ECO202
1. Categories of federal revenue
There are three main categories of federal government revenue which include individual income taxes, corporate income taxes, and social insurance taxes. Individual income taxes refer to taxes that are levied upon persons getting interest from bonds, dividends, as well as notes from stocks (Mankiw, 2012). Corporate income taxes refer to those taxes levied on revenue that is generated by a corporation that is filed back at the end of a taxable year to the federal government. On the other hand, social security taxes refer to taxes that are levied on employed individuals by the federal government so as to safeguard their own future social security benefits.
Receipts from individual income taxes account for the largest source of revenue for the federal government, which is about half the entire federal revenue. Social insurance tax receipts are the second largest source of federal revenue (Mankiw, 2012). Over the last 50 years, the composition of federal revenues gained through tax collection has significantly shifted, with a significant growth in individual income taxes but a decline in corporate tax incomes as a share of the total
2. Categories of federal government expenditure
Federal government expenditure are categorized into three major categories, namely: social security, Medicaid and Medicare, and Defense Department expenditures (Mankiw, 2012). Medicare and Medicaid expenditures are used primarily in funding health insurance coverage for elderly citizens aged sixty five and above. On the other hand, social security expenditures are used by the federal government to fund social insurance together with welfare programs. The third category of federal expenditure known as Defense expenditures are used to fund the U.S. Department of Defense to undertake its activities such as military activities and operations. Some of the government expenditures are mandatory expenditures, meaning payments that the federal government is required to have by certain laws. The opposite of mandatory expenditures are termed as discretionary, where their payment amounts are subject to renewal on fiscal year basis as part of budget process ((Mankiw, 2012).
3. Review the Deficit Reduction Proposals
It is projected that the federal government will generate about forty six percent of its entire revenue from the individual income tax category. Payroll taxes, which are paid jointly by employees and their employers, are projected to account for thirty four percent in the fiscal year 2014. Income taxes that are filed back by businesses are projected to account for eleven percent. These three categories of taxes are expected to fund a federal budget of $2.7 trillion in the fiscal year 2013.
The deficit reduction proposals are targeted at four key areas: health care, discretionary programs, inflation measurement mechanisms, and upper-income revenue increases (Mankiw, 2012). Of these, deduction the upper-income revenue increases would be a most effective approach for the federal government to consider, and combine it with a different measure of inflation. Implementing this has the potential to increase federal government revenue by over $800 billion in a period of ten years. In other words, combining the two approaches promises to result in the highest level of returns for the federal government over a short period of time (Mankiw, 2012). It would be unwise for the federal government to consider deficit reductions in funding of both health care programs and discretionary programs because of their greater impact on many Americans across the board. In addition, funding deductions in both health care and discretionary programs would result in less than fifty percent of revenue unlike the other two deficit reduction options.
The main disadvantage of implementing these two deficit reduction reductions is their potential to result in tax hikes so as to better facilitate it. As can be imagined, any tax hikes will strain the tax payers. However, compared to the impact of effecting funding cuts on the key health programs along with discretionary programs, the best option at the moment for the federal government in realizing deficit reduction would be on upper-income revenues increases.
4. Economic Recovery and Unemployment rate
In the short term, the correlation between unemployment rate and economic growth may be a loose one. This is especially because unemployment rate can continue to show sustained decline for some time following the implementation of broad positive measures of the economy. That is why it is commonly termed as a lagging economic indicator (Bivens et al, 2013). A reason why unemployment rate may remain high even when the economy growth has picked up in the wake of a recession is that some companies may have many underutilized employees on their payrolls so as to avoid the costly exercise of laying them off when product demand is low and rehiring them immediately when product demand increases. Employment will only rise when there is growth in real gross domestic product that exceeds growth in labor productivity.
The answer to economic growth and faster reduction of unemployment rate in the U.S. would only come when the fiscal policy and monetary policy and politics are aligned to be more consistent and functional (Bivens et al, 2013). The government and the Congress need to make concerted efforts so as to install efforts designed to spur economic growth, create more jobs as well as strengthen the safety net. More aggressive reorientation of the fiscal policy on the part of the federal government is needed to realize full employment. This would include such measures as deficit-financed federal spending to end the shortfall in aggregate demand by funding economic stimulus of about an extra $650 billion in the fiscal year 2013 and between $1.5 trillion and $2.2 trillion in the course of the next three years (Bivens et al, 2013). This way, the U.S. government would be able to guarantee that decades of increasing income as well as living standards would not be needlessly forfeited.
