Splash Screen Contents Chapter Focus Section 1Section 1Raising Money Section 2Section 2Preparing the...

Chapter Focus

Section 1 Raising Money

Section 2 Preparing the Federal Budget

Section 3 Managing the Economy

Chapter Assessment

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• Raising Money Identify the kinds of taxes and the methods of borrowing the government uses to raise money.

Chapter Objectives

• Preparing the Federal Budget Describe the roles of the executive and legislative branches in the preparation of the federal budget.

• Managing the Economy Explain the influence of fiscal and monetary policies on the economy.


Raising Money

Key Terms

taxes, taxable income, dependent, withholding, securities, national debt

Find Out

• How does the federal government use tax laws to affect economic decisions?

• How does the income tax compare with other sources of federal revenue in terms of the amount collected?


Raising Money

Understanding Concepts

Civic Participation How are income taxes collected from citizens of the United States?

Section Objective

Identify the kinds of taxes and the methods of borrowing the government uses to raise money.


Representative Dick Armey (R-Texas) keeps his constituents informed on issues through his Web page. Among other things, the page features a daily update of the amount of the national debt. On October 15, 2000, the debt equaled $5,653,997,843,075.88. To pay off the debt, each American would have to contribute $21,152.21.The interest on the national debt is one of the largest expenses of the federal government.


A. Individual income taxes are the government’s largest source of revenue.

I. Taxes as a Source of Revenue (pages 555–558)

1) The income tax is progressive, that is, it is based on ability to pay.

2) April 15 each year is the deadline for filing income tax returns.

3) The Internal Revenue Service (IRS) collects taxes during the year through its regional centers.

B. Corporations, too, pay income taxes on income they earn beyond expenses and deductions.


C. The federal government collects social insurance taxes paid equally by employees and employers to pay for Social Security and Medicare.

D. Excise taxes are federal taxes on the manufacture, transportation, sale, and consumption of goods like gasoline, tires, oil, liquor, and cigarettes, and the performance of services.

E. Customs duties are levied on goods imported into the United States.

F. The federal government collects an estate tax on the property and money above a set amount when someone dies.



Do you agree or disagree with the policy that exempts colleges, labor unions, churches, and other nonprofit groups from paying income taxes? Explain.

Students should weigh the value of nonprofit organizations against loss of revenue.



A. U.S. tax laws are complex and filled with special provisions.

II. Taxes and the Economy (pages 558–559)

B. Tax exemptions, or loopholes, favor certain groups and encourage activities such as oil exploration.

C. The Tax Reform Act of 1986 reduced many tax exemptions, tax credits, and tax shelters, and the number of tax brackets.

D. The federal government today provides tax credits to people in lower income brackets.


II. Taxes and the Economy (pages 558–559)

What are some benefits and losses associated with the tax credits policy for people with lower incomes?

Answers will vary. Tax credits are a way of shifting the tax burden to those most able to pay.


A. In addition to collecting taxes, the federal government borrows to raise money by selling federal securities, such as bonds, notes, and certificates, on which it pays interest.

III. Borrowing for Revenue (page 559)

B. The accumulated moneys the government borrows is the national debt.


III. Borrowing for Revenue (page 559)

Why does the federal government sell securities to individuals, corporations, and other institutions, and how does this affect the national debt?

The government sells securities to raise revenues. This is a form of borrowing that adds to the national debt.


1. Main Idea Use a graphic organizer like the one below to show the steps in collecting federal income tax.

Checking for Understanding

Employers withhold estimated taxes from workers’ pay and send the money to the IRS; self-employed people pay an estimated tax 4 times per year; by April 15 the following year, each taxpayer must file a return and send any amount still owed.


___ taxes

___ taxable income

___ dependent

___ withholding

___ securities

___ national debt

A. one who depends primarily on another person for basic needs

B. financial instruments that are sold as a means of borrowing money with a promise to repay the buyer with interest after a specific time period

C. the total income of an individual minus certain deductions and personal exemptions

D. the money an employer withholds from workers’ wages as payment of anticipated income tax

E. the total amount of money the government owes at any given time

F. money that people and businesses pay to support the activities of the government


F

C

A

D

B

E

Match the term with the correct definition.


