover
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