5. Aggregate demand and Aggregate supply
Aggregate Demand (AD) is the total demand for goods and service in an economy over a particular period of time and price level. Conversely, Aggregate Supply (AS) is the total supply of goods and services in the economy over a particular period of time and price level. The aggregate demand curves shifts downward toward right to imply consumers are demand more goods and services with decrease in prices, while the aggregate supply curve shifts upward toward right to denote increased supply of goods and services by businesses with increase in prices. Finally, a point is reached when all resources are fully utilized i.e. when there is full employment. An increase in prices at this point has effect on production (aggregate demand is vertical to X axis).The economy is said to be in equilibrium when the aggregate demand is equivalent to aggregate supply – which is at point Y, income level. At this point, the investment is equal to saving. Greater aggregate demand than aggregate supply implies greater investment than saving, and the net injection to circular flow will be greater compared to the leakage.
B. In the United States, deficit reduction refers to spending, taxation, and economic policies meant to reduce the federal budget deficit. The budget deficit results from expenditures that are more than federal tax collection during a certain period, necessitating borrowing so as to fund the difference. The federal government can strive to reduce its deficit through a number of strategies including promoting economic growth and employment, making equitable trade-offs, keeping both long- and short-term issues into perspective, avoiding or limiting future spending increases, investing productively, avoiding unnecessary regulation and uncertainty, and implementing budget process reforms.
A decision by the federal government to reduce its budget deficit by reducing spending, all other factors remaining constant, would result in reduced aggregate demand. This is primarily as a result of reduced government demand for goods and services. However, reducing budget deficit by effecting reductions in government expenditures often affect the economy in a manner that complicates the process of reducing the deficit itself. Cutting federal spending tends to reduce aggregate output, which in turn may result in increased deficit. For instance, a federal spending cut of about $20 billion has the potential of reducing the deficit by not more than $20 billion where the aggregate output falls significantly due to government spending cuts.
C. In the United States, consumer spending is estimated to account for 2/3 of GDP, meaning that consumption is in fact the largest component of AD. If American consumer decided to cut on their spending on products and services so as to use the money in reducing their credit card debt, the aggregate demand curve would shift let i.e. a decrease in aggregate demand. This is because a decrease in consumer spending results in decrease in the quantity of goods and services demanded at every price level.
Similarly, a reduction in consumer spending would cause the aggregate supply to decrease. This is because many businesses will be unwilling to offer more goods and services because of the consumers’ less demand of the offering at any price levels.
D. “Cash for Crunkers” Car Program
The Car Allowance Rebate System (CARS), commonly known as the “cash for crunkers” program was a U.S. government scrappage program launched in July 2009 designed to provide economic incentives to American people to purchase new, more fuel-efficient vehicle by trading in their less fuel-efficient vehicles (Brux, 2011). The rationale of the program was to providing stimulus to the U.S. economy at a time when aggregate demand was ineffectively low through boosting auto sales while at the same time introducing safer and more fuel-efficient vehicles. The CARS program artificially raised the income of consumers, making them more apt of spending money on the vehicles. As a result, the aggregate demand curve shifted to the right, denoting an increase in aggregate demand. As the aggregate demand shifted to the right, the aggregate supply curve also shifted to the right to imply an increase in aggregate supply. The demand-side inspired the increase in demand of more fuel-efficient automobiles in the United States as well increase in supply of the same (Brux, 2011).
The resultant increase in aggregate supply was particularly beneficial to automobile manufacturers that laying off workers or shutting down. The increased aggregate demand as a result of government intervention resulted in “demand-pull” inflation in the United States (Brux, 2011). It significantly decreased unemployment as more firms in the targeted automobile industry generated more funds to pay workers as well as their increased labor demand to match the increased demand.
References:
Bivens, J., Fieldhouse, A., & Shierholz, H. (2013). From free-fall to stagnation. Retrieved from: http://www.epi.org/publication/bp355-five-years-after-start-of-great-recession/
Brux, J. M. (2011). Economic issues and policy. Mason, OH: South-Western Cengage Learning.
Mankiw, N. G. (2012). Principles of macroeconomics. Mason, OH: South-Western Cengage Learning.
