Copyright, 2000 © Prentice Hall Magruder’s American Government C H A P T E R 16 Financing Government

2 Financing Government C H A P T E R 16 Financing Government SECTION 1 Taxes SECTION 2 Non-tax Revenues and Borrowing SECTION 3 Spending and the Budget Spending and the Budget Chapter 16

3 CH Financing Government: Taxes The power to tax is granted to Congress by the Constitution, but that power is not unlimited and taxes may be levied only for public purposes. Direct taxes must be apportioned among the States according to their populations and indirect taxes must be uniform in every State. Income taxes levied on individuals and corporations are progressive taxes and are the largest source of federal revenue. A progressive tax increases as income increases. Excise taxes, estate and gift taxes, and custom duties also contribute. A customs tax is a tax laid on goods brought into the U.S. from another country. Each U.S. income-earner files an annual tax return, a form that shows how much tax a person must pay. Nonprofit organizations such as churches and schools are not subject to an income tax. Social insurance taxes (collected as payroll taxes) are regressive taxes (meaning the rate is the same for everyone) & pay for three major social welfare programs: 1. Old-Age, Survivors, and Disability Insurance 2. Medicare 3. Unemployment compensation

Non-tax Revenues and Borrowing Many Non-tax sources contribute to the money that goes into the federal treasury: 1.interest on loans made by federal agencies, as well as fees for copyrights & trademarks 2.the “conscience fund” (money that people send in to ease their minds over past taxpaying mistakes) 3.the profit the U.S. Mint makes in the production of coins 4.the sale of mint stamps to collectors by the U.S. Postal Service The Constitution gives Congress the power to borrow money on the credit of the United States for crisis situations (such as war) or for large-scale projects. No constitutional limits exist on the amount of money the Federal Government can borrow and the government has built up a huge debt financing past federal deficits. Between 1929 and 1968, the government regularly spent more money than its income. This is called running up a deficit. In recent years, the annual deficit has been eliminated. However, all the past deficits have to be repaid, plus interest. This money is the public debt (sometimes called the “national debt”). The largest area of federal spending today is on entitlement programs, which are larger than the annual budget for the Defense department. CH 16.2

5 CH Spending and the Budget The Federal Government spends the largest amount of money every year for social security and other entitlement programs, which are payments made to people that federal law says have the right to the money. Defense spending is the second largest part of the federal budget, followed by interest on the Public Debt (3 rd largest). Entitlement spending is uncontrollable spending, or spending required by law. Controllable spending is spending that may be adjusted each year. The Budget is the federal government’s spending plan for one year. The Executive branch, with the help of the Office of Management and Budget, prepares a budget each year. This includes a detailed spending plan for each department. These become part of the budget document sent to Congress by the President. In Congress, it is referred to the Budget and Appropriations Committees in each house. Congress reviews the budget, holds hearings, & makes appropriations (spending bills). Funds cannot be spent until appropriated by Congress. Congress passes 13 major appropriations bills every year, each covering a broad slice of federal spending; these must each be signed by the President. If all 13 bills are not passed by 1 October, a continuing resolution is passed to allow affected agencies to continue working without new funding.

6 Creating the Federal Budget 1.The President, with the help of the Office of Management and Budget, creates the budget. 2.The President sends the budget to Congress. 3.Congress gives the budget plan to Budget and Appropriations Committees in the Senate, and in the House. 4.Congress approves the final budget. 5.Congress sends 13 appropriations bills to the President each year to authorize government spending for the coming year. Chapter 16

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