A system of free enterprise is characterized by individual and private control of capital. Private businesses interact within a competitive system which operates outside the control of government. Socialism is characterized by state ownership or control of some industries while other, typically smaller, companies are owned privately. Communism is characterized by complete state control of all all industry and property. Communism differs from socialism in a few key ways. One difference is that private ownership of businesses still exists under socialism. Communism is both an economic and political system in which the state makes all decisions. A Marxist system differs from the U.S system in many ways. The United States has a system of free enterprise which vastly differs from a Marxist system of complete state control. The U.S also has free elections and private healthcare which also do not exist under a Marxist system.

The United States has a mixed economy because some industries are run by the state and there is government regulation of other industries. Public education, the postal service, water systems, the power system, waste and recycling programs, and mass transit are all run by the state. Modern socialist states are also mixed economies because there is both private and state run businesses. This differs from the United States because the government is far more involved both socially and economically in these systems. While the United States government may have regulations in place for various industries, one would not find the same degree of full state ownership of industry.

Fiscal policy is the government’s policy on taxing and spending while monetary policy is that which regulates the actual amount of money in circulation and how much credit is available. Fiscal policies influence the economy at the state and local level because taxation has a large impact on all citizens. Increased government spending can have a positive economic impact. At the federal level, GDP is heavily influenced by federal spending as 20% of GDP is federal spending. Monetary policies, as determined by the Federal Reserve, impact how much money is in circulation. This has a large impact at both the state and federal levels. Too little money in circulation can cause a panic which drives people to take their money out of the bank. Too much money in circulation reduces its value and causes inflation.

The Federal Government regulates the economy in order to provide the best working and economic conditions for its citizens. Some regulatory agencies that work toward this goal are: The Federal Reserve, the Securities and Exchange Commission (SEC), and The Department of Labor. The Federal Reserve affects the economy at all levels by their manipulation of interest rate used by banks loaning funds to other banks. This is called the federal funds rate and will cause a change in the amount of available money in the economy. If interest rates increase one would expect to see the economy contract. If rates go down, the economy should expand. The SEC is charged with regulating the stock market and prevent abuses. The Department of Labor has a variety of offices which assist in economic regulation. The Bureau of Labor and Statistics is responsible for calculating rates of unemployment. OSHA sets regulations for businesses to follow that aim to decrease work place death and injury. The combined efforts of these regulatory agencies influence the economy at all levels. Interest rates affect all Americans. The stock market has a large impact on individual wealth and businesses.

The Sherman Anti-Trust Act was passed by Congress in 1890 and sought to prevent monopolies and promote innovation and entrepreneurship. This act gave Congress the power to break up monopolies or prevent mergers with the goal of maintaining a competitive open market. The constitutional basis for this act was the Commerce Clause of Article I Section 8 of the Constitution. Other constitutional protections to foster competition are also found in Article I Section 8 which empowers Congress to, “regulate commerce with foreign nations, and among the several states, and with the Indian tribes; To establish a uniform rule of naturalization, and uniform laws on the subject of bankruptcies throughout the United States; To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures; To provide for the punishment of counterfeiting the securities and current coin of the United States”

Government regulations aim to protect the consumer and workers. However, these regulations can make conducting business more complicated and expensive. The extensive safety testing required for new products may prevent some new businesses from even getting started. The licenses required to open a business can also be expensive and time consuming. The cost of complying with regulations may decrease profits. Local regulations can affect businesses through zoning laws which restrict where a business can open. The environmental protections in place by the EPA also restrict the manner in which some businesses can conduct themselves.

The Servicemen’s Readjustment Act of 1944 (GI Bill) was legislation that aided returning veterans with attending college, buying a house, and other activities that would help them adjust to life back at home after the war. The GI Bill affected the U.S economy because returning veterans were buying houses and attending college in large numbers. More veterans with college degrees were set up for higher earnings throughout their lives. The GI Bill also caused a cultural change regarding the type of person who attended college. Changing the mindset from “college is only for the privileged” to making college accessible to more people.

The **primary source of government revenue comes from taxes**. There are different tax revenue, and they include income taxes, excise taxes, sales taxes, property taxes, payroll, and more.

