0205084885 ch15

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

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.


LO 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 Objectives

LO 15.1



LO 15.1

• 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

• 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.


Who Pays the Income Tax


Heritage Interactive Chart

• http://www.heritage.org/federalbudget/top10-p



LO 15.1

• 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.

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


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.

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 15.2: 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


LO 15.2


• 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


• 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

• 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.”


Baseline Budgeting Explained

LO 15.2


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 15.3: 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



LO 15.3

• 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


• 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 15.1
Summary
• 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 15.1
Summary
• 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 LO 15.1
federal expenditures goes to paying
interest on the federal debt?

A.
B.
C.
D.
E.

1 percent
7 percent
15 percent
25 percent
40 percent


LO 15.2
Summary
• 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 15.2
Summary
• 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.
B.
C.
D.

LO 15.2

Defense expenditures.
Income security expenditures.
Foreign aid expenditures.
Domestic policy expenditures other
than for income security.


LO 15.3
Summary
• 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.

LO 15.3
The budget
the scope of
government, but the budget may also
constrain the scope of government.

A.
B.
C.
D.

decreases
reduces
expands
none of the above


Text Credits
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•

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Budget of the United States Government, Fiscal Year 2011:
Historical Tables (Washington, DC: U.S. Government Printing
Office, 2010), Table 2.1.
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.
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.
Office, 2010), Table 1.1.


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


0205084885 ch15

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