Economics: Today and Tomorrow © 2012

Chapter 16: Government Spends, Collects, and Owes

Chapter Overviews

Section 1: Growth in the Size of Government
Government spending at all levels—federal, state, and local—has increased significantly over the years. The level of government spending reflects political decisions about how much goods and services should be provided by the public or private sectors. Although no one can know how much spending is good for society, a general rule is that government spending has opportunity costs.

Section 2: The Functions of Government
The general purpose of government is to protect individual rights, to promote a stable legal environment for economic activity, and to promote policies that support the well-being of citizens. Public goods are a special type of goods and services that government supplies to all citizens. Government can promote the well-being of citizens by redistributing income with social-insurance and public-assistance programs. Other functions of government involve regulating economic activity. Many people criticize government involvement in the economy and think that market solutions are better than government involvement.

Section 3: The Federal Budget and the National Debt
Congress and the president work together to prepare an annual budget showing federal expenditures and revenues for the year. Most years, the government spends more than it collects in taxes, causing a budget deficit. The budget deficit is the amount that the government borrows for a given year. The national debt is the total amount of debt for the federal government. Each year’s budget deficit adds to the national debt.

Section 4: Taxation
All levels of government use taxes to raise revenue. Taxes are usually justified by either the benefits-received principle or the ability-to-pay principle. Taxes may be classified depending on the effect they have on those who are taxed. Classifications are regressive, progressive, or proportional, depending on whether the tax as a percentage of income increases, declines, or stays the same as income increases.