Key Terms
Fiscal policy
Changes in federal government spending or tax rates to influence the macroeconomy.
Budget deficit
Spending exceeds tax revenue in a given year. Budget surplus: tax revenue exceeds spending in a given year.
Largest single item
Education (about one-third of state/local spending; roughly 90 cents of every dollar spent on education in the U.S. come
Other major categories
Highways, hospitals, libraries, parks, police and fire protection.
Progressive tax
Marginal rate increases with income. Proportional tax: flat percentage regardless of income.
Proportional tax (flat tax)
Same percentage regardless of income level. Tax rate does not change as income rises.
Regressive tax
Marginal tax rate decreases as income rises; higher earners pay a smaller share of income.
Ability to pay principle
Higher income means greater capacity to pay; justifies progressive taxation. Benefit principle: taxes paid in proportion
Main sources
Sales taxes, property taxes, and federal transfers. Many states also levy personal and corporate income taxes.
Property taxes
Based on assessed value of real estate. Sales taxes: percentage of retail purchases; generally regressive.
Two forces converged
1. Spending fell: defense spending dropped from 5.2% of GDP in 1990 to 3.0% in 2000; interest payments also declined.
Also
Transfer payments (unemployment benefits, food stamps, welfare) declined as employment rose.
Severe recession
Spending climbed and tax collections fell to historically unusual levels simultaneously.
Baby boom demographic
Exceptionally high birth rates from 1946 through the mid-1960s. Starting around 2010, the front edge of that generation
Automatic stabilizers
Existing programs that cushion AD shifts without new legislation. Discretionary fiscal policy: new law passed to explici