The Federal Budget: The Politics of Taxing and Spending AP US Government and Politics

Americans want them to balance the budget, maintain or increase the level of government spending on most policies, and still keep taxes low. The budgetary process is the center of political battles in Washington and involve nearly everyone in government. usdebtclock.org

Resources have been scarce because the national government has run up large annual budget deficits over the past thirty years. A budget deficit occurs when expenditures exceed revenues. The total national debt rose sharply during the 1980s, increasing from less than $1 trillion to $17 trillion by 2014.

Government Sources of Revenue personal and corporate income tax social insurance taxes borrowing Only a small portion comes from excise taxes (gas, alcohol, cigarettes) and other sources.

The History of the Income Tax The first peacetime income tax was enacted in 1894. The tax was declared unconstitutional in the court case Pollock v. Farmers’ Loan and Trust Co., 1895. The Sixteenth Amendment was added to Constitution in 1913, permitting Congress to levy an income tax. Congress had already started one before the amendment was ratified, and the Internal Revenue Service (IRS) was established to collect it.

Advantages and Disadvantages How much time and effort does it take for an average person to complete and file their income tax returns? Is it too complicated? What are the advantages and disadvantages of this system of collections? What arguments would you give in support of the income tax? What arguments would you give against income tax?

Corporations also pay income taxes and at one time yielded more revenue than individual income taxes. However, today with all the tax shelters (called loop holes), corporations only yield about 13 cents of every federal dollar, compared to 48 cents coming from individual income taxes.

Come from both employers and employees These payments do not go into the government’s general money fund; they are earmarked for the Social Security Trust Fund to pay Social Security benefits.

Borrowing When the federal government wants to borrow money, the Department of the Treasury sells bonds, guaranteeing to pay interest to the bondholder. Today, the federal debt—all the money borrowed over the years and still outstanding—exceeds $17 trillion. About 9% of all federal expenditures goes to paying off the debt.

Concern about the national debt has led to some calls for a balanced-budget amendment. The Democrats and Republicans can’t find a compromise on which programs to cut or not to cut. Why?

Examples of Tax Expenditures Tax expenditures represent the difference between what the government actually collects in taxes and what it would have collected without special exemptions. Examples of Tax Expenditures deductions for contributions to charity deductions by homeowners for mortgage interest deductions by businesses for investment in new plants and equipment

As a whole, tax expenditures benefit middle and upper income taxpayers and corporations. Poor people (who tend not to own homes) cannot take advantage of most such provisions.

Federal Expenditures: Where the Revenue Goes mandatory spending Social Security Medicare Medicaid interest on the national debt discretionary spending everything else we argue about, including defense, education, foreign aid, social welfare, environment, etc.

Federal spending is split into two categories: mandatory (uncontrollable): Social Security, etc. discretionary: defense, etc.

Federal Entitlements federal program that guarantees a specific level of benefits to persons who meet the requirements set by law, such as Social Security, farm price supports, and unemployment FDR signs Social Security Act

Eligibility for Entitlements A person receives an entitlement by meeting certain requirements for “mandated” spending required by law. It is the largest portion of uncontrollable spending because it is out of the government’s discretionary control, which controls entitlement spending.

Examples of Federal Entitlements Social Security Medicare unemployment

Social Welfare Policy Aid to Families with Dependent Children (AFDC) Temporary Assistance for Needy Families (TANF) block grants (monies given to states for general needs)

Medicare and Medicaid Acts (1965) Medicare (aid to the elderly) and Medicaid (aid to the poor) have protected the health of countless elderly and poor Americans. However, looking into the future, the programs are so enormous that both the federal and state governments are destined to face budget challenges with these entitlement programs.

Federal Entitlements Prove to Be a Barrier to a Federal Balanced Budget Congress has no discretion on how much money to appropriate (set by requirements, not by appropriations). It is mandatory spending; therefore, Congress cannot manipulate it to balance the budget. Entitlements account for two-thirds of federal government spending, and Congress has little leeway to balance the budget.

Incrementalism The best predictor of this year’s budget is last year’s budget plus a little bit more (an increment). Causes: Support of relevant interests for spending programs makes it difficult to pare the budget. The budget is too big to review from scratch each year. More federal spending has become “uncontrollable.”

Budget-Making Process The Office of Management and Budget (OMB) exerts presidential influence on the budget-making process by supervising preparation of the federal budget and advising the president on budgetary matters. The director is appointed by the president with Senate approval.

Congressional Budget Office (CBO) advises Congress on the likely consequences of its budget decisions, forecasts revenues, and is the counterweight to the president’s OMB

Ways and Means Committee: Previous Chair Charles Rangel above Ways and Means Committee Congress controls the budget-making process with the “power of the purse.” It writes tax legislation and fill affecting Social Security, Medicare, and other entitlement programs. Ways and Means Committee: Previous Chair Charles Rangel above

Congressional Budget and Impoundment Act of 1974 Provisions **fixes budget calendar for each step in budget process **binds Congress to total expenditure level that forms the bottom line of all federal spending for all programs (budget resolution) Two Ways 1) reconciliation: revises program or entitlement (comes at end of budgetary process to save money) 2) authorization bill: establishes discretionary government programs and sets maximum amount program may spend or standards for entitlement programs

More Reforms: Gramm-Rudman-Hollings Act of 1985 (Balanced Budget and Emergency Deficit Control Act) It mandated maximum allowable deficit levels for each year until 1993—at which point the budget was to be balanced. If Congress failed to meet its goals, across the board spending cuts would be mandated by the president (sequestrations). In 1990, Congress decided to shift its focus from controlling the size of the deficit to controlling increases in spending. Deficits continued to climb until the Clinton administration, when tax cuts were made to entitlement programs. Decreased tax revenues in 2000 and tax cuts in 2001 sent the budget into a deficit again.

Government grows by responding to groups and their demands Government grows by responding to groups and their demands. The budget is the government. The bigger the budget, the bigger the government. Americans want to spend, but not pay taxes. They are not unwilling victims of big government, but rather coconspirators. We have become “politics of scarcity”—scarcity of funds for programs like health-care reform and education.