The Congress, the president, and the budget Political Economics The Congress, the president, and the budget

Two central questions Who bears the burden of paying for government? Who benefits?

How this is calculated results in a budget

The budget allocates burdens (taxes) and benefits (expenditures) Similar to your personal budget, but the government’s budget has major political effects because it says who is going to get burdened and who is going to get benefits

If government expenditures (money spent) is more than revenues (money taken in) a budget deficit occurs Currently 985 Billion (dollars)

This creates a problem for politicians because the average American wants a balanced budget (no deficit) In order to get a balanced budget you either need to decrease expenditures, or increase revenue (i.e. taxes) But Americans also want the same amount of spending on most programs, and low taxes See how this could be a problem?

In addition, every year the Congress and the president must appropriate funds to run the government If they don’t do this, the government (theoretically) could stop No army, no post office, no benefits to the poor

If government needs revenue to keep running, where does this money come from?

Three main sources Income tax (personal and corporate) Social insurance taxes Borrowing (Sales taxes are part too, but make up only a small amount of government revenue) Three main sources

Income tax Shares of your individual wages (i.e. income) collected by the government Authorized by the 16th amendment

The income tax is a progressive tax Those with more income pay a higher tax rate (a larger percentage) Also called a graduated income tax Top 10% of tax payers pay 2/3rds of income taxes

Table 1. Tax Brackets and Rates, 2018 For Unmarried Individuals, Taxable Income Over For Married Individuals Filing Joint Returns, Taxable Income Over For Heads of Households, Taxable Income Over 10% $0 12% $9,525 $19,050 $13,600 22% $38,700 $77,400 $51,800 24% $82,500 $165,000 32% $157,500 $315,000 35% $200,000 $400,000 37% $500,000 $600,000

Social insurance taxes Social security Medicare These taxes go to a specific purpose

Borrowing Sometimes, like the average citizen, the federal government needs to borrow money To do this, it sells bonds. This means it agrees to pay back the amount plus interest Who can buy bonds? Citizens Financial institutions Corporations Other governments

Most government borrowing is for the day-to-day operations of the government But when you owe money, you are in debt

The U.S. has accumulated a massive federal debt (all the money borrowed that has not been payed back) Currently 20 trillion Your books says 9 trillion; that’s how much it has increased in about 10 years That’s more than our current GDP GDP is Gross Domestic Product; it’s basically the value of everything a country produces

Many see this as a problem, but disagree on a solution Republicans – cut taxes, because this will make people spend more, increasing tax revenue in the future Democrats – when taxes are cut too much, we never make up the lost revenue, which leads to increasing debt

Most government income still comes from taxes though

Taxes Leads to lots of contentious debates over a variety of issues Tax loopholes Hard to define Basically happens when people or businesses are able to pay fewer taxes than it appears they should

Tax expenditures Revenue losses because of special tax exemptions or deductions Happens when the government could collect money for something, but instead allows you to deduct it from your taxes or not pay any taxes on it Charitable contributions Mortgage interest

Tax Reduction Should taxes be lowered? By how much? Source of much intense debate Compared to other countries, the U.S. has a fairly low tax rate However, our government also spends less the public than countries with high tax rates How to deal with the tax code is referred to as tax reform

Federal Expenditures It’s a lot All American governments combined spend about 1/3rd of GDP Why so big?

Basically, Americans like government services Realistically, what can we all agree on to cut?

How much money should be allocated to the defense budget? Terms “national security state” and “social service state” are associated with the growth of the government How much money should be allocated to the defense budget?

Social Services Biggest part of the budget Things like: social security, Medicare, Medicaid, subsidies for environmental programs, drug rehab, aid to the poor

Social Security 1935 Social Security Act Meant to aid the elderly in retirement What’s the issue? How does it work?

Medicare Provides health coverage to the elderly

Why does the budget continue to grow? Incrementalism This year’s budget is usually last year’s budget plus a little bit more It doesn’t feel that bad when you add a little, but over time it adds up

“Uncontrollable” expenditures aka entitlements These are things the government has already agreed to pay to certain eligible people or interests Social security is an example: If more people retire in a given year and become eligible to collect social security, then of the course the government has to pay more; hence “uncontrollable”

Discretionary spending The opposite of uncontrollable expenditures is discretionary spending This is spending that comes through appropriations bills in Congress, and is essentially “optional,” unlike the mandatory spending of entitlements Examples are foreign aid, education, national defense, and transportation

The budget determines who gets what, so naturally it’s a big deal, with lots of people and groups in involved

Who’s involved Interest groups Government agencies Office of Management and Budget (formulates president’s budget) The president Tax committee in Congress CBO Subject matter committees Appropriations committee Government Accountability Office (GAO) Congress as a whole