3. Identify progressive tax, IRS, social insurance taxes, regressive tax, tax loophole.


A progressive tax is a tax based on a taxpayer’s ability to pay.The IRS, or Internal Revenue Service, is the bureau of the United States Treasury Department responsible for collecting taxes.Social insurance taxes are taxes collected to pay for major social programs such as Social Security, Medicare, and unemployment compensation.A regressive tax is a tax in which people with lower incomes pay a larger portion of their income.A tax loophole is an exemption from taxes.


4. What is the federal government’s biggest single source of tax revenue?


The federal government’s biggest single source of tax revenue is the individual income tax.


5. Identifying Alternatives Why does the government raise most of its revenues through taxing rather than borrowing?

Critical Thinking

Although taxes are unpopular, borrowing costs the government a huge amount of interest, adds to the national debt, and threatens the nation’s economic security.


Civic Participation Obtain a paycheck stub—yours or a family member’s. Note the categories and amounts of money deducted for city and state taxes, FICA, and Social Security. Create a graph that shows the percentage of the earned wages deducted in each category.


Preparing the Federal Budget

Key Terms

fiscal year, uncontrollables, entitlement, incrementalism

Find Out

• Why is it so difficult for the federal government to reduce spending or raise taxes in order to balance the budget?

• How do the executive and legislative branches work together to produce an annual budget for the federal government?


Preparing the Federal Budget


Public Policy What factors prevent the budget from changing very much from year to year?

Section Objective

Describe the roles of the executive and legislative branches in the preparation of the federal budget.


In August 1997, Congress and the president agreed to enact a balanced federal budget for the first time in 30 years. In reaching this historic agreement, President Clinton and the Republican-controlled Congress cut individual income taxes by $94 billion and pledged to reduce the federal deficit by $182 billion over the next 5 years.


A. Since 1921 the president has been responsible for preparing the budget.

I. Drawing Up the President’s Budget(pages 560–

562)

B. The Office of Management and Budget (OMB) collects spending requests from each federal agency and analyzes the nation’s economic situation. The president, the OMB director, the secretary of the treasury, and the president’s Council of Economic Advisors (CEA) discuss how the proposed budget may affect the administration’s general policies and goals.


C. The White House returns guidelines to the federal agencies to help them prepare their final budgets.

D. Before the final budget is presented to Congress, the OMB submits a complete budget to the president for final review and approval.

E. About 70 percent of spending in the federal budget is uncontrollables, or expenditures required by law or resulting from previous commitments, such as Social Security, government pensions, Medicare, veterans’ benefits and interest on the national debt.


562)



562)


How do the OMB, the CEA, and the Department of the Treasury work with the president in preparing the federal budget each year?

OMB: Gives first set of figures to the president. CEA and Treasury: Make decisions on the effect of budget decisions on policy goals.


562)


A. The Constitution requires that Congress approve all federal spending; only Congress has the power to raise revenue and pass appropriations.

II. Congressional Budget Action (pages 562–564)

B. Congress can revise the president’s budget, and key lawmakers must often negotiate with the president about budget proposals.


C. The Congressional Budget Act of 1974 set up House and Senate Budget Committees and the Congressional Budget Office (CBO) to centralize and evaluate the federal budget for Congress.

D. The Gramm-Rudman-Hollings Act of 1985 aimed to force the president and Congress to work together to reduce the huge federal budget deficits.



E. Congress 1) reviews the president’s budget proposals, 2) reconciles differences between the House and Senate taxing and spending plans, and 3) carries out the procedures in the Gramm-Rudman-Hollings Act.

F. The Budgetary Enforcement Act (BEA) of 1990 divided the budget into domestic policy, defense, and international affairs, and said any spending that exceeded the budgeted limit in any area would come out in the next year’s funding for that area.




In what ways are the conflicts over the budget between the president and Congress beneficial and troublesome for taxpayers?

Beneficial: Negotiated budget is more carefully planned. Troublesome: Impasse can delay programs or shut down government.


A. The federal budget-making process is based on incrementalism.

III. Incremental Budget Making (page 564)

B. Incrementalism means that federal agencies usually can assume they will get at least the same amount of money they received in the previous year.


III. Incremental Budget Making (page 564)

For which federal agencies would you like to see the budget increased or decreased? Explain.

Answers will vary. Students may list budget priorities. They should support their choices with logical reasons.


1. Main Idea Use a graphic organizer like the one below to show how the budget process is affected if Congress and the president are from different political parties.


