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Section 1: Raising Money Section 2: Preparing the Federal Budget Essential Question Section 1: Raising Money Section 2: Preparing the Federal Budget Section 3: Managing the Economy Chapter Summary Chapter Menu

How does the government spend the taxes you pay, and how do government expenditures affect the economy? Essential Question

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Section 1-Content Vocabulary taxes taxable income dependent withholding securities national debt Section 1-Content Vocabulary

Section 1-Academic Vocabulary anticipate estimate impose Section 1-Academic Vocabulary

Section 1-Reading Strategy As you read, complete a graphic organizer similar to the one below to list the types of taxes the federal government uses for revenue. Section 1-Reading Strategy

Section 1-Polling Question Who benefits most from tax credits? A. low-income individuals B. businesses C. the Fed A B C Section 1-Polling Question

Taxes as a Source of Revenue Taxes are payments made by individuals and businesses to support government activities. The individual income tax is the federal government’s biggest single source of revenue. The federal income tax is levied on a person’s taxable income, an individual’s total income minus certain deductions and exemptions. Section 1

Taxes as a Source of Revenue (cont.) A dependent is someone who depends primarily on another person for basic items such as food, clothing, and shelter. During the year, employers withhold a certain amount of money from the workers’ wages. This withholding pays the anticipated taxes ahead of the April 15 filing date. The Internal Revenue Service (IRS) is a bureau of the U.S. Treasury Department and collects taxes through regional centers. Section 1

Taxes as a Source of Revenue (cont.) The federal government taxes all the earned income of a corporation beyond its expenses and deductions. The federal government collects huge sums of money each year to pay for Social Security, Medicare, and unemployment compensation programs. The taxes collected to pay for these major social programs are called social insurance taxes. Section 1

Taxes as a Source of Revenue (cont.) Excise taxes are taxes on the manufacture, transportation, sale, or consumption of goods and the performance of services. Taxes levied on imported goods are called customs duties, tariffs, or import duties. An estate tax is a tax on property and money left after someone has died. Section 1

Payments made by individuals and businesses to support government activities are called A. taxes. B. investments. C. income. D. bills. A B C D Section 1 – DQ1

Taxes and the Economy Governments at all levels can use taxes to influence the economy. Tax exemptions are a privilege granted by government that legally frees certain types of property, sales, or income from taxpaying obligations. Estimated Federal Taxing and Spending, 2007 Section 1

Taxes and the Economy (cont.) Today the federal government provides tax credits mostly to people with lower incomes. Tax credits allow taxpayers to reduce their income tax liability. Estimated Federal Taxing and Spending, 2007 Section 1

What is the term for a privilege granted by government that legally frees certain types of property, sales, or income from taxpaying obligations? A. tax avoidance B. tax freedom C. tax exemption D. tax amnesty A B C D Section 1 – DQ2

Borrowing for Revenue In addition to collecting taxes, the federal government borrows money. The government borrows by selling federal securities—financial instruments that include bonds, notes, and treasury bills. Government borrowing to fund annual budget deficits over time creates the national debt. The size of the national debt affects the federal budget and the economy. Section 1

Financial instruments that include bonds, notes, and treasury bills are called A. securities. B. fiscal tools. C. monetary units. D. capital. A B C D Section 1 – DQ3

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Section 2-Content Vocabulary fiscal year uncontrollables entitlement incrementalism Section 2-Content Vocabulary

Section 2-Academic Vocabulary confer preliminary evaluate Section 2-Academic Vocabulary

Section 2-Reading Strategy Create a graphic organizer similar to the one below to list entitlements provided by the government. Section 2-Reading Strategy

Section 2-Polling Question Who has the greatest influence on the nation’s budget? A. the president B. Congress A B Section 2-Polling Question

The President’s Budget Today, the federal budget is used to predict and control revenue and spending. The budget follows a fiscal year—the 12-month accounting period from October 1 to September 30 of the next year. Steps in the Budget Process Section 2

The President’s Budget (cont.) The Budget and Accounting Act of 1921 makes the president responsible for directing the preparation of the budget and making key decisions about national budget priorities. The actual day-to-day preparation of the budget is the responsibility of the Office of Management and Budget. Steps in the Budget Process Section 2

The President’s Budget (cont.) About 70 percent of the federal budget consists of what are called uncontrollables—expenditures required by law or resulting from previous budgetary commitments. A major part of uncontrollable spending is the entitlements—benefits such as Social Security and veterans’ benefits that Congress must by law provide to individuals. Steps in the Budget Process Section 2

C. the financial calendar. D. the accounting year. A B C D The 12-month accounting period from October 1 to September 30 of the next year is called A. the tax calendar. B. the fiscal year. C. the financial calendar. D. the accounting year. A B C D Section 2 – DQ1

Congressional Budget Action The Congressional Budget Act of 1974 set up House and Senate Budget Committees and the Congressional Budget Office (CBO). The CBO’s job is to evaluate carefully the overall federal budget for Congress. In 1985 Congress enacted the Balanced Budget and Emergency Deficit Control Act, known as the Gramm-Rudman-Hollings Act (GRH). Section 2

