The top tax rate has been different in different

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Unformatted text preview: at anyone paid was 7 percent. As you learned in this chapter, the top (stated) tax rate today is 35 percent. The top tax rate has been different in different years. The following list shows the top tax rate for a few selected years. T Year Top Tax Rate 1913 1916 1919 1922 1929 1938 1944 1952 1962 1967 1986 1999 2005 7.0% 15.0 73.0 58.0 24.0 79.0 94.0 92.0 91.0 70.0 50.0 39.6 35.0 14 (364-389) EMC Chap 14 11/18/05 10:59 AM Page 383 Budgets: Balanced and in Deficit Adam Smith, the eighteenth century economist, said,“What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom.” In other words, if it is right and reasonable for a family to do something, it is probably also right and reasonable for a great nation to do the same. If it is right for a family to save and avoid debt, then it is right for a nation to do the same. For many years this notion carried over to the discussions of U.S. federal budget policy. Most people believed that the federal budget should be balanced—that is, government expenditures should be equal to tax revenues. Budget deficits, which occur when government expenditures exceed tax revenues, were acceptable, but only during wartime. (As an aside, a budget surplus exists if tax revenues exceed government expenditures.) The Great Depression Conditions began to change around the time of the Great Depression (1929–1933), a period of great economic distress in this country. During this time, unemployment skyrocketed, the production of goods and services plummeted, prices fell, banks closed, and companies went bankrupt. Until this time, many people in the United States thought that free enterprise was a stable, smooth mechanism. The economic downturn of the Great Depression gave these peo- ple cause for doubt, however, and slowly many previously accepted ideas of budget policy began to be discarded. One notion in particular that fell by the wayside was the idea that the federal budget should be balanced. People began to accept budget deficits as a way of reducing unemployment. Reducing Unemployment What do budget deficits have to do with reducing unemployment? Suppose the federal budget is balanced. Government spending is $2,000 billion, and tax revenues are $2,000 billion. However, unemployment is high, say, about 10 percent. The president, along with Congress, wants to reduce the unemployment rate by implementing expansionary fiscal policy (increase government spending or decrease taxes). Together, they decide to increase government spending to $2,200 billion. Tax revenues, we’ll assume, remain constant at $2,000 billion. In this instance, expansionary fiscal policy leads to a budget deficit. Many people came to see budget deficits as necessary, given the high unemployment that plagued the economy. According to them, the choice was simple: (1) either keep the federal budget balanced and suffer high unemployment (and the reduced output of goods and services that results), or (2) accept the budget deficit and r...
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