Cause—president and Congress are from different parties; Effect—budget is slowed due to the need for compromise


2. Define fiscal year, uncontrollables, entitlement, incrementalism.


A fiscal year is a 12-month accounting period.

Uncontrollables are government expenditures required by law or resulting from previous budgetary commitments.

An entitlement is a required government expenditure that continues from one year to the next.

Incrementalism is the term used to explain that the total budget changes little from year to year.


3. Identify Office of Management and Budget, Congressional Budget Office.


The Office of Management and Budget, or OMB, is responsible for the actual day-to-day preparation of the federal budget.

The Congressional Budget Office, or CBO, is responsible for carefully evaluating the overall federal budget for Congress and acting as a counterbalance to the OMB in the executive branch.


4. Identify four entitlements that are a part of the federal budget.


Any four: Social Security, pensions for retired government employees, Medicare, Medicaid, veterans’ benefits


5. Expressing Problems Clearly Why does the federal government find it difficult to raise taxes or reduce spending to balance the budget?

Critical Thinking

People do not want to pay more taxes, and the budget contains about 70 percent uncontrollables or entitlements.


Public Policy Imagine that you are a part of a presidential committee set up to decide the spending priorities for next year’s government budget. Your job is to list the four top areas that you think should have the greatest share of the budget. Prepare a supporting argument for the four areas you have chosen.


Managing the Economy

Key Terms

fiscal policy, monetary policy, gross national product (GNP), discount rate, reserve requirement, open-market operations

Find Out

• What are the four major categories of federal government spending?

• What is the difference between fiscal policy and monetary policy?


Managing the Economy


Public Policy Why must the Fed operate free of pressures from Congress or the president?

Section Objective

Explain the influence of fiscal and monetary policies on the economy.


The Federal Reserve Board (the Fed) plays a key role in the nation’s economy. The Fed determines the interest rates member banks pay to borrow money. When the chairman of the Fed’s Board of Governors testifies before a congressional committee, the stock market sometimes overreacts. On October 27, 1997, not long after Chairman Alan Greenspan suggested that stock prices might be getting too high, the stock market plunged more than 554 points. Even though the market soon recovered this loss, the experience revealed how closely investors pay attention to the words and actions of the Fed.


A. Most of the federal government’s annual $2 trillion in spending goes to direct benefits for individuals, national defense, discretionary spending, and interest on the national debt.

I. Where the Money Goes (pages 566–567)

B. Spending for Social Security, social-welfare, and health-care programs is one of the biggest items in the federal budget.

C. Spending for defense has increased since 2000 after decreasing during the 1990s.

D. Federal grants to state and local governments help to pay for public housing, road repairs, school lunch programs, flood insurance, and other services.


Why do you think spending for national defense declined following the end of the Cold War?

National security needs were changing as the major threat to national security was gone.



A. Beginning with the Great Depression of the 1930s, the federal government’s role in managing the nation’s economy has expanded.

II. Fiscal and Monetary Policy (pages 567–568)

B. The federal government influences the direction of the nation’s economy by its fiscal policy.

C. The government also uses monetary policy to influence the direction of the economy.



What tools does the federal government use to influence and manage the nation’s economy?

Fiscal and monetary policy.


A. The Federal Reserve System’s 12 Federal Reserve Districts make up the central banking system of the United States.

III. The Federal Reserve System (pages 568–570)

B. A seven-member Board of Governors, which supervises the Fed, is appointed to four-year terms by the president but is independent of both Congress and the president.

C. The Board of Governors supervises the operations of the Federal Reserve Banks and determines the money and credit policies of the nation.


D. The Board of Governors 1) fixes the discount rate, 2) raises or lowers the reserve requirement, and 3) puts money into the economy through open market operations.




How does the Board of Governors of the Federal Reserve System carry out its duties to determine the general money and credit policies of the United States?

Changing the discount rate and the reserve requirement; buying securities on the open market.


1. Main Idea Use a graphic organizer like the one below to compare recent federal grants with those in the 1980s.


1980s—number of grants for infrastructure investment declined; Recently—grants for public welfare programs increased


___ fiscal policy

___ monetary policy

___ gross national product

___ discount rate

___ reserve requirement

A. the interest rate the Federal Reserve System charges member banks for loans

B. a government’s use of spending and taxation to influence the economy

C. the percentage of money member banks must keep in Federal Reserve Banks as a reserve against their deposits.

D. the sum of all goods and services produced in a nation in a year

E. a government’s control of the supply of money and credit to influence the economy


B

E

D

A

C

Match the term with the correct definition.


