Chapter 16

Chapter 16

CHAPTER 16 Government Spends, Collects, and Owes CHAPTER 16 SECTION 1 Growth in the Size of Government Government Growth The number of government workers and functions has increased dramatically.

The federal government paid for national defense, the salaries of members of congress, federal judges, and employees of executive departments. Government Growth The government also paid for publicworks projects. Public-works Projects: publicly used facilities such as schools and highways built by federal,

state, or local governments with public money The government paid for these things until about 1970 when federal funds diminished and state and local governments began paying for these items. Why Has Government Grown? During the depression, more government services were needed.

Financing World War II caused more government growth. The countrys increasing wealth may have led to demands for evening out inequities through more government services. Why Has Government Grown? Total government purchases represent 18

percent of GDP, and all government spending is more than one-third of GDP. Government spending includes services to the people paid for by their taxes. Why Has Government Grown? The true size of government may be greater than most estimates because of required private sector spending.

Whether the growth of government is good or bad is unknown. Keep in mind opportunity costs and the displacement of private economic decision making. CHAPTER 16 SECTION 2 The Functions of Government

Providing Public Goods Public Goods: goods or services that government supplies to its citizens Public goods can be used by many individuals at the same time without reducing the benefit each person receives. Providing Public Goods

National defense is one of the few public goods only provided by the national government. Different levels of government share responsibility for other types of public goods. The most important public good provided only by the government is a sound system of property rights. Individuals have the right to own factors of

production, risk investments, and discover new ways of production. Providing Public Goods Merit Goods Merit goods are those considered socially desirable by government leaders. Sometimes the government will subsidize merit goods so that all citizens can enjoy them.

Demerit Goods Demerit goods are those considered socially undesirable, and are often taxed, regulated, or prohibited. Redistributing Income Income Redistribution: Government activity that takes income from some people through taxation and uses it to help citizens in need

Groups in need refer to groups including the aged, ill, and the poor. Tax dollars are used to subsidize two general categories of assistance: social insurance programs and public assistance Social Insurance Programs Social Insurance Programs: government programs that pay benefits to retired and disabled workers, their families, and the

unemployed Examples of social insurance programs include Social Security, Medicare, and workers compensation. Social Insurance Programs Social Security: federal program that provides monthly payments to people who are retired or unable to work

Workers Compensation: government program that extends payments for medical care to workers injured on the job Public-Assistance Programs Public-Assistance Programs: government programs that make payments to citizens based on need

Often referred to as welfare Public-Assistance programs include Supplemental Security Income, Temporary Assistance for Needy Families, and Medicaid. Public-Assistance Programs Supplemental Security Income: federal programs that include food stamps and payments to the disables and aged

Temporary Assistance for Needy Families: state-run program that provides assistance and work opportunities to needy families Medicaid: state and federal public-assistance program that helps pay health care costs for low-income and disabled persons Regulating Economic Activity

The government can implement laws to curb the negative side effects of the production process, known as externalities. Externalities: economic side effects or byproducts that affect an uninvolved third party Can be negative or positive Ensuring Economic Stability

Governments try to ensure economic stability by smoothing the ups and downs in the overall economy so that people do not feel the harmful effects of economic shifts. Criticism of Government Involvement Critics feel public goods should be provided by private organizations.

If people pay less tax, they can use that money to choose which goods they want. Redistribution programs discourage personal progress, incentives, and self-development. Government regulations raise the prices of goods and services; seek market solutions instead. CHAPTER 16 SECTION 3 The Federal Budget

and the National Debt The Budget-Making Process The Federal Budget is prepared about 18 months before the fiscal year. The President and the Office of Management and Budget (OMB) work together to outline a budget plan.

The President approves a budget and then submits it to Congress. The Budget-Making Process Congress then examines and discusses the budget, and should pass it before the coming fiscal year. Often the budget is not passed until after the fiscal year has already begun.

The largest category in state and local budgets is education. Other large categories include public assistance, hospitals, health maintenance, and highways. Deficit Spending and the National Debt Budget deficits are created when the

government spends more than its revenues. In order to make up the difference in funds, the government borrows the money, known as deficit funding. The government borrows money by selling securities. Deficit Spending and the National Debt

The national debt is the total amount of money the federal government owes. A budget surplus occurs when the government spends less than its revenues. CHAPTER 16 SECTION 4 Taxation Principles of Taxation

Taxes are usually justified according to one of two major principles. Benefits-received principle states that people who use a service should support it with taxes in proportion to the benefit they receive. Ability-to-pay principle states that people support programs based on their incomes,

not their usage of the programs. Forms of Taxation Actual taxes are classified according to the effect they have on those who are taxed. Proportional taxes are based on a proportion or percentage of a persons income. Progressive taxes are taxes where a person pays a

higher percentage of income in taxes as that income rises. Regressive taxes are taxes where a person pays a lower percentage of income in taxes as that income rises.

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