Key Terms

Key Terms

automatic stabilizers tax and spending rules that have the effect of slowing down the rate of decrease in aggregate demand when the economy slows down and restraining aggregate demand when the economy speeds up, without any additional change in legislation balanced budget when government spending and taxes are equal budget deficit when the federal government spends more money than it receives in taxes in a given year budget surplus when the government receives more money in taxes than it spends in a year contractionary fiscal policy fiscal policy that decreases the level of aggregate demand, either through cuts in government spending or increases in taxes corporate income tax a tax imposed on corporate profits crowding out federal spending and borrowing causes interest rates to rise and business investment to fall discretionary fiscal policy the government passes a new law that explicitly changes overall tax or spending levels with the intent of influencing the level of overall economic activity estate and gift tax a tax on people who pass assets to the next generation—either after death or during life in the form of gifts excise tax a tax on a specific good—on gasoline, tobacco, and alcohol expansionary fiscal policy fiscal policy that increases the level of aggregate demand, either through increases in government spending or cuts in taxes implementation lag the time it takes for the funds relating to fiscal policy to be dispersed to the appropriate agencies to implement the programs individual income tax a tax based on the income, of all forms, received by individuals legislative lag the time it takes to get a fiscal policy bill passed marginal tax rates or the tax that must be paid on all yearly income national debt the total accumulated amount the government has borrowed, over time, and not yet paid back payroll tax a tax based on the pay received from employers; the taxes provide funds for Social Security and Medicare progressive tax a tax that collects a greater share of income from those with high incomes than from those with lower incomes proportional tax a tax that is a flat percentage of income earned, regardless of level of income recognition lag the time it takes to determine that a recession has occurred regressive tax a tax in which people with higher incomes pay a smaller share of their income in tax standardized employment budget the budget deficit or surplus in any given year adjusted for what it would have been if the economy were producing at potential GDP

Key Concepts and Summary

17.1 Government Spending

Fiscal policy is the set of policies that relate to federal government spending, taxation, and borrowing. In recent decades, the level of federal government spending and taxes, expressed as a share of GDP, has not changed much, typically fluctuating between about 18% to 22% of GDP. However, the level of state spending and taxes, as a share of GDP, has risen from about 12–13% to about 20% of GDP over the last four decades. The four main areas of federal spending are national defense, Social Security, healthcare, and interest payments, which together account for about 70% of all federal spending. When a government spends more than it collects in taxes, it is said to have a budget deficit. When a government collects more in taxes than it spends, it is said to have a budget surplus. If government spending and taxes are equal, it is said to have a balanced budget. The sum of all past deficits and surpluses make up the government debt.

17.2 Taxation

The two main federal taxes are individual income taxes and payroll taxes that provide funds for Social Security and Medicare; these taxes together account for more than 80% of federal revenues. Other federal taxes include