THE FEDERAL BUDGET, TAXING, AND SPENDING

AP UNIT 4 CONTINUED

Basic Terms

• budget - a policy document providing for taxing and expenditures (burdens and benefits)

• fiscal year - the time period a federal budget covers (Sept.-Sept.); “fiscal” = “financial”

• revenue - money made by the gov’t (usually made through taxes)

• expenditure - money spent by the gov’t• deficit - state in which there are more

expenditures than revenue (gov’t spending more $ than it’s making)

Types of Taxes

• income tax - taxes paid by individuals and businesses based on their yearly income

• Est. by 16th Amendment• is progressive (the more $ you make,

the more $ in taxes you pay)

2015 Tax Brackets (Single)

• social insurance (payroll) taxes - money taken out of individuals’ paychecks to fund programs such as Social Security and Medicare

• excise taxes - taxes paid on the manufacture of goods (alcohol, gasoline, tobacco, etc.)

• sales tax - taxes levied on the sale of an item (set by each state)• gift tax - taxes levied on gifts, prizes, and prize money• estate tax - taxes levied on transferred property after death

Borrowing Money

• deficit financing - spending all sources of revenue, then borrowing more to cover expenses• interest - extra fee added for extra

time to pay back a loan• national debt - all the money borrowed

and still owed by the federal gov’t • CURRENT NATIONAL DEBT: $19.1 TRILLION

Losing Gov’t Money

• tax expenditures - revenue lost by the gov’t because they give citizens exemptions and deductions through tax law

• Tax reductions are also popular with citizens, but lower gov’t revenues

Where Does Gov’t Spend All Its Money?

• The bigger the gov’t, the bigger the gov’t budget• The most gov’t money used to be spent

on national security and military expenditures• Today, more is spent on income

securities than anything else

• Social Security Act - created the program that provides monthly funds for older/retired individuals• People currently in workforce pay

the social security of those who are currently retiring• Medicare - funds that provide

medical services for older individuals

Uncontrollable Spending

• Entitlements - benefits that must be given to individuals who meet requirements set by law• Congress sets the qualifications and

limitations of these programs• Ex: Social Security, Medicare, welfare,

unemployment, disability, veterans’ benefits, etc.

The Budgetary Process

Starts with the President and the Office of Management and Budget (OMB) - due 1st week of Feb. each year

1.) OMB communicates with gov’t agencies/depts. to get budget estimates

2.) OMB works with president to advise creation of budget from estimates

3.) OMB communicates guidelines to agencies/depts., who create their budgets

4.) OMB drafts official budget document when all budget guidelines align

Budget is then sent to Congress (ONLY Congress has the power to appropriate/assign funds for gov’t spending)

5.) Congressional Budget Office (CBO) sends budget to both House and Senate Budget Committees (other committees send info as well)

6.) Budget committees set budget resolution (total level of budget spending for the fiscal year)-official guidelines for budget process in Congress

-gov’t CANNOT spend more than this amount of money

Legislating the Budget

Congress has two methods:budget reconciliation - edits to current

program spending to match the new budget spending levels

ORPass authorization bills - bills that create

or change a specific gov’t program (including its setup and expenditures)

Must also pass an appropriations bills - bills that officially fund authorization bills

• Usually the President and Congress’ budget goals end up being very different, though the President tries to persuade Congress to keep to his budget• Congress ends up passing continuing

resolutions - resolutions that allow gov’t to spend the same level of money from the previous fiscal year• Usually budget increases by increments (a

little higher than the previous year’s budget)

Other Influences in the Budget Process

• Interest groups try to influence Congress to allocate money for favored programs/projects• Gov’t agencies/depts. always push for

bigger budgets• House Ways and Means Committee and

Senate Finance Committee deal with tax code legislation to fund the budget• Members of Congress pushing for pork

barrel spending for constituencies

• Government Accountability Office (GAO) monitors budget implementation and how agencies use their budgets