Chapter 7: The Executive Branch at Work Section 3: Financing Government (pgs )

Paying for Government Revenue comes in the form of taxes, fees, and other nontax sources. Up until 1913 Congress only had the power to limited taxes, like sales tax on specific items. But in 1913 the 16 th Amendment was ratified which allows income tax. Today almost 50% of federal revenue comes from individual income tax and 12% comes from corporate income tax. Income tax is a progressive tax ranging from 10% to 35%.

Payroll Taxes Payroll taxes are collected to help pay for Social Security, Medicare, & other forms of social insurance. Payroll taxes make up about 34% of federal revenues and they are withheld from a person’s paycheck by their employer. Social Security is a regressive tax. A person who makes $200,000 a year pays the same as a person who makes $97,500 a year. Medicare is a proportional tax b/c everyone pays the same amount & it can also be called a regressive tax.

Other Sources of Revenue Nontax revenues make up 6% of all federal funds. Excise Taxes or sales tax Tariffs of taxes on imports Estate tax or the death tax The Gift tax Entrance fees at national parks Earnings by the Federal Reserve System (or interest on their loans)

Borrowing Money The government can’t always cover expenses by collecting revenue so they borrow money. They do this by selling bonds. A bond is a financial instrument by which a borrower agrees to pay back the money, plus interest at a future date. Historically, the U.S. would only borrow money in emergencies like in time of war, but 1970 we have only had a surplus between 1998 to The federal debt is the amount borrowed and not yet paid back. Today it is around 18 Trillion.

Government Spending Every year Congress creates a budget that tells how much the government will spend to fund its various programs. Mandatory spending is required by law and not subject to the annual budget process. This includes entitlement programs and today is 69% of the budget.

Discretionary Spending The 2 nd type of government spending is discretionary spending. This is spending that is subject to the annual budget process. This only makes up 31% of the budget today. This is the part of the budget that the legislative and executive branches have long debates about.

The Budget Process The branches of government have to compromise to get a budget done A fiscal (financial) budget begins Oct. 1 and goes to Sept. 30 of the next year. The process starts with the president and the OMB helps him. By January prior to the start of the fiscal year the President should give his budget in his State of the Union address. Then the Congress has eight months to work with it.

The Budget in Congress The president must present the budget to Congress by the 1 st Monday of February. Congress reviews the proposal and makes changes. The Congressional Budget Office (CBO) helps with expect analysis. Appropriations Committees write the budget legislation and determine how the discretionary funds are to be spent. The Congress is suppose to complete the budget by the beginning of the fiscal year but in recent years the president and Congress have had to pass a continuing resolution. And recently there has been government shutdowns.

Fiscal & Monetary Policy Fiscal Policy is when the president and Congress create the federal budget and tax laws. When the government alters the amount of money in circulation and the interest rates at which money is borrowed, is creating a monetary policy. These policies are suppose to help economic growth, lower unemployment, stable prices for goods and services, and balance the budget.

Fiscal Policy This is the goal of keeping adequate funds for government w/o adversely affecting the economy. When the economy is slow or shrinking the government can do one or two things: spend more money or cut taxes. This can create large budget deficits. Borrowing more then businesses borrow less, build less and expand slowly. To much gov. spending can, trigger inflation. Government can combat inflation by reducing spending, raising taxes, or raising interest rates.

Monetary Policy The gov. can also effect the economy through its monetary policy. This policy is carried out by the Federal Reserve System or the Fed (1913) This is an independent regulatory commission that acts as the nation’s central banking system. It has a 7 person board nominated by the president and confirmed by the Senate. The Fed chair is a powerful position. The Fed tells banks how much money that they have to have in reserve. The Fed keeps money out of circulation. The Fed adjusts the interest rates it charges its customers. Raising the rate discourages borrowing…lowering has the opposite effect. The Fed also buys and sells gov. bonds There are limits to what the gov. can do but it can help…example 2008 recession