Financing the Government Chapter 16

Taxes: Section 1 The Power to tax: granted by the Constitution Article I, section 8, Clause 1 Expressed Limits on taxation Must be used for public purposes only Taxes cannot be levied on exports Commerce Compromise 1787 Taxes must equally apportioned (distributed) according to their populations. Exception: income tax All indirect taxes levied by the US government must be set at the same rate in all parts of the country.

Implied Limitations Federal government cannot tax states when they are exercising their government functions. Money used to run schools Health care provision Caring for roads They can tax for those items outside of government Liquor tobacco

Current Federal Taxes

Income Tax The Income Tax What is a progressive tax? Flexible Tax Authorized by the 16th amendment Largest source of income for federal government Progressive tax What is a progressive tax? A tax that gets higher as one’s income gets higher Flexible Tax Congress can adjust it to produce whatever rates are necessary. File a tax return each year

Corporate Taxes Rates paid above the cost of doing business What is the cost of doing business? Wholesale products Employee wages Purchases Mileage Services Postage Facilities Advertising Supplies Utilities

Entitlement Programs Social Security Medicare Unemployment Assessed at a flat rate Does not mean that all pay the same amount All pay the same proportion

Other Taxes Estate Tax : levy on assets of who dies Gift Tax: money given to a living person $10,000.00 limit Custom Duties: payments on items brought into the US from abroad. $800 tourist allowance Coffee Bibles Bananas

Tax for nonrevenue purposes Taxation is not just for revenue generation. Discourage activity Matches Phosphorus Marchetti v. United States $50 license on bookies. Tax was allowable Ruled against under the 5th amendment

Nontax and borrowing Nontax monies Patents Interest Passports Trademarks Sale of public lands Sale of public assets Sales of minted coins Stamps for collections

Power to borrow Originally viewed as a way to meet costs of crisis Finance large scale projects Only recently has the government borrowed money for the purpose of deficit spending. What is a deficit? What is a surplus?

Public Debt The public debt is all of the total outstanding indebtness, which include money borrowed AND interest owed. 1 million dollars would be a stack of $1,000 dollar bills 4 inches high. 1 trillion dollars (the amount owed during the Reagan administration) would be 67 miles high. No Constitutional limits on amount Congress has put limits on the debt limit or ceiling

Spending and the budget

Federal Spending Spending priorities Entitlements : must be paid to all those who meet eligibility requirements. Social Security Medicare Medicaid Food stamps Unemployment compensation Veteran’s pensions Welfare programs Interest on the public debt

Controllable v. Uncontrollable Controllable- discretionary Uncontrollable-fixed President and Congress decide how much will be spent each year. Environmental Military equipment Aid to education 80 % falls into uncontrollable spending. Interest on debt Public programs Social Security Could be redefined Percent of uncontrollable gets larger each year.

Federal Budget President’s Budget Congress Agencies estimate the cost of doing business for the upcoming year. Agencies submit them up through the agencies to OMB. President sends budget to Capital Hill. Congress Budget Committee in each chamber Reviews President’s budget Congressional Budget Office studies the budget and helps the Budget Committee. Also sent to the House and Senate Appropriations Committee After budget is studied measures are drawn by committees to appropriate the funding.

Concurrent resolutions in respective chambers Concurrent resolutions in respective chambers. The measures must be passed by May 15 to act as guides for the budget committees. By September 15 a second resolution must be passed to set expenditure limits for agencies. There are no appropriation measure can provide for spending beyond those limits.

Congress (hopes) to pass 13 major appropriations each year. If appropriations are not passed emergency legislation has to be passed in the form of a Continued Resolution. Agencies without appropriations passed operate based on the previous year’s appropriations.