CONGRESS, THE PRESIDENT AND THE BUDGET:

THE POLITICS OF TAXING AND SPENDING

AP GOVERNMENT—CHAPTER 14

The President and Congress have been caught in a budgetary squeeze.

Americans want them to balance the budget, maintain or increase the level of government spending on most policies, and still keep taxes low.

The budgetary process is the center of political battles in Washington and involved nearly everyone in government.

Questions to think about . . .

• Should the federal government have to balance the budget yearly like the states do?

• Should EVERYONE be entitled to Social Security or Medicare?

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

• What factors do you think prevent the budget from changing very much year to year?

Resources have been scarce because the national government has run up large annual budget deficits over the past 30 years.

A budget deficit occurs when expenditures exceed revenues.

The total national debt rose sharply during the 1980’s, increasing from less than one trillion dollars to 11 trillion by 2010.

Government Sources of Revenue

1. Personal and corporate income tax

2. Social insurance taxes3. Borrowing

Only a small portion comes from excise taxes (gas, alcohol, cigs) and other sources

Income TaxThe history of the income tax . . .

-First peacetime income tax enacted in 1894.• The tax was declared unconstitutional in court case: Pollock

v Farmers’ Loan and Trust Co, 1895

–The 16th Amendment was added to Constitution in 1913, permitting Congress to levy an income tax

–Congress had already started one before the amendment was ratified and the Internal Revenue Service (IRS) was established to collect it.

Corporations also pay income taxes and at one time brought in more revenue than individual income taxes.

However, today with all the tax shelters (called loop holes), corporations only yield about 13 cents of every federal dollar compared to 48 cents coming from individual income taxes.

• This tax comes from both employers and employees

• These payments do not go into government’s general money fund; they are earmarked for the Social Security Trust Fund to pay Social Security benefits.

• SS taxes have grown faster than any other source of federal revenue.

BORROWING

1. When federal government wants to borrow money, the

Treasury Department sells bonds, guaranteeing to pay

interest to the bondholder.

2. Today the federal debt—all the money borrowed over the

years and still outstanding—exceeds 12 trillion

3. 9% of all federal expenditures goes to paying off the debt

Concern about the national debt have led to some calls for a balanced budget amendment.

Unlike the state and local governments and private businesses, the federal government does not have a capital budget, a budget for items that will serve for the long-term.

These purchases are counted as current expenditures and run up the deficit.

TAX EXPENDITURES• This is one cost to the federal government.

• Tax expenditures represent the difference between what the government actually collects in taxes and what it would have collected without special exemptions.

-Expenditures are essentially money that government could collect, but doesn’t because exemptions from taxation have been created

-The OMB (Office of Management and Budget) estimated that the total tax expenditures in 2007 would be more than a third of the total federal receipts.

-Individuals receive most expenditures and corporations get the rest.

Examples: deductions for contributions to charity, deductions by homeowners for mortgage interest, and business deductions of investment in new plants and equipment

As a whole, tax expenditures benefit middle and upper income taxpayers and corporations.

Poor people (who tend not to own homes) cannot take advantage of most such provisions.

some recent tax history . . .

1981 the Reagan Administration, enacted tax cutsMany blamed the 1981 tax cuts on the massive deficits of 1980’s and 1990’s.

1993 the Clinton Administration, Congress agreed to raise the income tax rate for those in the top two percent of income. Congress also increased top corporation income tax and energy tax.

2001 the Bush Administration and Congress once again enacted tax cuts and deficits reappeared.

FEDERAL EXPENDITURES—WHERE THE REVENUE GOES

MANDATORY SPENDING•Social Security•Medicare•Medicaid•Interest on the national debt

DISCRETIONARY SPENDING•everything else we argue about . . . defense, education, foreign aid, social welfare, environment, etc.

MANDATORY SPENDING

• Mandated under current law or previous obligation

• Result from policies that makes some group automatically eligible from some benefit; these are called entitlements

• 2/3 of budget mandatory spending

Federal Entitlements

• Federal program that guarantees a specific level of benefits to persons who meet the requirements set by law, such as Social Security, farm price supports, unemployment

FDR signs Social Security Act

Examples of Federal

Entitlements:

• Social Security• Medicare, Medicaid• Unemployment

Medicare and Medicaid Acts

(1965)

• Medicare (aid to the elderly) and Medicaid (aid to the poor) have protected health of countless elderly and poor American putting it close to Social Security in it impact on American life.

• However, looking into the future, the programs are so enormous that both the federal and state governments are destined to face budget challenges with these entitlement programs.

DISCRETIONARY SPENDING

• The part of the budget left up to debate and discussion

• This portion of the budget causes heated arguments about who gets how much . . . .

-defense?

-education?

-environment?

-foreign aid?

Budget for Department of Defense now accounts for 1/5 of all federal expenditures.

Payrolls and pensions constitute a large component of defense budget as does research, development and procurement (purchasing) of military hardware.

Cost of advanced weapons and technology cause cost overruns

INCREMENTALISM

•The best predictor of this year’s budget is last year’s budget plus a little bit more (an increment)

• Causes:• Support of relevant interests for spending programs

makes it difficult to pare budget

• Budget is too big to review from scratch each year

• More federal spending has become “uncontrollable”

Budget Making Process

• Office of Management & Budget (OMB) Presidential influence on budget making process: Supervises preparation of the federal budget and advises the president on budgetary matters

• Director is appointed by President with Senate approval.

• Federal law requires the President to send his budget proposal to Congress by the 1st Monday in February

• Process begins year before with OMB analyzing agencies needs, economic situation and issuing guidelines. They then submit give guidelines to agencies who review them and submit their projections to OMB for their needs of upcoming year. OMB reviews and prepares recommendations.

• President estimates the amount of money the federal government will raise from taxes and estimates overall government spending, and indicates whether the government will have a surplus or budget deficit.

Budget Making Process

Congressional Budget Office (CBO)• Advises Congress on the likely consequences of its

budget decisions, forecasts revenues and is counter weight to the President’s OMB.

• House Ways & Means Committee –Congressional controls on the budget making process: “Power of the Purse”

• Writes tax legislation and fill affecting Social Security, Medicare and other entitlement programs.

Ways & Means Committee: Previous Chair Charles Rangel

above

Congressional Budget & Impoundment Act of 1974

Provisions:**Fixed budget calendar for each step in budget process**Binds Congress to total expenditure level that forms the bottom line of all federal spending for all programs (budget resolution)

Two ways . . . 1) Reconciliation—revises program or entitlement (comes at end of budgetary process to save money)2) Authorization bill—establishes discretionary government programs and sets maximum amount program may spend or standards for entitlement programs

Democracy and Budgeting

• All democracies have seen a growth in government

• Economists Melzer and Richard argue that government grows in a democracy because of equality of suffrage.– Poorer voters will always use their votes to support public policies

that redistribute benefits for the rich to the poor– Growing expenditures such as Social Security, Medicaid, Medicare

are supported by poorer voters

Corporations support a big government that offers them contracts subsides and other benefits.

All socio-economic classes vote for those politicians that promise them benefits.

Government grows by responding to groups and their demands. The budget is the government. The bigger the budget, the bigger the government.

Americans want to spend, but not pay taxes. They are not unwilling victims of big government, but rather co-conspirators.

Consider:

• To evaluate government deficits and debts we need to look at why we are borrowing and ask whether in the long term it is a good investment.

• War on terror?• Health care? • Education?• Environment?