11_Fiscal_Policy

11_Fiscal_Policy - 1 11.Fiscal Policy 2 Overview 0....

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1 FISCAL POLICY Intro to Macro (ECON 0110) Torsten Jochem b Overview b 0. Definition b 1. Taxation s Marginal Income taxation; Progressive, regressive and proportional taxation; the Laffer curve (arithmetic vs. economic effect); int’l 11.Fiscal Policy 2 comparison of taxation structures. b 2. Government Expenditures s b 3. Stimulating the Economy through Fiscal Policy s Consumption & the Income Expenditure Model; The Multiplier Effect s Limits of the Multiplier, Demand-Side vs. Supply-Side Economics s Automatic Stabilizers b 4. The Public Debt s The coming Social Security/Medicare/Medicaid Crisis b 0. Fiscal Policy vs. Monetary Policy b Fiscal Policy: s Policies relating to taxation and government expenditure are called “fiscal policies”. 11.Fiscal Policy 3 b Monetary Policy: s Policies that affect the money supply of and interest rate in the economy. 11.Fiscal Policy b 0. Fiscal Policy vs. Monetary Policy FED Congress/ Government Monetary & Fiscal Policy are the toolboxes for the public sector to 4 U.S. economy Monetary Policies Fiscal influence the economy.
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b 1. Marginal Income Taxation s “Marginal” means that each tax bracket is taxed separately and then the tax amounts are added up. s Gross Income – Exemptions – Deductions = Taxable Income 010 11.Fiscal Policy 5 s 2010 Marg. Tax Rate Tax Bracket 10% till $8,375 15% till $34,000 25% till $82,400 28% till $171,850 33% till $373,650 35% above 373,651 Exemptions = in 2009, $3,650 per person in household (purpose: certain level of income should not be taxed at all); Deductions = e.g., home mortgage interests, medical expenses (standard deduction one can claim, $5,700 for a single) b 1. Marginal Income Taxation s Example: Single HH, $100,000 gross income; use standard deduction. 11.Fiscal Policy 6 Taxable income = $100,000 – 3,650 – 5,700 = $90,650 . Income Tax = 8,375*0.1 + (34,000-8,375)*0.15 + (82,400-34,000)*0.25 + ( 90,650 - 82,400)*0.28 = $ 19,091.25 Effective Tax Rate = Income Tax/Gross Income = 19,091.25 / 100,000 = 19.1% b 1. Taxation Types b Progressive Taxation: s Directly: marginal tax rates increase for higher tax brackets s Example: U.S. income tax s Indirectly: tax amount higher for high income earners. 11.Fiscal Policy 7 s Example: Champagne tax; constant for every bottle of wine, but as the rich buy more Champagne, they pay a higher nominal tax amount. b 1. Taxation Types b Progressive Taxation: s Directly: marginal tax rates increase for higher tax brackets s Example: U.S. income tax s Indirectly: tax amount higher for high income earners. 11.Fiscal Policy
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11_Fiscal_Policy - 1 11.Fiscal Policy 2 Overview 0....

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