Federal Revenue and Borrowing

LO 14.1: Describe the sources of funding for the federal government and assess the consequences of tax expenditures and borrowing.

Federal Expenditures

LO 14.2: Analyze federal expenditures and the growth of the budget.

The Budgetary Process

LO 14.3: Outline the budgetary process and explain the role that politics plays.

Understanding Budgeting

LO 14.4: Assess the impact of democratic politics on budgetary growth and of the budget on scope of government.

Federal Revenue and Borrowing

Budget

A policy document allocating burdens (taxes) and benefits (expenditures).

Deficit

Excess of federal ______over federal revenues.

Total debt will be about $15 trillion by 2011.

Expenditures

Government spending – Major areas are social services and national ______.

Revenues

Financial resources of the government – Individual income tax and Social Security ______are two major sources.

Personal and Corporate Income Tax

Income tax – Shares of individual ______and corporate revenues collected by the government.

Sixteenth Amendment – Explicitly authorized Congress to levy a tax on ______.

Social Insurance Taxes

Both employers and ______pay Social Security and Medicare taxes.

In 2010, employees and employers each paid a Social Security tax equal to 6.2 percent of the first $106,800 of earnings, and for ______they paid another 1.45 percent on all earnings.

Borrowing

Treasury Department sells______when the federal government wants to borrow money.

Federal debt – All the money______by the federal government over the years and still outstanding.

Today the federal debt is about $18 trillion.

Taxes and Public Policy

Tax Expenditures – Revenue losses from special ______, exclusions, or deductions allowed by federal tax law.

Tax Reduction – In 2001, tax cut gradually lowered tax rates over the next ten years, and in 2003, Congress reduced the tax rates on capital gains and ______.

Federal Expenditures

Big Governments, Big Budgets

Big budgets are necessary to pay for big______.

National, state, and local government spend an amount equal to one-third of the gross domestic product ______

National government’s spending alone currently represent about ______of the GDP.

The Rise of the National Security State

In the 1950s and 1960s the Department of Defense received more than ______of federal budget.

Defense now gets about ______of all federal expenditures.

This is one reason for growth of government.

The Rise of the Social Service State

The biggest federal spender is now income ______programs.

______is #1 spender, now it includes disability benefits and Medicare, and its recipients are living longer.

This is another reason for government growth.

Incrementalism

A description of the budget process where the best predictor of this year’s budget is ______budget, plus a little bit more (an increment).

According to Aaron Wildavsky, “Most of the budget is a product of ______decisions.”

Policymakers focus little attention on the ______base.

Agencies can safely assume they will get ______the budget they had the previous year.

Most of the debate and attention is on the ______increment.

Any given agency’s budget ______to grow a little bit every year.

“Uncontrollable” Expenditures

Expenditures determined by how many ______beneficiaries there are for a program or by previous obligations of the government and that Congress therefore cannot easily control.

Social Security benefits are an example of ______expenditures.

Entitlements – Policies for which Congress has ______itself to pay X level of benefits to Y number of recipients.

Social Security benefits are an example of ______.

The Budgetary Process

Budgetary Politics

Stakes and Strategies – Every political actor has a ______in the budget.

Think of budgetary politics as a game in which players adopt various strategies.

There are plenty of players in the ______politics game, and they have their own strategies.

The Players – Interest groups lobby for their needs; agencies push for higher budget requests; Office of Management and Budget ______) prepares the president’s budget; and the president makes the final decisions on what to propose to Congress.

The Players – Tax committees in Congress write the tax codes; Budget Committees and the Congressional Budget Office (CBO) set the ______of the congressional budget process; and subject-matter committees write new laws, which require new expenditures.

The Players – Appropriations Committees decide who gets what and their subcommittees hold hearings on agencies’ requests; Congress as a whole approves taxes and appropriations; and the ______Accountability Office (GAO) audits, monitors, and evaluates what agencies are doing with their budgets.

The President’s Budget

Budget and Accounting Act ______requires presidents to propose an executive budget to Congress and created the Bureau of the Budget to help them.

In the 1970s, President Nixon reorganized the Bureau of the Budget and renamed it the Office of Management and Budget ______

______– Budget policy developed.

______– Budget decisions conveyed to agencies.

______– Estimates reviewed.

______– President’s budget determined and submitted.

Congress and the Budget

Congressional Budget and Impoundment ______was designed to reform the congressional budgetary process.

It established a fixed budget calendar; a budget ______in each house; and a congressional budget office.

______– To advise Congress on the probable consequences of its decisions and to forecast revenues.

______– A resolution binding Congress to a total expenditure level, supposedly the bottom line of all federal spending for all programs.

______– How program authorizations are revised to achieve required savings.

______– Establish, continue, or change programs.

______– Funds programs established by the authorization bills.

Budgets were in red every year between 1974 reforms and 1998.

______– Allow agencies to spend at last year’s level when Congress can not pass appropriations bills on time.

______– Appropriations bills all together in one bill and not 13 appropriations bills.

The 1974 reforms have helped Congress view the entire budget early in the process.

The problem is not so much the procedure as disagreement over how scarce resources should be spent.

Understanding Budgeting.

Democracy and Budgeting

Many politicians spend money to buy votes.

______– Many groups and people ask for government assistance.

People like government programs, but they really do not want to pay for them, thus there are ______and federal debt.

The Budget and the Scope of Government

The size of budget is the scope of government.

The bigger the government, the bigger the budget.

Limits on revenues can limit what the government can do.

LO 14.1SummaryFederal Revenue and Borrowing

The personal income tax is the largest source of revenue for the federal government, with social insurance taxes a close second.

Other revenue comes from the corporate income tax and excise taxes.

Borrowing helps with funding the government, and the national debt and expenditures have grown rapidly in the past decade.

Interest on the debt will eat up a big portion of future budgets.

Tax expenditures represent an enormous drain on revenues but subsidize many popular activities.

LO 14.2SummaryFederal Expenditures

Budgets have grown with the rise of the national security state and the social service state.

National security and, especially, social services such as Social Security and Medicare, plus interest on the debt, make up most of the budget.

Expenditures for most policies grow incrementally, with each year’s budget building on last year’s.

Much of the budget represents uncontrollable expenditures, primarily entitlements to payments that the government has committed to make at a certain level and that are difficult to limit.

LO 14.3SummaryThe Budgetary Process

The budgetary process is a long and complex one that involves the president, agencies, Congress as a whole, and many important congressional committees.

The president submits the budget to Congress, whose reformed budgetary process has nonetheless not brought spending in line with revenues.

LO 14.4SummaryUnderstanding Budgeting

Budgets in democracies grow because the public and organized interests demand new and larger public services.

Increasing budgets increase the scope of government, but decreases in taxes and increases in debt make it more difficult to add or expand programs.