3. Identify Federal Reserve System, Board of Governors.


The Federal Reserve System is the central banking system of the United States.

The Board of Governors supervises the entire Federal Reserve System and determines the general money and credit policies of the United States.


4. Analyze why the federal government adopted policies that created a huge debt.


Increasing government spending provides social programs that help people, puts more people to work, and increases economic activity; reducing taxes gives consumers and investors more purchasing power; allowing the budget deficit to grow as the gross national product grew maintained a fairly stable debt as a percentage of the GNP.


5. Identifying Alternatives What methods could the federal government use to stimulate the economy during a time when people were opposed to deficit spending?

Critical Thinking

The government would have to rely on monetary rather than fiscal policy. The Fed could lower the discount rate, lower the banks’ reserve requirement, or expand credit through open-market operations.


Public Policy Research several back issues of The Wall Street Journal or selections from the Readers’ Guide to Periodical Literature to analyze Federal Reserve Board decisions that affect the economy. Create a poster of headline captions showing the Fed’s actions.


Reviewing Key Terms

Insert the terms below into the following paragraph to describe how the federal government regulates the economy. Each term should be used only once.

withholding securitiesnational debt taxestaxable income incrementalismfiscal policy GNPmonetary policy fiscal yearentitlements uncontrollables


Reviewing Key Terms

The federal government collects more than $1 trillion in (1) each year. Through (2) wage earners pay taxes on their (3) during the year. The government’s (4) begins on October 1. Because of (5) such as (6) in the budget, government spending often exceeds revenue, which enlarges the (7). Some economists are not alarmed because deficits are only about 5 percent of the (8). Others would like to see changes in (9) to control spending or raise taxes. By its (10) the Fed may stimulate economic growth to relieve some of these concerns.

1. taxes

2. withholding

3. taxable income

4. fiscal year

5. uncontrollables

6. entitlements

7. national debt

8. GNP

9. fiscal policy

10. monetary policy


1. What is the deadline for filing individual income tax returns?

Recalling Facts

April 15 is the deadline for filing individual income tax returns.

2. Identify three institutions that are exempt from the federal income tax.

Nonprofit organizations such as churches, colleges, and labor unions are exempt from federal income tax. Students may list any three.


3. What are three responsibilities of the Internal Revenue Service?

Recalling Facts

Three responsibilities of the IRS are to collect taxes, check tax returns, and investigate suspected criminal tax law violations.

4. What are four types of taxes that the federal government collects?

Four types of taxes collected by the federal government are income taxes, excise taxes, customs duties, and estate and gift taxes.


5. What executive agency is charged with preparing the federal budget?

Recalling Facts

The Office of Management and Budget (OMB) is responsible for preparing the federal budget.

6. Why are federal securities such as bonds popular with investors?

They are safe, and interest on some is tax exempt.


7. What is the goal of the Gramm-Rudman-Hollings Act?

Recalling Facts

The goal is to force the president and Congress to work together to reduce federal budget deficits.

8. What factors make it difficult for Congress to cut spending?

Much of the budget consists of uncontrollables such as entitlements and interest on the national debt; each special-interest group wants the cuts in someone else’s area.


9. Identify state and local uses of intergovernmental revenues.

Recalling Facts

State and local uses of intergovernmental revenues include road repair, public housing, police equipment and training, school lunches, flood insurance, mental health services, public welfare programs, and so on.


1. Public Policy Why has the United States been unable to balance the national budget most of the time beginning in the 1930s?


The United States has been unable to balance the national budget because of uncontrollables, such as entitlements and interest on the national debt; because of disagreements between the president and Congress on budgetary priorities; because of recessions; and because of incremental budget making and pressure from interest groups to maintain federal spending and programs.


2. Public Policy What kinds of banks are members of the Federal Reserve System?


All the large, important banks in the nation are members of the Federal Reserve System.


1. Making Generalizations Why would business groups support protective tariffs?

Critical Thinking

Business groups support protective tariffs because they raise the price of foreign goods, making them less competitive compared to American goods on the domestic market.


2. Analyzing Information Why must the Federal Reserve Board of Governors operate free of pressure from the president or Congress?

