Chapter 11 government taxing and spending


НазваниеChapter 11 government taxing and spending
Дата публикации14.06.2013
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CHAPTER 11

GOVERNMENT TAXING AND SPENDING


  1. Key terms – matching and translation.

Read aloud the key term and its definition so that they make up a single sentence. (Remember about the agreement between the subject and the predicate!). Translate the sentences you have arrived at from English into Russian.

1 fiscal policy

  1. Deliberate changes in spending and taxes for stabilization policy.

2 fiscal drag

  1. Retards growth in Aggregate Expenditures

3 automatic stabilizers

  1. Examples of nondiscretionary fiscal policy

4 balanced budget multiplier

  1. Always equals one.

5 discretionary fiscal policy

  1. The use of government spending and tax policies to stimulate or contract economic activity to offset cyclical fluctuations.

6 Laffer curve

  1. Higher tax rates may either raise or lower government revenues.

7 high tax rates

  1. Keynesians see as dampening spending, while new classical economists emphasize the destructive effects of production incentives.

8 government spending and transfers

  1. - (MPC/MPS).




9 structural deficit

  1. Keynesians perceive as bolstering spending, but new classical economists worry about disincentive effects on production.

10 autonomous tax multiplier

  1. Occurs if the economy has excessive idle capacity.




11 cyclical deficit

  1. Tax revenues minus government outlays if the economy were producing at its capacity.


^ 2 Text translation.

Translate the text from English into Russian in writing paying particular attention to the translation of the economic terms in bold as well as words and phrases relevant to the subject of the text. Read out your translation in class and introduce the necessary corrections.

^ GOVERNMENT TAXING AND SPENDING

Chapter Objectives

After you have read and studied this chapter you should be able to differentiate between discretionary automatic fiscal policy; explain how the autonomous spending, tax, and balanced-budget multipliers operate; distinguish between structural and cyclical deficits; and identify differences between Keynesian and new classical economic fiscal policies.
^ Chapter Review: Key Points

  1. Keynesian fiscal policy is the use of federal spending and tax policies to stimulate or contract Aggregate Spending and economic activity to offset cyclical fluctuations. Classical (supply-side) fiscal policies rely on low tax rates and minimal government spending to allow Aggregate Supply to grow.

  2. Discretionary fiscal policy consists of deliberate changes in federal government spending and taxation for stabilization purposes. Without congressional action automatic stabilizers such as corporate and personal income taxes and various transfer programs cause changes in spending and taxation as economic conditions change.

  3. Increases in government spending increase Aggregate Expenditure and National Income through the multiplier process in the same way as changes in investment or autonomous consumer spending.

  4. Changes in net tax revenues (tax revenues minus transfer payments) affect Aggregate Spending differently than changes in government spending. Changes in net taxes directly affect disposable income and, therefore, saving. These effects are transmitted into spending through the autonomous tax multiplier (∆Y/∆T = 1 - 1/mps), which is weaker than the spending multiplier.

  5. In a Keynesian depression, the balanced-budget multiplier equals one, suggesting that equal increases (decreases) in government spending and taxes will increase (decrease) Aggregate Spending and equilibrium income by an equal amount. This result follows from the fact that the autonomous tax multiplier is one minus the autonomous spending multiplier.

  6. Automatic stabilizers tend to cushion the economy. When income fails, automatic stabilizers keep the level of disposable income from falling as rapidly as income. Our progressive income tax causes tax collections to fall proportionally faster when income is falling and to increase proportionally faster when income is rising.

  7. Built-in stabilizers can pose the problem of fiscal drug. When potential income is rising, automatic stabilizers brake the economy and slow the rate of growth.

  8. The structural deficit is an estimate of the deficit that would be generated at full employment under existing tax and expenditure structures. This is a way to estimate the expansionary or contractionary influence of any tax and expenditure mix.

  9. The cyclical deficit is attributable to business conditions. As unemployment grows, the cyclical deficit grows, and vice versa.

  10. The Laffer curve indicates that high tax rates may impose such large disincentives to productive effort that Aggregate Supply and tax revenues are both restricted.

  11. Marginal tax rates are the percentage taxes applied to small gains in additional income.


^ 3 Vocabulary practice: switching.

