Pump Primer

Name what you believe are the main sources of federal revenue (income) for the federal government.

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13The Budget: The Politics of Taxing and Spending

Biblical Integration

• Scripture reveals the importance of being trustworthy, especially with money placed in your control. Since money is a necessary part of this world it must be handled in a way that is pleasing unto God. (Luke 16:11-12)

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13Learning Objectives

Describe the sources of funding for the federal government and assess the consequences of tax expenditures and borrowing

Analyze federal expenditures and the growth of the budget

13.1

13.2

13Learning Objectives

Outline the budgetary process and explain the role that politics plays

Assess the impact of democratic politics on budgetary growth and of the budget on scope of government

13.3

13.4

Video: The Basics 13

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Federal Revenue and Borrowing

Personal and Corporate Income Tax

Social Insurance Taxes

Borrowing

Taxes and Public Policy

13.1

FIGURE 13.1: The federal budget: An overview

13.1

The federal budget consists of revenues and expenditures.

When expenditures exceed revenues, the budget runs a deficit. The accumulation of debt over time creates the national debt. Data are estimates for fiscal year 2013.

Budget • A policy document allocating burdens (taxes) and

benefits (expenditures).

Deficit • Excess of federal expenditures over federal

revenues.

13.1Federal Budget

Expenditures Government spending – Major areas are social

services and national defense.

Revenues Financial resources of the government – Individual

income tax and Social Security tax are two major

sources

13.1Federal Budget

Sixteenth Amendment (1913) Established an income tax

• Progressive Tax• More you make more you pay

10-35% current tax rates IRS

Created to collect and process tax payments

Today, it received over 140 million individual income tax returns per year

13.1Personal and Corporate Income Tax

Who pays taxes? (2009) 42% (made so little money) paid no taxes Richest 1% paid 37% Richest 10% paid 70% Bottom 50% paid 2%

Flat tax Everyone, regardless of income pays the same tax

rate

13.1Personal and Corporate Income Tax

FIGURE 13.2: Federal revenues 13.1

Explore the Budget: How High Are Your Taxes?

13.1

http://media.pearsoncmg.com/long/long_edwards_mpslgia_16/pex/pex13.html

Social Insurance Taxes

Social Security

Medicare Both withheld from your pay and matched by employers

Provide 1/3 of federal revenue

13.1

Borrowing

Tax revenue does not cover expenditures

Bonds Sold by Treasury Department Agrees to pay interest to the bondholder

Borrowing from itself Takes from Social Security to pay military pensions or

farm subsidies Creates intra-governmental debt

13.1

Borrowing

National debt = $18 trillion and growing every minute (http://www.usdebtclock.org/)

6% of federal spending = interest payments Debt ceiling

A limit on how much money the government can borrow

Economic downturn

Spending increases when revenue declines Government services increase

Unemployment Food stamps

13.1

FIGURE 13.3: Total national debt 13.1

Video: In the Real World 13.1

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Taxes and Public Policy

Tax Reform Act of 1986 Eliminated or reduced the value of many tax

deductions Removed several million low-income individuals

from the tax rolls Changed the system of 15 separate brackets to

just two generally lower rates (15% and 28%).

13.1

Taxes and Public Policy

Tax expenditures Revenue lost due to exemptions

Charitable contributions Mortgage interest Business equipment Benefit the wealthy and businesses

Tax reduction Popular with voters Benefits the wealthy more than the average American –based on

income taxes

13.1

TABLE 13.1: Tax expenditures: The money government does not collect

13.1

13.1 What percentage of federal spending is simply interest payments on the national debt?a. 6%

b. 3%

c. 11%

d. None

13.1

13.1 What percentage of federal spending is simply interest payments on the national debt?a. 6%

b. 3%

c. 11%

d. None

13.1

Explore the Simulation: You Are the President During a Budget Crisis

13.1

http://media.pearsoncmg.com/long/long_longman_media_1/2013_mpsl_sim/simulation.html?simulaURL=22

Federal Expenditures

Big Governments, Big Budgets

Rise of the National Security State

Rise of the Social Service State

Incrementalism

“Uncontrollable” Expenditures

13.2

FIGURE 13.4: Federal expenditures 13.2

Big Governments, Big Budgets Big government needs big money

¼ of GDP is govt. spending

Why has government grown? Increased demand for government services

Public demand Changes in economy Changes in social conditions Economic downturns Urbanization and industrialization Pollution

13.2

Rise of the National Security State Permanent military establishment

Cold War Military-industrial complex – 50s and 60s keep military

spending high

Dept. Of Defence (DoD) spending half of federal budget during Cold War Decreased until 9/11 1/5 of federal budget today

