4.4 Fiscal Policy Spring 2024

Power and Limitations for Taxes

• Power to Tax – Article 1, Section 8,

Clause 1 of the U.S. Constitution
and the 16th Amendment

• Limitations:

– Purpose is for “the common defense

and general welfare”

– Federal taxes must be the same in

every state

– Government may not tax exports

Types of Taxes

Progressive- as income goes up tax rate increases
Regressive- takes larger percent of income from
the lower income group
Proportional- takes the same percent of income
from all income levels
Excise Tax- tax paid on a good or service to be used
for your benefit (ex gas tax used to maintain roads)
Estate Tax- tax on inheritance above around $11
million in gross assets
Custom Duties- tax on imports

Top Federal Taxes

●

Individual Income Tax - Includes
earned income (wages, salaries,
commission) and unearned income
(dividends, interest, rents).

●

Social Security – one part of FICA – a
taxpaid by employees and
employers
○

FICA=SocialSecurity + Medicare

●

Corporate Income Tax– a tax levied
on a corporation's profits

Government Spending/Expenditures

● Goods and Services
● Transfer Payments - a payment

for which the government
receives neither goods nor
services.
○ Examples: Unemployment,

social security, welfare and
veterans benefits

Not counted

in GDP!

Counted
in GDP!

Federal Budget

●Federal budget - an annual plan outlining
proposed revenues and expenditures for the
coming year.

●Approximately 2/3 of the federal budget consists of
mandatory spending - spending authorized by
law that continues without the need for annual
approvals of Congress.
○(Social Security, Income Security, Healthcare
services (Medicaid), Interest in the national debt)

●The remaining one-third of the budget deals with
discretionary spending– programs that must
receive annual authorization.

●

●

●

2 Types of Fiscal Policy

Contractionary: during an
expansion and involves
decreased spending and/or
increased taxes, to combat
inflation.

2 Types of Fiscal Policy

Expansionary: during a recession
and involves increasing government
spending, and/or decreasing taxes,
to battle unemployment.
● This is deficit spending: annual

spending in excess of taxes and
other revenues. Its why are debt is
so large.