**Income taxes** are taxes levied from the incomes charged on federal, state, and local levels.
**Sales taxes** are taxes levied from the services and goods.
**Excise taxes** usually combine with sales taxes for a single purchase. They are mainly levied on activities, goods, and services, for example, cigarettes, alcohol, and gasoline.
**Property taxes** are property-based taxes – a tax on a car or real estate.
**Payroll taxes** are taxes levied on employers and employees. They represent social security taxes.
**Gift taxes** are taxes on received gifts and transactions. They are taxed if a gift price is higher than 14 thousand USD.
**Estate taxes** are taxes levied on everything that is estate-related; they contain inheritance taxation.

The federal government also has revenue from the **interest**rates on borrowed money, loans, **fees for particular services**, **seigniorage** (coining money), and **postal service**.

The most significant federal revenues are **taxes**. Paying taxes is the duty of citizens, and in the end all taxes are paid by those, even those who do not seem to be individual in the first place.

**Corporate income tax** are taxes paid by each company in relation to its net income. Net income represents the difference between total earnings and operating expenses.

When calculating these taxes, various deductions are allowed. Some non-profit organizations such as charitable foundations are exempt from paying these taxes.

The government determines and conducts fiscal policy, which is actually the use of taxes to influence the economy. Through fiscal policy, the government affects revenues and consumption and thus directly affects companies.

Each company pays taxes at several levels: local, state and federal. Local and State taxation should be in line with federal fiscal policy.

If the government decides to pursue an expansive tax policy, it will reduce taxes and thus enable a larger mass of money in circulation. Because they pay lower taxes, citizens have more money to spend that they use to buy goods and services. In this way, companies increase their turnover and revenues. Increasing demand for goods and services can force companies to create new jobs and increase the number of employees, which also leads to economic growth.

However, if the government decides to pursue a contractionary financial policy due to a certain economic situation, it increases taxes. This means that there is much less money in circulation, that citizens buy less goods and services. In these cases, there is a decline in economic activity, which negatively affects the company’s operations.

In addition to fiscal policy, the government can influence companies through **subsidies and tariffs.**

If the state considers that there are some companies that deal with vital business important for the whole economy, it can decide to subsidize such companies. From the taxes collected from all citizens, certain revenues are allocated, which are subsidized to certain companies. In this way, subsidized companies have preferential treatment by the government over others.

Tariffs are taxes that the government applies to imported products. They are applied in order to increase the final price of foreign products, in order to make domestic ones more competitive. In this way, the government protects domestic companies and puts foreign companies at a disadvantage.

Franklin Roosevelt was President of the United States from 1933-1945. The New Deal was a series of government programs designed to jump start the economy and end the Great Depression. President Roosevelt supported the New Deal because he believed that government had a role and obligation to use government spending to create jobs and opportunities. This was based on the economic theories of John Maynard Keynes and his work, The General Theory of Employment , Interest , and Money. The New Deal and President Roosevelt’s view continue to influence government today. He was the first to heavily involve government in economic issues. President Obama’s 2009 economic stimulus plan mirrored FDR’s policies and role of the government to intercede in times of economic downturns.

The congressional committees most directly involved in creating the budget are the House and Senate Budget Committees, House Ways and Means Committee, Senate Finance Committee, and the House and Senate Appropriations Committees. The two Budget Committees review the President’s budget request with help from the staff agency the Congressional Budget Office (CBO). The two Appropriation Committees hold hearings to discuses various aspects of the proposed budget. After the Appropriation Committees have modified the spending bill, it goes to the Budget Committees and is then presented as a concurrent resolution to both houses.

Fiscal Policy is the policy of government regarding taxing and spending. Fiscal policy and domestic policy are related because all domestic policies rely on tax dollars for funding. If a government cuts taxes as an aspect of their fiscal policy, there will be less money available for domestic programs. Taxes are an important part of the federal government because all actions of government require revenue. Without taxes, the work of government could not be carried out.

The purpose of taxes is to provide revenue that funds the Federal Government. Supreme Court Justice Oliver Wendell Holmes Jr said, “Taxes are the price we pay for a civilized society.” Taxes are a responsibility of citizenship because the federal government could not function without them. It is tax dollars that make the water run, the streetlights work, our food safe to eat, our schools available to children, our military able to provide protection, and a myriad of other benefits.

Canada and Mexico are important trading partners partially because they share significant borders with the United States. In 2012 Canada was the United States’ largest trading partner while Mexico was the 3rd largest trading partner. The strength of these relationships is also due to the North American Free Trade Agreement (NAFTA). NAFTA sought to remove barriers to trade like tariffs and establish free trade among the U.S, Canada, and Mexico. Other factors that influence U.S trade partnerships include foreign relations with the trading partner and the supply and demand of available goods from each country.