Critical Thinking

The Federal Reserve Board of Governors must operate free of pressure so that it can make decisions based on sound monetary policy rather than political pressures.


3. Identifying Alternatives Use a graphic organizer like the one below to show two measures the federal government could take if the national debt seemed to be growing too fast.

Critical Thinking

increase taxes, reduce spending


1. What is this man doing?

Interpreting Political Cartoons Activity

He is mailing his annual income tax return.


2. How does he seem to feel about this?


He is not happy; he does not like paying taxes.


3. Do you think this man’s feelings are representative of the general feeling of taxpayers? Explain.


Possible answer: Yes, most Americans dislike paying taxes and do not enjoy filling out their income tax returns, although the government does provide services in return for the tax money.


One nontax source of revenue for the federal government is seigniorage (seignorage). What is that?

profit on the minting of coins


1) corporate taxes in 1950; employment taxes in 2000

2) consistently decreasing after 1950 3) Answers will vary.

1) Kuwait; United States2) U.S. has larger deficit, but Nigeria’s deficit

as a percent of its GDP is much larger

3) United States and Russia

1) Answers will vary.2) No; because if the Budget Bureau made any reductions an agency

might receive less than the needed amount

3) Answers will vary.

Watching Current Events Read newspapers and magazines for articles on topics discussed in the chapter, such as the IRS, the federal budget, the Federal Reserve, tax reform, or defense spending. Choose five articles and summarize the main points. Then choose one issue and write a position statement or letter to the editor about the issue.

In the past few years the federal government’s annual expenses have exceeded $1 trillion. If you were able to spend $1 million every day, you would need nearly 3,000 years to spend $1 trillion.

More About Government Benefits Tax money also goes to support parks and monuments, school breakfast and lunch programs, disaster relief, the space program, and many, many other things.

Fiscal comes from a Latin word meaning treasury or basket.

Everyone has to pay federal income tax. However, not everyone has to pay state income tax. Seven states do not tax their residents: Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In New Hampshire and Tennessee a state tax is imposed only on dividend and interest income. Most states that do have an income tax use a graduated scale, much like the federal tax. Six states, on the other hand, have a flat rate, so everyone pays the same percentage: Colorado, Illinois, Indiana, Massachusetts, Michigan, and Pennsylvania.

A Taxing Situation

SETTING UP THE DEBATE Work in small groups to learn more about the various alternatives to the current income tax and present your findings to the class. Then prepare statements supporting or opposing the current tax. You should include a discussion of the alternatives in your statements.

CONCLUDING THE DEBATE Discuss the presentations and the vote. What points did you think were most persuasive? Did you change your mind after the presentations? Why?

The Principles of Free Enterprise Since the 1930s, the government has taken an increasing role in the nation’s economy. How large a role should the government play in the economy? In the modified free-enterprise system in the United States, control of the economy is divided between the government and the private sector. Debate the following questions: How does the use of fiscal and monetary policy conflict with the principles of the free-enterprise system? Under what circumstances should the government interfere in the economy?

Filling Out Tax Returns Obtain copies of income tax forms from the local post office or library. Study and discuss them, including how to use the tax tables. Note that tax rates increase with income levels. Then note the kinds of deductions and exemptions that taxpayers may take. Fill out a return for a hypothetical family, using standard deductions and itemized deductions.

In March 1997 Paula Moore won $42 million in the Massachusetts lottery. Like Leonard Sanders, she believes in helping others. After aiding family and friends, Moore donated $100,000 to her late mother’s church. She also set up a college scholarship earmarked for women like herself who return to school late in life. The hospital that Moore credits with saving her granddaughter’s life and the Visiting Nurse Association also benefited from her generosity.

Activity: Write a paragraph or two explaining what you would do (and why) with the money if you won the lottery.

Leonard Sanders

Alan Greenspan, chairman of the Federal Reserve, was nominated by President Ronald Reagan and took office in 1987. A moderate Republican, Greenspan supports deregulation and believes that the best way to check inflation is by limiting the money supply. Because his remarks are subject to intense scrutiny (and possible misinterpretation) by the financial world, he is guarded in his pronouncements. He says he “learned to mumble with great incoherence” early on. “If I seem unduly clear to you,” he has told visitors, “you must have misunderstood what I said.”

Alan Greenspan

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