GOALS OF TAX POLICY AND THE BUDGET DEFICIT

GOALS OF TAX POLICY AND THE BUDGET DEFICIT - NATIONAL DEBT...

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SECTION 21: GOALS OF TAX POLICY AND THE BUDGET DEFICIT
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SOME GOALS OF TAX POLICY 1. Generate revenue 2. Redistribute income 3. Reallocate resources 4. Influence the economy via fiscal policy
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3. Reallocate resources Taxes make some activities more expensive Thus, people buy less Taxes on cigarettes, alcohol
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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 Money invested in an IRA and any interest earned from the investment is not taxed until it is withdrawn after age 59 This causes a reallocation from current consumption to current saving Charitable contributions are tax deductible.
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BUDGET DEFICIT Government spending on goods, services and transfer payments exceeds tax revenue G > T Deficit years: 1961 – 1968, 1970 – 1997, 2002 –
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BUDGET SURPLUS Tax revenue exceeds government spending T > G Surplus years: 1969, 1998 – 2001
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BALANCED BUDGET Government spending equals tax revenue G = T
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Unformatted text preview: NATIONAL DEBT = Total amount owed by the Federal government = Sum total of all past deficits and surpluses FINANCING A DEFICIT TREASURY DEPARTMENT issues bonds GOVT borrows from lenders Interest is taxable. US bonds are considered to be virtually risk-free US has never defaulted on a loan or missed an interest payment. THE INTEREST PAYMENTS ON THE NATIONAL DEBT ARE NOT LOST TO THE ECONOMY Current taxpayers pay the interest on the Federal debt. Thus, without a national debt, current taxes would be lower. Are these taxes “lost” to the economy? The interest is paid to the bondholders. The bondholders are other consumers, firms, governments, foreigners, and the FED. WHO RECEIVES THE INTEREST PAYMENTS ON THE FEDERAL DEBT? If we exclude the interest that is paid to foreigners, the interest is paid to other US entities. (About 80% of the interest is paid to Americans.) Except for the interest paid to foreigners, there is no net loss to the US economy....
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This note was uploaded on 04/15/2008 for the course ECON 0110 taught by Professor Kenkel during the Fall '08 term at Pittsburgh.

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GOALS OF TAX POLICY AND THE BUDGET DEFICIT - NATIONAL DEBT...

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