Macroeconomic approach
FISCAL POLICY
Macroeconomic approach
FISCAL POLICY
WHAT IS FISCAL POLICY?
•
Changes in government spending
or taxes to alter the economy
INFLUENCE
•
Aggregate demand and the level of
economic activity
•
The pattern of resource allocation
•
The distribution of income
EXAMPLES OF EXPANSIONARY
FISCAL POLICY
•
Increase government spending
•
Decrease taxes
•
Increase government spending and
decrease taxes equally
BUDGET DEFICIT
•
When government spending
>
government
revenues
EXAMPLES OF CONTRACTIONARY
FISCAL POLICY
•
Decrease government spending
•
Increase taxes
•
Decrease government spending
and increase taxes equally
BUDGET SURPLUS
•
When government revenues
>
government
spending
WHAT IS THE PURPOSE OF
FISCAL POLICY?
•
Economic long-run growth in output
•
Full employment
•
Price stability
TWO SIDES OF FISCAL POLICY
•
Supply-side fiscal policy
•
Demand-side fiscal policy
WILL AN INCREASE IN TAXES
LEAD TO HIGHER GOVERNMENT
REVENUE?
•
Laffer curve – increasing taxes from
zero will increase tax revenues up
to a certain point
WHY DOES THE SHRINKAGE
HAPPEN?
•
Less incentive to work
•
Shadow economy
•
Less incentive to invest
•
Tax havens
SUCCESFUL IMPLEMENTATION OF
THE IDEA
•
1925, USA – decreasing PIT from 73% to
25%
•
Government revenues
1921: 719 milions USD
1925: 1 bilion USD
•
+redistribution effect
REAGANOMICS
•
Economic Recovery Tax Act of 1981
•
Top marginal rate of tax: 70% ->
31%
•
Revenue:
885 billion (1980)
1,9 trillion (1990)
END