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Chapter 15: Congress, The President, and the Budget The Politics of Taxing and Spending

• Federal Revenue and Borrowing• Federal Expenditures• Understanding Budgeting• Summary


Chapter Outline and Learning Objectives

• Federal Revenue and Borrowing• LO 15.1: Describe the sources of funding for

the federal government and assess the consequences of tax expenditures and borrowing.

• Federal Expenditures• LO 15.2: Describe the major categories of

federal expenditures, and explain why the budget has grown.


Chapter Outline and Learning Objectives

• Understanding Budgeting• LO 15.3: Assess the impact of democratic

politics on budgetary growth, and explain how the budget can constrain the scope of government.

Federal Revenue and BorrowingLO 15.1: Describe the sources of funding for the federal government and assess the consequences of tax expenditures and borrowing.

• Budget• A policy document allocating burdens

(taxes) and benefits (expenditures).

• Deficit• Excess of federal expenditures over federal

revenues.• Total debt will be about $15 trillion by 2011.

To Learning ObjectivesCopyright © 2011 Pearson Education, Inc. Publishing as Longman

To Learning Objectives

LO 15.1



Federal Revenue and Borrowing

• 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.


LO 15.1



• Personal and Corporate Income Tax• Social Insurance Taxes• Borrowing• Taxes and Public Policy


LO 15.1


LO 15.1




• Personal and Corporate Income Tax• Income tax – Shares of individual wages

and corporate revenues collected by the government.

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


LO 15.1


Who Pays the Income Tax


Heritage Interactive Chart

• http://www.heritage.org/federalbudget/top10-percent-income-earners

http://www.heritage.org/federalbudget/top10-percent-income-earners

http://www.heritage.org/federalbudget/top10-percent-income-earners



• Social Insurance Taxes• Both employers and employees 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 Medicare they paid another 1.45 percent on all earnings.


LO 15.1



• Borrowing• Treasury Department sells bonds when the

federal government wants to borrow money.

• Federal debt – All the money borrowed by the federal government over the years and still outstanding.

• Today the federal debt is about $17 trillion.


LO 15.1


Who owns our national debt?Mostly US citizens….but click the link to read more because it is not quite so simple….

http://useconomy.about.com/od/monetarypolicy/f/Who-Owns-US-National-Debt.htm


Check out the share owned by the Fed.This is known as monetizing the debt since the fed creates new money to buy new debt….what a scam!


CNN Article


LO 15.1




• Taxes and Public Policy• Tax Expenditures – Revenue losses from

special exemptions, 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 dividends.


LO 15.1


Deductions: Reduce taxable Income

Income is $50,000

Mortgage Interest Deduction: $5,000

Taxable Income: $45,000

For the sake of simplicity, assume a 10% flat tax. Your tax bill would be:

$45,000 x 10%= $4,500


Credits: Reduce the actual Tax Bill

So you owe $4,500 (From previous slide)

You have 2 children. Child tax credit is $1,000 per child.

Tax Bill now is $4,500 - $2,000= $2,500

Your employer withheld $3,000 from your paychecks.

Your refund is $500


LO 15.1


Federal ExpendituresLO 15.2: Describe the major categories of federal expenditures, and explain why the budget has grown.

• Big Governments, Big Budgets• The Rise of the National Security

State• The Rise of the Social Service State• Incrementalism• “Uncontrollable” Expenditures



LO 15.2



Federal Expenditures

• Big Governments, Big Budgets• Big budgets are necessary to pay for big

governments.• National, state, and local governments

spend an amount equal to one-third of the gross domestic product (GDP).

• National government spending alone currently represents about one-fourth of the GDP.


LO 15.2



• The Rise of the National Security State• In the 1950s and 1960s the Department of

Defense received more than 50% of the federal budget.

• Defense now gets about one-sixth of all federal expenditures.

• This is one reason for growth of government.


LO 15.2


LO 15.2


http://www.cfr.org/defense-budget/trends-us-military-spending/p28855


LO 15.2




• The Rise of the Social Service State• The biggest federal spender is now income

security programs.• Social Security is #1 spender, now it

includes disability benefits and Medicare, and its recipients are living longer.

• This is another reason for government growth.


LO 15.2


LO 15.2




• Incrementalism• A description of the budget process where

the best predictor of this year’s budget is last year’s budget, plus a little bit more (an increment).

• According to Aaron Wildavsky, “Most of the budget is a product of previous decisions.”


LO 15.2


Baseline Budgeting Explained


LO 15.2



• “Uncontrollable” Expenditures• Expenditures are determined by how many

eligible beneficiaries there are for a program or by previous obligations of the government; Congress therefore cannot easily control.

• Social Security benefits are an example of uncontrollable expenditures.


LO 15.2



• “Uncontrollable” Expenditures (cont.)• Entitlements – Policies for which

Congress has obligated itself to pay X level of benefits to Y number of recipients.

• Social Security benefits are an example of entitlements.


LO 15.2

Understanding BudgetingLO 15.3: Assess the impact of democratic politics on budgetary growth, and explain how the budget can constrain the scope of government.

• Democracy and Budgeting• The Budget and the Scope of

Government



Understanding Budgeting

• Democracy and Budgeting• Many politicians spend money to buy

votes.• Bigger budgets – 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 deficits and federal debt.


LO 15.3


Understanding Budgeting

• 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 15.3


LO 15.3



LO 15.1Summary

• Federal 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.



LO 15.1Summary

• Federal Revenue and Borrowing (cont.)• 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.



Approximately what percentage of federal expenditures goes to paying interest on the federal debt?

A. 1 percent

B. 7 percent

C. 15 percent

D. 25 percent

E. 40 percent


LO 15.1


LO 15.2Summary

• Federal 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.



LO 15.2Summary

• Federal Expenditures (cont.)• 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.



Which of the following comprises the largest slice of the budgetary pie?

A. Defense expenditures.

B. Income security expenditures.

C. Foreign aid expenditures.

D. Domestic policy expenditures other than for income security.


LO 15.2


LO 15.3Summary

• Understanding 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.



The budget the scope of government, but the budget may also constrain the scope of government.

A. decreases

B. reduces

C. expands

D. none of the above


LO 15.3


Text Credits

• Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010), Table 2.1.

• Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010),Table 7.1. Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010),Tables 16.1 and 16.3.

• Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010),Table 6.1. Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010), Table 3.1.

• Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010), Table 1.1.


Photo Credits

• 503: AP Photos• 504: AP Photos• 510: Mike Keefe/Denver Post• 518: AP Photos

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