The federal budget of the United States has its own **revenues** and **expenditures**.

**Revenues** mainly consist of taxes, fees and other incomes from the economy. The highest tax revenues are taxes on income and salaries.

On the other hand, the **expenditure** side of the budget is quite diverse. Budget expenditures, which are determined once a year, tell us about the government’s priorities.

Budget spending can be divided into three main categories:

**1. Mandatory**

**2. Discretionary**

**3. Interest**

**The Mandatory category** includes spending on programs that are determined by the provisions of the law. Governments have no influence on spending funds for mandatory purposes – they cannot decide not to spend on what is marked as mandatory by the law. The only way to change mandatory spending is to change the laws that govern it.

What governments can change are the criteria for determining whether someone is a beneficiary of mandatory benefits and thus try to increase or decrease the number of beneficiaries and thus affect the total amount of mandatory benefits. There is a trend of increasing these benefits in the United States.

In the case of mandatory spending, the law determines who is entitled to certain benefits, according to which criteria and to what extent, and the government is obliged to provide funds for all who are subject to the criterion.

There is no fixed amount determined by law that divides it into users, the law only defines users, criteria and levels of benefits. The amount of total benefits that the government must provide depends on the number of beneficiaries in the current year.

Mandatory expenditures can be divided according to the main areas covered:

**1. Major health programs**
– **Medicare** (seniors and disabled people)
– **Medicaid** (low-income people)
– **Health insurance subsidies** (low-income, moderate-income people
– **Children’s Health Insurance Program** (low-income children, parents)

**2. Social security** (retired workers, workers with disabilities, as well as their spouses and children)

**3. Income security programs**

**4. Federal retirement programs** (federal civilian and military retirees)

**5. Programs for veterans** (pensions, income support and other benefits for those who served in the military)

**Discretionary spending** is determined by Congress and the President once a year. This spending is revised every year in each new budget. There are 12 different documents to be adopted during the year in Congress – **appropriation bills**. Discretionary spending accounts for most of federal spending, but has a declining trend.

Discretionary spending includes:

**1. Defense** – more than half

**2. National security**

**3. Education**

**4. Transport**

**5. Scientific research**

**6. Food safety**

**7. Space programs**

**8. State aid in case of natural disasters**

**9. Environmental protection**

The third main category of expenditures is **interest on the national debt.** Interest rates are low in this case, but have an increasing trend.

Trade embargoes are a complete prohibitions on trade with another country. Trade embargoes are typically used as a part of a greater foreign policy goal. Since the 1960’s the United States has enforced a trade embargo against Cuba as a response to both the nationalization of American companies in Cuba in 1960 and the aligning of Cuba with the Soviet Union in the Cold War.

The North American Free Trade Agreement ( NAFTA) is a trade agreement between the United States, Canada, and Mexico. The agreement came into effect January 1st, 1994 and aimed to remove all tariffs and trade restrictions on goods traded between the three countries. Canada has long been the United States’ number one trading partner. After NAFTA came into effect, Mexico moved up into the second largest trading partner position (although since then China has bumped Mexico back down to third). On the whole NAFTA has had a positive economic impact for all three countries. However, the agreement may have harmed American manufacturing workers as some of those jobs moved out of the country.

An initial look would suggest that the power to regulate trade agreements would lay with Congress. Article I Section 8 gives Congress the power to, “… regulate commerce with foreign nations”. However, Article II Section 2 of the Constitution empowers the President by stating, “He shall have power, by and with the advice and consent of the Senate, to make treaties, provided two thirds of the Senators present concur.” Throughout the 20th Century Congress continually ceded more power over trade agreements to the President through passing legislation delegating these powers. In the present day, the President typically negotiates trade deals with foreign countries which Congress then approves.

One of the most important functions of the Federal Government is certainly the implementation of **trade policy**. In this field, government works closely with Congress.

The main goal of trade policy is to ensure that domestic producers and workers are in a more favorable position than foreign ones. This goal needs to be implemented in a way that maintains good relations with the countries from which foreign capital comes.

This type of international trade policy is called **protectionism** and many countries choose to apply it. The application of the protectionist method controls the import of capital in order to protect the domestic one.

