Congress and the Control of Fiscal Policy Sanford-Green text Chapter 10.

Congress and the Control of Fiscal Policy

Sanford-Green text Chapter 10

The First Federal Budget

George Washington, President Alexander Hamilton, Secretary of the

Treasury Hamilton designed the first federal budget

Budget Growth

In the 1790s, the US population was about 4 million (4,000,000)

The federal budget was less than $6 million ($6,000,000) That’s about $1.50 per person

Budget Growth

The US population today is over 300 million (315,432,505 as of 3/4/13 at 9:00 AM local time)

The current federal budget is about $3,540,604,513,937 ($3.5 trillion)

That’s $11,240 per person

Sources of Revenue

For the first hundred years (or so) of the republic, tariffs (taxes on imports) provided most of the revenue for operating the federal government

Then citizens’ expectations rose as to what they wanted the federal government to do

The budget increased accordingly

Sources of Revenue

Until 1913 (16th Amendment), personal incomes could not be taxed

Income taxes now provide about 45% of the revenue to the federal government

Payroll taxes paid by employers provide another 35%

Other Sources of Revenue

Social Security taxes Corporate income taxes Excise taxes Estate and gift taxes Customs taxes

Limits on Congressional power to impose taxes

Congress may not impose taxes on goods exported from the United States

Congress must tax people uniformly in every state

The purpose of imposing taxes is to provide revenue for government operations

Taxation as an Instrument of Social Policy

Taxes can also be used to guide social policy

Taxes can be used to discourage certain activities

For example . . . smoking, drinking alcohol, driving big cars

“The power to tax is the power to destroy” (Chief Justice John Marshall)

Collecting Taxes

The Internal Revenue Service (IRS) collects taxes

The US has a “voluntary” income tax system

Congress and the IRS are always working to close “loopholes”

However, tax evasion is on the increase

Paying Taxes

People who make more than a certain amount of money are required to file an annual income tax return

Employers withhold what they estimate will be “enough” to pay the employees’ income taxes, based on information provided by the employees

Employers are required to send that money to the IRS in a timely way

Paying Taxes

Sometimes employers withhold too much money, and the employee gets a refund at tax time

Sometimes employers withhold too little money, and the employee must pay additional taxes at tax time

Some people make too little money to pay any income taxes at all.

Some of these people receive an “Earned Income Tax Credit” (EITC) when they file their return

The IRS uses sophisticated computer programs to verify the information provided in connection with taxes.

Who pays taxes?

Tax Year 2008

Percentiles Ranked by AGI AGI Threshold on Percentiles

Percentage of Federal Personal Income Tax

Paid

Top 1% $380,354 38.02

Top 5% $159,619 58.72

Top 10% $113,799 69.94

Top 25% $67,280 86.34

Top 50% $33,048 97.3

Bottom 50% <$33,048 2.7

Note: AGI is Adjusted Gross Income

Source: Internal Revenue Service

Where do Federal tax dollars go?

Almost since the beginning, the government has “borrowed” money to fund its operations

When the government spends more money than it takes in, this is called “deficit spending”

The accumulated deficits (the total “borrowed”) represent the national debt

Where do Federal tax dollars go?

The national debt has increased over the years

Sometimes faster than at other times The U S National debt is now about

$17,156,117,102,204.49 That’s about 102% of GDP (Gross Domestic

Product)

Other Expenditures

Some money goes to “other” federal operations

Maintenance of federal properties NASA Disaster relief Flood control Highway construction and maintenance

Paying interest on the national debt

The national debt is one factor in the dollar losing value relative to other currencies

It’s also a factor in inflation Higher prices, resulting from higher costs

of production, resulting from higher interest rates

Money is appropriated by Congress

“No money shall be drawn from the Treasury, but in consequence of appropriations made by law.”