Congressional Budget Action (cont.) The GRH was intended to force the president and Congress to cooperate on programs that would reduce budget deficits. In 1990, President George H.W. Bush and the Democratic Congress agreed on the Budgetary Enforcement Act, which divided the budget into three areas: domestic policy; defense; and international affairs. Section 2

Congressional Budget Action (cont.) The budget-making process generally follows three steps: the House and Senate Budget Committees review; reconcile differences between the House and Senate versions of the budget bill; and final budget aligns with the Budgetary Enforcement Act of 1990. Section 2

D. international affairs A B C D Which of the following is a division of the budget as defined by the Budgetary Enforcement Act of 1990? A. commerce B. law enforcement C. education D. international affairs A B C D Section 2 – DQ2

Incremental Budget Making Incrementalism means that generally the total budget is changed only by an increment, or small amount. The best way to forecast what this year’s budget will be is to assess last year’s budget and add a little more. Incrementalism means that most changes in our political system unfold gradually. Section 2

Incrementalism means that generally the total budget is changed by A. a large amount. B. a small amount. C. legislation. D. Congress. A B C D Section 2 – DQ3

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Section 3-Content Vocabulary fiscal policy monetary policy gross domestic product discount rate reserve requirement open-market operations Section 3-Content Vocabulary

Section 3-Academic Vocabulary portion objective infrastructure Section 3-Academic Vocabulary

Section 3-Reading Strategy As you read, create a graphic organizer like the one to the right to help you take notes on managing the economy. Section 3-Reading Strategy

Section 3-Polling Question Which form of government influence has the most significant effect on the economy? A. fiscal policy B. monetary policy A B Section 3-Polling Question

Where the Money Goes The government currently spends roughly $3 trillion per year, a figure that can be broken down into four major components: direct benefit payments to individuals, including Social Security, health, and welfare programs; national defense; Comparing Governments: Government Revenue and Expenditures Section 3

Where the Money Goes (cont.) discretionary spending including spending on the environment, transportation, criminal justice, and other areas; and interest on the national debt. Comparing Governments: Government Revenue and Expenditures Section 3

The government annually spends roughly how much money? A. $3 billion B. $30 million C. $3 trillion D. $30 trillion A B C D Section 3 – DQ1

Fiscal and Monetary Policy The government can influence the economy in two main ways: Fiscal policy involves using government spending and taxation to influence the economy. Monetary policy involves controlling the supply of money and credit to influence the economy. Section 3

Fiscal and Monetary Policy (cont.) When the government increases spending or reduces taxes, it is likely to run a deficit because it must spend money that it does not have. Since the 1930s, the United States has had deficit, or unbalanced, federal budgets. The Public Debt, 1940-2008 Section 3

Fiscal and Monetary Policy (cont.) The gross domestic product (GDP) is the sum of all goods and services produced in the nation in a year. Some economists say that the deficit as a percentage of the gross domestic product (GDP) is more important than the deficit alone. The Public Debt, 1940-2008 Section 3

Policy involving the supply of money and credit to influence the economy is A. fiscal policy. B. monetary policy. C. financial policy. D. credit policy. A B C D Section 3 – DQ2

The Federal Reserve System The Federal Reserve System, known as the Fed, is the central banking system of the United States. When banks need money, they borrow from the Fed. Section 3

The Federal Reserve System (cont.) The United States is divided into 12 Federal Reserve Districts. Each district has one main Federal Reserve Bank. Most Federal Reserve Banks have branch banks within their districts. Federal Reserve Districts Section 3

The Federal Reserve System (cont.) A seven-member Board of Governors in Washington, D.C., determines the general money and credit policies of the United States and supervises the operations of the Federal Reserve Banks in the 12 districts across the country. Federal Reserve Districts Section 3

The Federal Reserve System (cont.) The Fed uses four main tools to control the financial activities of the nation’s banks: The discount rate is the rate the Fed charges member banks for loans. The Fed can raise or lower the reserve requirement—the money banks must keep in their vaults or on deposit with the Federal Reserve Banks. Section 3

The Federal Reserve System (cont.) The Fed can put money into the economy by buying government bonds on the open market—open-market operations. The Fed may sell government securities. Section 3

C. financial calculation A B C What is one of the four tools used by the Fed to control the financial activities of the nation’s banks? A. discount rate B. coupon fund C. financial calculation A B C Section 3 – DQ3

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ANSWERS 1. corporate taxes in 1950; employment taxes in 2006   2. generally decreasing after 1950   3. Answers will vary but may include that Social Security was fairly new in 1950 and had few beneficiaries receiving payments. DFS Trans 1

DFS Trans 2 ANSWERS 1. United Kingdom; India 2. The United States has a larger deficit, but France’s deficit as a percent of its GDP is much larger.   3. United States and Japan DFS Trans 2

ANSWERS 1. Answers will vary but should note that such requests might be very large and impossible to fill.   2. No; because if the Budget Bureau made any reductions an agency might receive less than the needed amount.   3. Answers will vary, but students should recognize that current events may influence budget makers’ attitudes and decisions. DFS Trans 3

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