Bell Activity What do you already know about federal spending categories?

Federal Government Finances Chapter 14 Section 2 Part 1

I will be able to… Explain the process of determining an annual federal budget. List major expenditures. Discuss the effect of a federal deficit on the national debt. Explain how the transfer of purchasing power between generations affects future generations. Describe the difficulties involved with reducing the national debt.

Establishing the Federal Government Federal budget spans a fiscal year. 12 month financial planning period that may coincide with the calendar year. Government’s calendar year starts on October 1 and ends on September 30. By law, the budget must be sent to both houses of Congress by the first Monday in February.

Establishing the Federal Government Executive Formulation President’s Office of Management and Budget (OMB)- is responsible for preparing the federal budget. President’s budget is only a request. Congress can approve, modify, or disapprove it.

Establishing the Federal Government Congressional Action House of Representatives breaks down into 12 major expenditure categories. Assigns each to a separate House subcommittee Each subcommittee prepares a appropriations bill- Act of Congress that allows federal agencies to spend money for a specific purpose. Subcommittees hold hearings, debate, and vote on each bill.

Establishing the Federal Government Congressional Action An approved bill is sent to the full House Appropriations Committee. If it passes there, then sent to entire House for a vote.

Establishing the Federal Government Final Approval Senate acts on the budget after the House approved it. Senate may approve the bill as sent by the House or may draft its own version. If differences exist, a joint House-Senate conference committee tries to work out compromise bill. Senate often seeks advise from the Congressional Budget Office (CBO). Nonpartisan congressional agency the evaluates the impact of legislation and predicts future revenues and expenditures that result from the legislation.

Establishing the Federal Government Final Approval Congress send bill to the president for signature. President can sign or veto the bill and try to force Congress to come up with a budget closer to the original version. Budget becomes the official document for the next year. Continuing budget resolution-an agreement to fund a government agency at existing, reduced, or even expanded levels.

Budget deficit- negative balance that results when expenditures exceed revenues. Budget surplus- expenditures were less than revenues.

Individual Income Taxes Individual income taxes account for about 1/3 of all federal government revenue. Tax is collected through payroll withholding system Requires employer to automatically deduct income taxes from worker’s paycheck. Sent directly to the IRS. Indexing- upward revision of the tax brackets to keep workers from paying more in taxes because of inflation.

Borrowing Large source of federal revenue. Four thing have increased reliance on it. Increased government spending on Social Security and Medicare. Increased spending on national defense after 9/11. Steady passage of lower tax rates Lower tax collections during and after the Great Recession. Tax revenues fluctuate, the government never knows how much it will have or need to spend. Government simply borrows the rest by selling bonds to investors.

Payroll Taxes Federal Insurance Contributions Act tax (FICA) Is deducted directly from paychecks. Levied on employers and employees equally to pay for Social Security and Medicare. Social Security component of FICA is 6.2% of wages and salaries up to $117,000. Above that amount taxes are not collected. Regardless of income. Maximum of $7,254. 1965-Congress added Medicare to the Social Security program. Taxed at 1.45% with no cap on the amount of income taxed. Makes it a proportional tax.

Corporate Income Taxes Tax corporations pay on their profits. Corporations pay a slightly progressive tax. Actual tax rate is lower because of numerous tax breaks.

Excise, Estate, and Gift Taxes Excise tax- tax on the manufacture or sale of items such as gasoline and liquor. Federal excise taxes are levied on telephone services, tires, gasoline, legal betting, and coal. Estate tax- tax on the transfer of property when a person dies. Range from 18 to 50% of the value of the estate. Estates worth less than $3.5 million are exempt. Gift tax- tax on the transfer of money or wealth and is paid by the person making the gift. Used to make sure that wealthy people do not try to avoid taxes before they die.

Other Revenue Sources Customs duty- charge levied on goods brought into the United States from other countries. User fee- charge levied for the use of a good or service. Include entrance charges at national parks. Fees ranchers pay when their animals graze on federal land.

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