Federal Government and the Economy Political Science I

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How does the US government raise money?

Taxes and Federal Securities Taxes are the primary source of revenue Taxes are used to influence the economy Federal securities (e.g. bonds, notes, treasury bills) are sold to borrow revenue

Individual Income Tax Is the federal government’s biggest single source of revenue Is levied on a person’s taxable income Is a progressive tax based on a person’s ability to pay (higher the income, higher the tax rate) Must be reported/filed by April 15th of every year Withholding pays the anticipated taxes ahead of the April 15th deadline Self-employed people who do not receive regular salaries must File income estimates four times a year Make payments based on estimates

Corporate Income Taxes Are the federal tax on all the earned corporate income beyond a corporation’s expenses and deductions Is approximately 14% of federal revenues (Remy, 2010) Does not apply to nonprofit organizations, which are exempt Colleges Labor unions Churches

Social Insurance Taxes Are taxes collected to pay for major social programs such as Social Security Medicare Unemployment compensation Are deducted from each worker’s paycheck by his or her employer who then pays an equal amount and sends the total to the federal government Go into Treasury Department special trust accounts, not the government’s general fund

Other Taxes Excise Taxes Customs Duties Are taxes intended to increase state revenue while reducing consumption of a product or service (e.g. gas and cigarette taxes) Are also called luxury taxes Customs Duties Are taxes levied on imported goods Are also called customs duties, tariffs, or import duties Are used to raise revenue or to protect domestic business and agriculture from foreign competition (i.e. protective tariff)

Other Taxes (continued) Estate Taxes Are taxes on property and money left by a person after he or she has died Gift Taxes Are taxes on money someone gives while living

Taxes Influence the Economy Governments use taxes to influence the economy by encouraging and discouraging activities, such as A tax deduction for home mortgage interest encourages people to buy homes, which helps the construction industry A heavy tax on cigarettes discourages smoking, which improves peoples health

Taxes Influence the Economy (continued) Tax exemptions Are a legal means to free certain types of property, sales, or income from taxpaying obligations Tax credits Are usually given to people with lower incomes Allow taxpayers to reduce their income tax liability (e.g. child care credit)

Federal Securities Federal securities (e.g. bonds, notes, treasury bills) are sold to borrow revenue The government must borrow money when its spending results in a deficit Government borrowing over time creates/increases the national debt The size of the national debt affects the economy

How does the US government manage the economy?

Characteristics of a Healthy Economy Low unemployment Stable prices of consumer goods High worker productivity Increasing economy overall

General Information The primary purpose of the national budget is to fund government programs at the federal, state, and local levels The Budget and Accounting Act of 1921 gives the President the authority to prepare an annual budget and submit it to Congress for approval The federal government plays a major role in managing the US economy Control of the US economy is divided between the government and the private sector, which often causes conflict

General Information (continued) Unlike some state and local governments, the federal government is not required to operate with a balanced budget It is very rare for the federal government to spend exactly the amount it receives in revenue The most recent federal budget surplus occurred in 2001 Since 2001, the federal government’s expenditures have exceeded its revenue, creating a budget deficit and increasing the national debt

Types of Policies The federal government influences the economy with two types of policies Fiscal Policy, which utilizes government spending and taxation Monetary Policy, which manages the supply of money and credit

Four Major Components of Federal Government Spending Direct benefit payments to people participating in social programs (e.g. Social Security, health and welfare programs) A large portion goes to uncontrollable expenditures The biggest entitlement program is Social Security (Remy, 2010) National defense expenses Discretionary spending On interests such as the environment, transportation, criminal justice, etc. As grants to states and localities Interest on the national debt

The Federal Reserve System (The Fed) Is the central banking system of the US Is the entity that loans money to banks Is supervised by a seven-member Board of Governors that Are selected by the President Are approved by the Senate Serve a four-year term Determine the general money and credit policies of the US Make decisions independent of the President and the Senate

The Federal Reserve System (The Fed) (continued) Uses four main tools to control the US monetary policy Raise or lower the discount rate Raise or lower the reserve requirement Buy government bonds Sell government securities Creates policies that may support or challenge existing government programs

Resources Remy, Ph.D., R. C. (2010), United States Government: Democracy in Action, Glencoe McGraw-Hill. http://apps.irs.gov/app/withholdingcalculator/