Fiscal Policy What Are the Three Major

Fiscal Policy

What are the three major categories of revenues for the federal government? Please comment on each and indicate their relative importance to each other. Relative importance can be indicated by dollar amounts, percent of total revenue or expenditure or, though less informative, by ranking.

The three categories of revenues for the federal government include: individual income taxes, corporate income taxes and social insurance taxes. These areas are interconnected to each other based upon: the strength of the economy and areas they are focused on. For example, in 2009 individual income taxes were $1.01 trillion. This is the largest category for revenues received. While corporate income taxes were $223 billion and social insurance receipts were $915 billion. In the case of individual and corporate incomes taxes, the total amounts were impacted by shifts in the economy (which were down from the previous year). While social insurance receipts were up modestly. These areas are showing how individual and corporate income tax revenues are subject to changes in the economy. Whereas social insurance taxes; are protected from these adjustments. The combination of these elements will have an effect on the total amounts of revenues that are received (from year to year). ("The Budget and Economic Outlook," 2009)

What are the three major categories of expenditures for the federal government? Please comment on each and indicate their relative importance to each other. Relative importance can be indicated by dollar amounts, percent of total revenue or expenditure, or, though less informative, by ranking

The three categories of expenditures of the federal government include: mandatory spending, discretionary spending and net interest. All three areas are interconnected from their ability to impact the national debt. Mandatory spending is the biggest category with this accounting for $2.164 trillion (in 2009). Discretionary spending is the second largest category coming in at $1.184 trillion. While the net interest; is accounting for $195 billion in expenditures. These different areas will have an impact upon the total amounts of increases or decreases on annual basis. ("The Budget and Economic Outlook," 2009)

Assume you are the Chief Economic Advisor to the President of the United States and the President has asked you to review the deficit reduction proposals that were submitted by his commission (see link above). Choose the two commission recommendations you agree with the most and the two you disagree with the most, and write an explanation to the President explaining your 4 choices. Please be detailed rather than general in your recommendation.

The two ideas from the debt reduction proposal that make the most sense include: going down to three basic categories for income tax brackets and a $.15 cent additional tax on gasoline for highway expenditures. While to recommendations that do not make sense include: raising the minimum age for Social Security eligibility to 69 and cutting $100 billion in defense spending. In the case of decreasing income tax brackets, this will simplify the tax code and reduce the total amounts of deductions. This will make it easier for everyone to understand how much they owe (without having tax rates high enough to hurt innovation). Whereas the increase in the gas tax will make certain that infrastructure projects receive consistent amounts of support. In the future, this will ensure that the nation maintains its competitive edge. (Fried, 2010)

While raising the minimum age for Social Security is occurring to slow. This is because actuaries are assuming that everyone will need time to make these adjustments. However, the reality is that these standards have not been increased since the 1930s. This means that these changes could occur over a much faster time frame (to reflect the advancements in medicine). If this were to happen, the rate of decline in total expenditures will increase dramatically. (Fried, 2010)

The decrease in defense spending should be avoided. The reason why is the military will be needed to deal with: emerging threats in Asia (i.e. An aggressive China) and continuing to go after Al Qaida. When there are decreases in spending, this could have an impact on the ability of the military to be ready for a host of possible threats. (Fried, 2010) ("Chinese Military Spending a Threat," 2012)

Describe the AD and AS equilibrium point.

The aggregate demand (AD) and aggregate supply (AS) will reach an equilibrium point in the year 2018. This is when the deficit will decline to -$188 billion. While the total amounts of revenues will come in at $4.30 trillion and expenditures will be $4.49 billion. This is the closest point that there is a near perfect balance in the U.S. government budgetary process. (Moffat, 2012) ("The Budget and Economic Outlook," 2009)

If the federal government reduces the budget deficit by reducing spending, assume nothing else changes, what affect would that have on the AD?

This would cause AD (i.e. The total amount of revenues) to increase. The reason why is because these kinds of reductions will reduce any kind of wasteful spending. It is at this point that a host of programs will become more efficient in addressing the needs of stakeholders. (Moffat, 2012)

American consumers currently have a high level of credit card debt, on average. If consumers decided to reduce their spending on products and services and, instead, used that money to reduce their debt, what affect would this have on AD and AS?

This would have a short-term negative impact on AD by causing AS to increase. Once this occurs, is when firms will be forced to reduce capital spending and the hiring of new employees. This will cause the economy to experience a slowdown. However, over the long-term this will have positive impact on AD by supporting spending practices that are fiscally prudent. When this happens, the economy will avoid the extreme boom and bust cycles. It is at this point that consumer spending will experience consistent and sustainable increases. (Moffat, 2012)

When the federal government offered the "cash for clunkers" car program, how did the affect AD and AS?

This caused the AD for vehicles that are fuel efficient to increase. While the AS for used cars, pre-owned vehicles and inefficient automobiles also rose. This is because the larger number of consumers; means that the sales of new cars are improving. However, part of the program required them trading in their old cars. Once this took place, is when the AS for used cars increased dramatically. (Moffat, 2012)