13.2

Rise of the National Security State Military expenses

7 million pensions Procurement - purchase of military hardware Cost overruns

13.2

FIGURE 13.5: Trends in national defense spending

13.2

Stealth bomber 13.2

Rise of the Social Service State Income security expenditures

Social Security– Social safety net– Created by FDR (1935) to reduce elderly

poverty– Disability Insurance (1965)

Medicare– Johnson’s Great Society programs (1965)– Prescription drugs (2003)

13.2

Rise of the Social Service State Income security expenditures

Intergenerational contract-- Workers of current era pay the benefits for

retirees More beneficiaries than workers

– Decline of birth rates– Elderly live longer– Ratio of workers»1940 – 40 workers per retiree »Today – 3 workers per retiree

13.2

13.2

FIGURE 13.6: Trends in social service spending

13.2

Video: Thinking Like a Political Scientist

13.2

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Incrementalism

Best predictor of this year’s budget is last year’s Incremental increase for each agency

Exceptions Shift of priorities

-- NASA

13.2

“Uncontrollable” Expenditures Why is the budget uncontrollable?

■ 2/3 of budget automatic

Not fixed, Congress could adjust it downward

■ Interest

Fixed, no discretion to allocate less money

■ Entitlements Everyone over 65 is entitled to Medicare. Social

Security and veterans’ benefits must also be paid to everyone who is eligible

Congress could alter with passage of legislation

-- Raise eligibility from 65 to 70.

13.2

13.2 Why does the federal government have so little discretion over its own budget?

a. Federal law forbids Congress from tampering with president’s budget

b. The president is obliged by the Constitution to sign whatever budget bill Congress sends him

c. Entitlements create uncontrollable obligations

d. All of the above

13.2

13.2 Why does the federal government have so little discretion over its own budget?

a. Federal law forbids Congress from tampering with president’s budget

b. The president is obliged by the Constitution to sign whatever budget bill Congress sends him

c. Entitlements create uncontrollable obligations

d. All of the above

13.2

Video: In Context 13.2

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The Budgetary Process

Budgetary Politics

The President’s Budget

Congress and the Budget

13.3

Budgetary Politics

Stakes and strategies■ Budget determines “Who gets what, when, and how” • Actors adopt strategies

– How programs benefit a senator’s state or district

Players Large cast Roles carefully scripted

13.3

Government shutdown 13.3

FIGURE 13.7: The players in the budgetary process

13.3

The President’s Budget

Presidents used to play limited role Budget and Accounting Act (1921) Prepares budget with help of OMB

Budget schedule Due first Monday in February Process begins a year in advance OMB begins soliciting requests from agencies Jockeying and negotiations continue until the last

minute

13.3

Congress and the Budget Power of the purse■ Congress has Constitutional power to authorize federal

appropriations

Budget resolutionReconciliation – changes to laws, which enables

Congress to stick to its budget ceilingAuthorization bills - establish or change government

programs Appropriations bills - to fund programs Continuing resolutions - laws that allow agencies to

spend at last year’s levels

13.3

Congress and the Budget Congressional Budget and Impoundment Control

Act of 1974 ■Designed to reform the congressional budgetary

process■Fixed budget calendar■Budget committee in each house■Congressional budget office■Problem - not procedural, more disagreement

over how scarce resources should be spent

13.3

FIGURE 13.8: The budget process 13.3

FIGURE 13.9: Fluctuating deficits 13.3

13.3 What type of bill must follow an authorization bill?

a. Continuing resolution

b. Reconciliation bill

c. Appropriations bill

d. None of the above

13.3

13.3 What type of bill must follow an authorization bill?

a. Continuing resolution

b. Reconciliation bill

c. Appropriations bill

d. None of the above

13.3

Understanding Budgeting

Democracy and Budgeting

The Budget and the Scope of Government

13.4

Growth in government tied to democracy

Do elites oppose big government? Bailouts Contracts and subsidies

Interest groups want their piece, too Zoologists, for example, want aid from the National Science

Foundation

13.4Democracy and Budgeting

Americans tax and spend less compared to

other democracies

Americans want lower taxes but more pork Cut taxes = re-elected Cut programs and benefits to their constituents =

defeated Bring pork barrel projects home to their states and

districts = re-elected Result = Deficits

13.4Democracy and Budgeting

Arches National Park 13.4

The Budget and the Scope of Government

The size of the budget is the scope of government Bigger the government, bigger the budget When country has need, govt. pays

Politics of scarcity Never enough funds Limits on revenues can limit the

13.4

13.4 What feature of American government tends to promote its growth?

a. Republicanism

b. Federalism

c. Democracy

d. All of the above

13.4

13.4 What feature of American government tends to promote its growth?

a. Republicanism

b. Federalism

c. Democracy

d. All of the above

13.4

Discussion Question

Why is the federal budget process so highly politicized? Who are the main stakeholders in budget decision-making? Why does the federal budget tend to increase each year?

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Further Review: On MyPoliSciLab

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