Balancing the Federal Budget (or at least reducing the annual deficit to a manageable size) The Problem: 2013 Spending - $3.45 Trillion 2012 Revenues - $2.7 Trillion _________________ $ 680 Billion Deficit 20% Borrowed After 4 years in a row with a $1Trillion+ deficit

Total Current Debt Total Current Debt (Accumulated over 80+ Years) More than our annual GDP (16.76 trillion) – We’ve only topped 100% once before, during WWII – Over $56,000 per person Our total debt is now 104% of our GDP (above 100% is considered to be unsustainable by most economists)

Another View – Debt during years of Dem v Rep. Control of Congress

The Debt Ceiling - $17.6 Trillion Set by Congress – Currently suspended until February 2014 No constitutional maximum Catastrophic global economic consequences Not raising it would result in the USA defaulting on outstanding Treasury Bonds. Newsroom Clip ceiling/?utm_source=ceiling&utm_medium=SE M&utm_campaign=Adwords&gclid=CKWEuM2 DprwCFYVDMgodonkAjwhttp:// ceiling/?utm_source=ceiling&utm_medium=SE M&utm_campaign=Adwords&gclid=CKWEuM2 DprwCFYVDMgodonkAjw Tea Party Clip

What Happens to Politicians Who Cut Too Fast/Too Much?

What Does the Public Want? Cut my taxes Balance the budget Cut out wasteful spending Provide all the services that I’ve come to expect Enviro poll: 66 percent support more public transportation, but only 42% willing to raise taxes to pay for it.

The typical American voter Give me all the services I want, but don’t make me pay for them

2 Central Questions Who has to pay? Who receives benefits? Did Obama buy his election victory by playing Robin Hood? Do modern politicians have to promise more than they can deliver to get elected?

The Budget - Spending A policy statement of allocated resources and benefits Taxes and spending

The Budget is Divided Mandatory spending set by law: Entitlements *Social Security, Medicare, Medicaid, CHIP, Veterans’ Benefits, Food Stamps, and more Discretionary spending—can be changed without changing laws +*Interest on the debt

Entitlements – Source of most spending increases The President's budget request for 2010 totals $3.55 trillion. Percentages in parentheses indicate percentage change compared to This budget request is broken down by the following expenditures:[8][8] Mandatory spending: $2.009 trillion – $695 billion (+4.9%) – Social SecuritySocial Security – $571 billion (−15.2%) – Other mandatory programs – $453 billion (+6.6%) – MedicareMedicare – $290 billion (+12.0%) – MedicaidMedicaid – $164 billion (+18.0%) – Interest on National DebtNational Debt

Medicare: dire Predictions Rising at 3X the rate of inflation. Health care costs are driving the budget deficit

Poverty is growing in America 30% of public school children live in poverty 1/7 Americans receive Medicaid 1/7 receive food stamps Medicaid nearly half are children 15% are seniors Nearly half of disabled receive it Under Affordable Health Care Act Medicaid benefits extended to those earning 133% of poverty

Forms of Government Welfare

Are Americans taxed too much? Are we overtaxed?

The GINI Index Measures Income Disparity Low # means greater equality. High # means greater gap, rich v. poor. What is the gap in America v. other countries?

Defense Related Budget – Over $1 Trillion Budget Breakdown for 2011Defense-related expenditure2011 Budget request & Mandatory spending[1][19]Calculation[6][20][1][19]Calculation[6][20] DOD spending$721.3 billionBase budget + "Overseas Contingency Operations" FBI counter-terrorism$2.7 billionAt least one-third FBI budget. International Affairs$10.1–$54.2 billionAt minimum, foreign arms sales. At most, entire State budget Energy Department, defense-related$20.9 billion Veterans Affairs$66.2 billion Homeland Security$54.7 billion NASA, satellites$3.4–$8.5 billionBetween 20% and 50% of NASA's total budget Veterans pensions$58.4 billion Other defense-related mandatory spending$7.5 billion Interest on debt incurred in past wars$114.8–$454.2 billionBetween 23% and 91% of total interest Total Spending$1.060–$1.449 trillion

Proposal – Did not pass

The Power to Tax: Two Constitutional Reasons 1. Common defense 2. General welfare ex: Health care, roads, schools, pollution control, flood projects, emergency response, national parks, job training, space exploration, medical research, etc.

