discretionary fiscal policy
Changes in taxes or spending
that are the result of deliberate
changes in government policy.
For example, tax rates are controlled by the government. By law, Congress has the authority
to decide who and what should be taxed and at what rate. Tax revenue, on the other hand, is not
subject to complete control by the government. Revenue from the personal income tax system
depends on personal tax rates (which Congress sets) and on the income of the household sector
(which depends on many factors not under direct government control, such as how much house-
holds decide to work). Revenue from the corporate profits tax depends on both corporate profits
tax rates and the size of corporate profits. The government controls corporate tax rates but not
the size of corporate profits.
Some government spending also depends on government decisions and on the state of the
economy. For example, in the United States, the unemployment insurance program pays benefits
to unemployed people. When the economy goes into a recession, the number of unemployed
workers increases and so does the level of government unemployment insurance payments.
Because taxes and spending often go up or down in response to changes in the economy
instead of as the result of deliberate decisions by policy makers, we will occasionally use
discretionary fiscal policy to refer to changes in taxes or spending that are the result of deliber-
ate changes in government policy.