The basic tools used by the government are **tariffs, import quotas, and trade embargoes.**

**The tariff** is a tax on imported goods – the more important a product is for the state, the higher the taxes on its import. Through these taxes, additional levies are imposed on foreign goods, which lead to an increase in the final price, so domestic products are cheaper.

**Import quotas** are quantity restrictions on imports of certain goods and are often used to restrict imports of basic foodstuffs such as milk and sugar.

**Embargo and sanctions** are aggressive methods that are less often used in order to achieve economic interest, and more often as a tool of political pressure.

One country may, in spite of restrictions, promote and expand cooperation with other countries in respect of trade. Very often they form international trade alliances that bring economic benefits to all members.

One of the most important agreements of this type for the United States is **The North American Free Trade Agreement – NAFTA.** This agreement was concluded in 1994 between the United States, Canada and Mexico. Its goal was to create a free trade zone between these countries and it brought many economic benefits to the signatories.

The most important government agencies involved in trade policy are the **Department of Commerce** and the **International Trade Commission.**

Fiscal policy determines how the government raises and then spends money. Fiscal policy influences the economy through the effects of both levels of taxation and government spending. Throughout the 20th century, starting with President Roosevelt, Presidents have used domestic spending during times of economic hardship to jump start the economy. The Council of Economic Advisers, an Executive Branch agency, sets recommendations based on current economic conditions. These recommendations are woven into the President’s budget request and then taken into account when Congress creates the budget.

One of the basic functions of the government of any state is to provide the general welfare to its citizens. To that end, the government pursues economic policy and tries to positively influence economic growth that will improve the quality of life of citizens. Given the great power that the state possesses, the question remains as to what exactly the role of government in a country’s economy should be.

There are two basic economic arrangements that determine the role of the state in the economy:

**1. Capitalism**

**2. Socialism**

**Capitalism** is an economic system based on the idea of ​​a free market in which the economic function of the state is very limited. Within this system, the means of production are privately owned, and investments, production and placement of goods and services take place according to the laws of the free market. The exchange of goods and services is realized on the basis of a voluntary agreement between the seller and the buyer.

In contrast to capitalism, **socialism** implies the great role of government in the economy of a country. Under socialism, there is mostly social ownership of the means of production, and the government largely decides on the production and placement of goods and services. There are also extreme versions of socialism, such as the **command or planned** economy, which implies that the government completely determines investments, production and allocation of capital in its plans. These systems existed in the former Soviet republics, which were strictly centrally organized countries and in which the government regulated almost all aspects of an individual’s life.

Proponents of capitalism believe that the only way for the economy to be successful is for the market to be free and for processes to take place without government intervention, which should only set some legal frameworks to protect participants from potential abuse.

On the other hand, the supporters of socialism believe that capitalism only leads to an increase in the wealth of the already wealthy and that in it only the processes are only seemingly regulated by the invisible hand of the market. They believe that in fact the owners of big capital decide on everything and that the system is unfair to the majority of citizens. For this reason, they believe that the government should play an active role in economic processes in order to protect rights and give opportunities to the working class, which is separated from big capital and can only offer its work.

Proponents of capitalism believe that state intervention is not fair, that everyone is equal in the free market, and that a free game should be allowed in which the most successful will achieve the deserved greatest benefits.

History has shown us that both economic systems face numerous challenges, but countries with a capitalist economic system in defiance have achieved greater economic growth and success.

The ideal economic system does not exist, but the most successful ones have managed to find the right balance between the free market and the protection of certain social groups that, for objective reasons, have disadvantages in such an environment.

The United States is a capitalist system. The Framers of the Constitution wanted to ensure the political and economic freedoms of the people, and to that end they foresaw a very limited role of the government in economic processes. The constitution provides for a market economy in which economic decisions are not made by the government, but by individuals – buyers and sellers.

Over time, there have been major changes in the economy and society, and the role of government has changed – its activities and functions have increased.

In market economy, the government has certain functions:

**1. Provides the legal and social framework of economic processes**

**2. Provides public goods and services**

**3. Redistributes income**

**4. Maintains competition**

**5. Stabilizes the economy**

The government performs these functions in order to achieve its goals:

**1. Economic growth**

**2. Price stability**

**3. Full employment**

**4. Reduction of national debt**

**5. Environmental protection**

**6. Reduction of market failures**

In order to achieve its goals, the government adopts and implements **fiscal policy, monetary policy, supply-side policy, tax policy, etc.**