Roles of Government in our Economy
- To safeguard the market system
- To provide public goods and services
- Deal with externalities
- Assist those in need
- Stabilize the economy
How does the government safeguard the market system?
- They establish and enforce the rules of the game
- They provide the public with information about market conditions and the state of the economy
- They help settle disputes
What are examples of public goods and services that the government provides?
- National defense
- Schools
- Roads
- Law and order
How does the government deal with externalities (pollution)?
- Persuasion
- Taxation
- Subsidies
- Regulation
How does the government assist those in need?
Transfer payments (entitlement programs)
Transfer payments (entitlement programs)
Money paid directly to the individual for which no goods or services are produced
How does the government stabilize the economy?
They control the interest rate
What three levels does the government conduct on?
- Local
- State
- National
Types of Government Budget
- Balanced budget (spending same as gaining)
- Surplus (gaining more than spending)
- Deficit (spending more than gaining)
How does government spend money?
- Direct benefit payments to individuals
- National defense
- Net interest
- Grants to the states
Grants-in-aids
Lots of conditions
Block Grants
Less conditions
State spends money where they see fit
Where does the federal government get its money?
- Personal income tax
- Taxes on corporations
- Excise tax
- Social insurance receipts
- Estate and gift taxes
- Customs duties (tariffs, tax on imported goods)
- Bonds
Excise tax
Tax on manufacture and sale of certain items
Where do states and local governments get their money?
- Sales tax
- Income tax
- Property tax
- Federal aid
- Lottery
What is the state and local governments highest expense?
Education
Why does the government collect taxes?
- To pay the cost of government
- To protect selective industry (protective tariff)
- To discourage activities that the government believes is harmful
- To encourage activities
- To regulate the level of economic activity
Three most important questions regarding taxes
- Who should pay?
- What types of taxes should be collected?
- Who will actually pay the taxes?
Benefits Received Principle
Belief that those who benefit from a government program, are the ones who should pay for that program
Ability to Pay Principle
Belief that taxes should be paid by those who can most afford them
Progressive Tax
Taxes a larger percentage of a higher income and a smaller percentage of a lower income
Proportional Tax
Takes the same percentage of all income
Regressive Tax
Takes a higher percentage from low income than from high income people
(Example: Sales tax)
Tax Incidents
The individual or business that will bare the burden of a tax