Get ready for an oral (written) translation exercise based on the economic terms in bold, as well as other relevant words and phrases from the text.

При полной занятости; autonomous consumer spending; при существующей структуре налогообложения;existing expenditure structures; любое сочетание структуры налогов и потребления; expansionary influence; относимый на счёт ч-л; to tend to cushion the economy; деловая конъюнктура; the Laffer curve; to impose disincentives on sth; tax revenues; отрицательный стимул; marginal tax rate; small gains in income; autonomous spending; функционировать; contractionary influence; federal tax policy; сокращать расходы; balanced budget multiplier; экономическая деятельность; to offset fluctuations; финансовая политика со стороны предложения; federal spending policy; минимальные государственные расходы; disposable income; дискреционная финансовая политика; structural deficit; налогообложение; autonomous tax multiplier; in a Keynesian depression; равняться единице; equilibrium income; следовать из ч-л; autonomous stabilizer; progressive income tax; взимание налогов (сумма налоговых поступлений); to fall proportionally faster; built-in stabilizer; ставить задачу; fiscal drag; тормозить развитие экономики; to increase sth through the multiplier process; замедлить темпы роста; percentage tax; cyclical deficit; в целях стабилизации; congressional action; автоматический стабилизатор; low tax rates; налог на прибыль корпораций; transfer program; подоходный налог с физических лиц; net tax revenues; воздействие; to transmit sth into spending.
4 Translation from page.

Translate from page the passage expanding on the subject of the text.

^ DOES TAXATION HAVE A NATURAL LIMIT?

An advisor to an Egyptian pharaoh is credited with first observing that high tax rates may hinder incentives to work and investment, reducing actual tax revenues. Joseph Schumpeter, while serving as Finance Minister in Austria during the 1920s, proposed an economic “law” that taxpayer resistance precluded any government from collecting taxes of more than 27% or so of people’s income. He may have been close to being right.

Arthur Laffer, a celebrated supply-sider, explained this concept to a journalist at a Washington, D.C. restaurant, and sketched on a napkin what has become known as the Laffer curve: very low tax rates might be raised to yield higher tax revenue, but raising tax rates excessively eventually drives tax revenues down when taxpayers decide either (a) that the extra effort necessary to generate extra taxable in­come is not worth it or (b) that cheating the tax system is okay.

If Uncle Sam's bite is too fierce, many taxpayers will prefer leisure over additional work and will consume immediately from income instead of saving and investing. And tax evasion may divert more activities into the underground economy.

Supply-siders argue that high tax rates are disincentives to produce, so that income shrinks as tax rates climb. This means that the same tax revenues might be generated by both a high tax rate and a low one. Marginal tax rates are the percentage taxes on small amounts of extra income.

Marginal tax rates that average ei­ther 15% or 75% yield tax revenues of $500 bil­lion, while marginal tax rates that average X percent yields $ 1 trillion to the tax collector. Any increase in marginal tax rates over X percent ac­tually shrinks tax collections.

How will people react if high marginal tax rates reduce the gains from working, saving, and investing? Potential workers may adjust to high tax rates with more non-market activities, such as do-it-yourself projects. Potential savers and investors will realize less interest income if mar­ginal tax rates are high, so they will consume more currently, forgoing future consumption.

Evidence of this sort of behavior was pro­vided when wealthy people in Britain splurged on furs, Rolls-Royces, and other luxuries in the 1970s when marginal income tax rates peaked at 99%. Investing was not worthwhile because of rapid inflation and the staggering tax rates on investment income. The British economy stag­nated in the 1960s and 1970s, while areas of London where high society gathered abounded with conspicuous consumption of luxury goods.

Some analysts argue that the United States operates close to the peak of the Laffer curve and favor reducing tax rates to ease disincen­tives against work and investment. They fear that tax hikes to slice recent deficits may restrict economic growth and squelch tax revenues. Ronald Reagan, a major convert to supply-side economics, persuaded Congress to cut marginal tax rates by an average of 25% between 1981 and 1983. Results? Between 1980 and 1994, the economy grew by 134%, while federal tax rev­enues grew 145%. But budget deficits grew be­cause politicians failed to control federal outlays, which expanded 152%. 2631 digits

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