The President proposes a budget to Congress Bills appropriating money must originate in the

House of Representatives Congress debates, amends, and passes the budget No money can be spent unless Congress

authorizes it

The Budget Process

Each federal department estimates how much money it will need for the coming year and submits a request

The OMB (Office of Management and Budget) reviews the requests, holds hearings, and prepares a budget proposal which is sent to the President

The President and his staff make changes and propose a budget to Congress

The Budget Process

Congressional committees review and revise the President’s proposal

The House and the Senate each pass their own version of the budget bill

A conference committee works out the differences and proposes a “compromise” version

Both House and Senate must eventually pass the same bill

This is supposed to be done by October 1 each year, but seldom is

The Budget Process

After final Congressional action, the appropriations bill (the budget) is sent back to the President

He can either sign it or veto it

Spending the money

Each federal department receives its funding through the GAO (General Accounting Office)

Problems Caused by the Appropriations Procedure

Short-term commitments Most agencies only receive funding one

year at a time This makes long-range planning difficult


Porkbarreling (AKA “earmarks”) Individual members of Congress try to get

money for “special projects” for their districts

Sometimes this is done for certain members in exchange for their vote for “earmarks” in another member’s district.

This sort of cooperation is sometimes called “logrolling”

Miscellaneous expenditures and Earmarks

Here are some examples of “pet projects”


Corporation for Public Broadcasting Subsidy ($445 million)

Save America 's Treasures Program ($25 million)

International Fund for Ireland ($17 million)

Legal Services Corporation ($420 million)


National Endowment for the Arts ($167.5 million)

National Endowment for the Humanities ($167.5 million)

Hope VI Program ($250 million)Amtrak Subsidies ($1.565 billion)


U.S. Trade Development Agency ($55 million)

Woodrow Wilson Center Subsidy ($20 million)

John C. Stennis Center Subsidy ($430,000)

Community Development Fund ($4.5 billion)


Heritage Area Grants and Statutory Aid ($24 million)

Essential Air Service ($150 million)Technology Innovation Program ($70

million)Manufacturing Extension Partnership

(MEP) Program ($125 million)


Department of Energy Grants to States for Weatherization ($530 million)

Beach Replenishment ($95 million)New Starts Transit ($2 billion)Exchange Programs for Alaska

Natives, Native Hawaiians, and Their Historical Trading Partners in Massachusetts ($9 million)


Intercity and High Speed Rail Grants ($2.5 billion)

Title X Family Planning ($318 million)Appalachian Regional Commission

($76 million)Economic Development

Administration ($293 million)


Programs under the National and Community Services Act ($1.15 billion)

Applied Research at Department of Energy ($1.27 billion)

Freedom CAR and Fuel Partnership ($200 million)

Energy Star Program ($52 million)


Economic Assistance to Egypt ($250 million)

U.S. Agency for International Development ($1.39 billion)

General Assistance to District of Columbia ($210 million)

Subsidy for Washington Metropolitan Area Transit Authority ($150 million)


Presidential Campaign Fund ($77 million)

Mohair Subsidies ($1 million)Subsidies to the United Nations

Intergovernmental Panel on Climate Change ($12.5 million)

Market Access Program ($200 million)


USDA Sugar Program ($14 million)Subsidy to Organization for Economic

Co-operation and Development (OECD) ($93 million)

National Organic Certification Cost-Share Program ($56.2 million)

Ready to Learn TV Program ($27 million)


The sheer complexity of the budget

The budget is so long and complicated (several hundred pages long) that almost no one can understand it completely

Congress influences the US Economy

Taxation to combat inflationTaxation to combat recessionTaxation to provide subsidies

and grants

Struggling to end the deficit

Andrew Jackson ended his term in 1836 with a budget surplus

Numerous attempts to balance the budget and end the deficit have not resulted in long-term success

The Federal Reserve SystemThe FDICInternational exchange ratesWorld Monetary Fund

Regulation of the Currency

Congress and the Control of Fiscal Policy Sanford-Green text Chapter 10.

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