KW_Macro_Ch_12_Sec_01_Fiscal_Policy_The_Basics

KW_Macro_Ch_12_Sec_01_Fiscal_Policy_The_Basics - chapter 12...

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>> Fiscal Policy Section 1: Fiscal Policy: The Basics chapter 12 Let’s begin with the obvious: modern governments spend a great deal of money and col- lect a lot in taxes. Figure 12-1 shows government spending and tax revenue as percentages of GDP for a selection of high-income countries in 2003. As you can see, the Swedish gov- ernment sector is relatively large, representing nearly 60% of the Swedish economy. The government of the United States plays a smaller role in the economy than those of Canada or most European countries. But that role is still sizable, meaning that the gov- ernment plays a major role in the U.S. economy. Changes in the federal budget—changes in government spending or in taxation—can potentially have large effects on the American economy. To analyze these effects, we begin by showing how taxes and government spending affect the economy’s flow of income. Then we can see how changes in spending and tax policy affect aggregate demand.
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2 C H A P T E R 1 2 S E C T I O N 1 : F I S C A L P O L I C Y: T H E B A S I C S Taxes, Purchases of Goods and Services, Government Transfers, and Borrowing In Figure 7-1 we showed the circular flow of income and spending in the economy as a whole. One of the sectors represented in that figure was the government. Funds flow into the government in the form of taxes and government borrowing; they flow out in the form of government purchases of goods and services and government transfers to individuals. What kinds of taxes do Americans pay, and where does the money go? Figure 12-2 shows the composition of U.S. tax revenue in 2004. Taxes, of course, are required pay- ments to the government. In the United States, taxes are collected at the national level Figure 12-1 60% 50 40 30 20 10 0 United States Japan Canada France Sweden 58.3% 58.1% 53.5% 50.2% 41.7% 43.4% 35.7% Government spending Government tax revenue 32.6% 38.2% 30.3% Gove r nment spending, tax r evenue (pe r cent of GDP) Government Spending and Tax Revenue for Some High-Income Countries in 2003 Government spending and tax revenue are represented as a percentage of GDP. Sweden has a particularly large government sector, representing nearly 60% of its GDP. The U.S. government sector, although sizable, is smaller than those of Canada and most European countries. Source: OECD.
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3 C H A P T E R 1 2 S E C T I O N 1 : F I S C A L P O L I C Y: T H E B A S I C S Figure 12-2 Corporate profit taxes, 8% Other taxes, 29% Personal income taxes, 35% Social insurance taxes, 28% Sources of Tax Revenue in the United States, 2004 Personal income taxes, taxes on corporate profits, and social insurance taxes account for most government tax revenue. The rest is a mix of property taxes, sales taxes, and other sources of revenue. Source: Bureau of Economic Analysis.
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by the federal government; at the state level by each state government; and at the local levels by counties, cities, and towns. At the federal level, the main taxes are income taxes on both personal income and corporate profits as well as social insurance taxes, which we’ll explain shortly. At the state and local levels, the picture is more complex:
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