The Congress, the President, and the Budget: The Politics of Taxing and Spending Chapter 14

What do you know? Pair Share / Write (you may use the back of the activity sheet) What is a budget? A deficit? A debt? *Think of these terms in relation to your family’s spending.

Introduction Budget A policy document allocating revenue (taxes) and expenditures (spending). Deficit An excess of federal expenditures (spending) over federal revenues (taxes or $ coming in). Debt The sum of all deficits over time Expenditures: All government spending (for laws and programs and staff who oversee them). Revenues: Sources of money paid by citizens to the government.

2012 Budget was $3.729 trillion

2012 Revenues were $2.627 Trillion

Current Numbers 2012 Budget was $3.729 trillion Obama’s budget revenue plan called for $2.627 trillion Deficit of over $1 trillion for the year!! Why???

Sources of Federal Revenue Income Tax Shares of individual citizens’ wages and corporate (business) revenues. The 16th Amendment permitted Congress to levy an Income tax. The individual taxpayers provide the largest single revenue source for the government.

Income Tax The House Ways and Means and the Senate Finance Committee writes the tax codes that set rules about who pays what to the federal gov’t Income tax is progressive: Those with MORE income pay HIGHER rates of tax on their income.

Social Insurance Taxes Both employers and employees pay Social Security taxes Money is deducted from pay checks These taxes have grown faster than any other source of federal revenue—and are over 40% of federal revenues

Sources of Federal Revenue Borrowing To make up shortfall/deficits, the federal government borrows money Sources are foreign investors, foreign governments and the American people (the Treasury Department sells bonds as one source). The federal debt is the sum of all the borrowed money that is still outstanding (over $16 trillion this budget)

National Debt Trends Total National Debt Figure 14.2

Sources of Federal Revenue: Taxes and Public Policy -Tax Loopholes: Any tax break that allows a person to benefit from NOT paying some part of his/her taxes Deductions for specific items Not everyone has the same access to loopholes Tax Expenditures: The losses in federal revenues that result from tax breaks, deductions and exemptions Examples: mortgage interest, child credits, exclusion of pension payments

Sources of Federal Revenue

Taxes and Public Policy Tax Reduction: The general call to lower taxes. Tax Reform: Rewriting the taxes to change the rates and who pays them. How much to tax is almost always a point of contention among Congress and the public Tax Reform Act of 1986: under Reagan, cut taxes for everyone Clinton raised tax rates for the wealthy

Federal Expenditures The biggest part of federal spending today is on social service programs (benefits to poor and elderly). 1. The biggest of these is Social Security. Social Security has been expanded since 1935 to include disability benefits and 2. Health Care- Medicare (health care for the elderly) and Medicaid (health care for poor) These benefit programs face financial problems with more recipients living longer.

Federal Expenditures The Rise of the Social Service State Social Security Medicare Medicaid Unemployment Insurance

Federal Spending

Federal Expenditures Trends in Social Service Spending (Figure 14.5)

Federal Expenditures 3. National Security/Defense Was the biggest expenditure through Reagan Defense now constitutes about one-fourth of all federal expenditures—down from ½ of budget.

Federal Expenditures Trends in National Defense Spending (Figure 14.4)

Federal Expenditures Incrementalism—Explains why budgets rise a little each year The federal budget is usually increased each year by a little bit A budget is calculated by assuming that expenditures of the previous year will rise for the next year. Agencies assume they will get at least what they got last year. This makes budgets rise a little each year.

“Uncontrollable” Expenditures - Are a form of mandatory spending Pensions and payments toward the national debt are fixed and thus not subject to cuts or changes These are entitlements like Social Security—and must paid to all who are eligible according to federal rules; NOT need based. The only way to control the expenditures is to change the rules/laws.

Federal Expenditures Social Services -Social Security -Medicare, -Welfare, -Other “uncontrollable expenditures” / entitlements Defense/National Security (used to be biggest until 1990s)

Why do Budgets Grow? Quick Write Why is it difficult to cut or balance the federal budget? Use these terms in your answer: Uncontrollable expenditures Loopholes Mandatory spending Incrementalism

The Budgetary Process Budgetary Politics The budget affects an involves agencies and departments in the federal, state and local governments The Players The President proposes/submits the budget, but Congress must approve it (sign it into law) Almost all committees are involved in the budget.

The Budgetary Process Step #1: The President Solicits Budget Requests from Exec Branch Departments -Budget requests from each executive department are submitted to the Office of Management and Budget (OMB) in the executive branch Interest groups and federal agencies (such as the FDA, EPA, DOD) often team up when making budget requests

The Budgetary Process Step #2: Formal Proposal Based on all of the agency requests, the President formally proposes a budget plan to Congress in February

The Budgetary Process Step #3: Congress Reviews the Proposed Budget The House and Senate Budget Committees and the Congressional Budget Office review the proposed budget for its feasibility House Ways and Means Committee and the Senate Finance Committees MAY rewrite tax codes now to increase or decrease revenue

The Budgetary Process Step #4: Congress Passes a Budget Resolution Congress must agree on a budget resolution, the final amount of expenditures NOT to be exceeded for the year

The Budgetary Process Step #5: Appropriations Committees allocate spending The Appropriations Committees in both the House and Senate set spending limits for all federal agencies and departments -Congress (thru the Appropriations Committees) MAY make changes to existing laws in order to meet the budget resolution Reconciliation: Program authorizations are adjusted Authorization Bill: They may change the requirements for entitlement programs or adjust discretionary spending amounts

Budgetary Process Step #6: Congress passes the budget bill Congress must pass the final budget bill and the President must sign it for it to become law

The Budget Process Budget requests are submitted to the Office of Management and Budget (OMB) Interest groups and agencies make requests Based on requests, the President formally proposes a budget plan to Congress in February The House Ways and Means Committee and the Senate Finance Committee predict revenues for the upcoming year Congress passes a budget resolution—the final amount of expenditures for the year The Appropriations Committees in both houses determine how federal funds will be allotted among agencies Congress must pass the final budget bill and the President must sign it into law

The Budgetary Process

The Budgetary Process

Budget Reform The Congressional Budget and Impoundment Control Act of 1974 An attempt to reform/improve the process. -Established a fixed budget calendar—with established deadlines -Created congressional budget committees in each house, -Created the Congressional Budget Office (CBO) to advise Congress on the consequences of spending; is a counterweight to the President’s OMB. A budget resolution sets the bottom line for the budget.

The Budgetary Process Congress and the Budget The 1974 Reforms haven’t been successful. Between 1974 and 1998, every budget was a deficit budget. Congress misses most of its own deadlines. Congress passes continuing resolutions to keep the government going until it passes a new budget.

The Budgetary Process Annual Federal Deficits (Figure 14.6)