Limits on Federal Taxation Can’t violate the constitution – free speech Must be for a public purpose Can’t tax exports Must be equally proportioned (except income tax) Uniform throughout the USA

Terms to Recall Direct Tax On buildings, persons, income, or property Indirect Tax Excise tax/”Sin Tax” on certain products

Revenue Sources 1955: was 27.3% Social Security and Medicare

#1 Source of Revenue – Individual Income Tax Progressive tax – tax brackets – the rich pay more Top rate – 39.6% on Taxable Income After credits and Deductions – 47% Pay $0 – still pay Other Taxes 16 th Amendment Made legal – Earlier income Taxes found unconstitutional

Federal Spending v Revenue Gray areas are recessions Bush tax cut

Income Tax Terms to Know Deductions – charity, mortgage interest, business expenses, state, local taxes……. Taxable Income Stuff that is not deductable – political contributions, vacations… Personal and dependent exemptions ($3,650 per person – 2011) Tax return W-2, year end statement of all income from salary and wages, plus lists all taxes withheld (withholding) 1099, statement of other income, proceeds from sales, consultant fees… Earned income tax credit – refunds for the poor – may result in a zero tax payment (close to 50% income earners pay no federal income

tax loopholes – 3 martini lunch, SUV’s for Doctors Loopholes are a form of tax expenditures Full size SUV’s for doctors

130 million individual income tax payers per year Audits – 1 million per year

Corporate Income Tax – Paid Only on Profits Declining since the 1950’s (was 27.3  now 9%) Current top rate – 35% 10,000’s of deductions creates an effective rate of 15-17% – Ex: Business expenses, equipment depreciation, … Corporations that paid no taxes in 2010 – GE, Wells Fargo, Mattel, Verizon, Bank of America – “the dirty 30”

Unequal Obligations and Payback State by State /08/americas-fiscal-union /08/americas-fiscal-union Economist chart

Two Main Sources of Budget Growth Since the 1940’s National Security – Defense Social welfare and safety net programs Know the liberal v conservative take on the latter Incrementalism – gradual growth – best predictor of next year’s budget is last year’s

Social Security Payroll Tax – FDIC – Since 1938 Flat tax on 1 st $116,000 of income (cap) 6.2% + 6.2% (paid by employer) Elderly retired, survivors, and disabled Elderly retired SSI and SSD – growing rapidly – over 1 million added in past 18 months – 9 million + receive

Pending Social Security Crisis? Pay as you go system – benefits paid out this year from funds collected this year Baby boomers bubble Leaving only 2 active workers to pay for each recipient Borrowing from the Social Security Trust Fund since 1982 By 2018, S.S. will no longer have a surplus – time to pay up

Pending Social Security Crisis Social Security has run a surplus since reform in 1982 The surplus has been diverted to pay for part of the debt The general fund will probably never be able to pay back the $3 trillion+ borrowed Will benefits be cut – or will taxes be raised to avert the crisis?

Medicare Payroll Tax 1.45% % (paid by the employer) 65+ all Americans Medicare Prescription Plan added in 2004 without additional funding by Bush Administration

Tax on Capital Gains and Dividends A tax on profits from stock or real estate gains Raised to 20% January 2013 (was 15%) Before 2002 capital gains and dividends were treated as ordinary income.

Estate Tax The “Death Tax” Currently: $5.3 million exempt – 40% rate on rest Should we tax estates? Is it a problem if some people inherit so much $$ that they never have to work? How will this impact our GINI index?

Excise Tax – Indirect tax Minor revenue – 3% of total Shapes behavior. Combined state and federal tax

Other Taxes and Revenue Sources of Minor Importance Customs duty - #1 source in 19 th century Gift tax User fees – park admission, passports, INS processing fees leasing of public lands for mining, lumber, and gas and oil drilling.

The Budget Congress has the “power of the purse” The budget is a statement of political priorities “Who gets what and when” 2/3rds of the budget is “uncontrollable” – entitlements programs plus interest on the debt equal over 75%. Can’t make cuts without changing the law that created the program

The Budget Process Starts with the Office and Management and Budget Preparing the President’s Budget Proposal Obama’s Budget Arrives to the Capitol Building Dead on Arrival?

The Budget Process – 18 Months

The Process 1.Office of management and Budget (OMB) prepares a budget 18 months early – takes requests from departments and agencies 2.President by law submits budget to Congress 9 months ahead 3.Congressional budget committees review the budget – 4.Congressional Budget office (CBO) analyzes the OMB numbers 5.Budget sent to appropriations standing committees – appropriation hearings – best chance for special interest groups to weigh in 6.House Ways and Means Committee and Senate Finance Committee rewrite tax codes 7.5 months before congress passes a concurrent (binding) resolution establishing the size of the overall budget 8.The actual budget will be passed as a series of 13 appropriation bills 9.If no budget by October 1 – faceoff/shutdown or continuation of past years budget – Continuing Resolution

Interest Groups and the Budget Best time to influence the process – when budget bills are in committee

Review the history of budgeting 1921 Budget and Accounting Act Congressional Budget and Impoundment Act of 1974 – fixed budgeting calendar

Terms and Groups to Know Omnibus spending bills Earmarks – pork barrel projects Sequestration CBO and OMB roles Reconciliation – revisions and cuts to an agency budget Budgeting via continuing resolution

20 th century patterns in government budgets Budgets are growing in all countries In democratic societies – suffrage leads to expansion of services – voters vote for those who promise… Elites/big business also get what they want – subsidies and tax breaks – effect use of special interest groups Deficits became the norm Success to those who promise to cut taxes USA taxes low – deficits growing

Actual Welfare - Welfare Queens?