1. Government in America: People, Politics, and Policy
Thirteenth AP* Edition
Edwards/Wattenberg/Lineberry
Chapter 14
The Congress, the President, and the Budget: The Politics of Taxing and Spending
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Bellringer 3/31
The federal income tax deduction for mortgage interest on an owner occupied home is an example of an
A. tax rebate
B. negative income tax
C. federally guaranteed loan
D. tax expenditure
E. tax refund
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Introduction
Budget:
A policy document allocating burdens (taxes) and benefits (expenditures)
Deficit:
An excess of federal expenditures over federal revenues
Expenditures:
What the government spends money on
Revenues:
Sources of money for the government
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4. Sources of Federal Revenue
Generally, Americans want the government to balance the budget, maintain or increase the level of government spending, and keep taxes low.
Three sources of federal revenues:
Income tax
Social insurance taxes
Borrowing
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5. Sources of Federal Revenue
Income Tax
Shares of individual wages and corporate revenues
The 16th Amendment permitted Congress to levy an income tax
Taxes
IRS accepts and analyzes income tax returns each year
Reorganized and established as the IRS in the 1950s
IRS commissioner and chief counsel selected by the President and confirmed by the Senate
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7. Sources of Federal Revenue
Income Tax
Individual taxes are the largest single revenue source for the government.
Income tax is progressive: Those with more income pay higher rates of tax on their income.
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12. Sources of Federal Revenue
Social Insurance Taxes
Both employers and employees pay Social Security taxes. Money is deducted from employees’ paychecks and matched by their employers.
These payments are earmarked for a specific purpose, the Social Security Trust Fund.
Taxes for Medicare are also deduced from employees’ paychecks and matched by their employers
OASDI: 6.2%
HI: 1.45%
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13. Sources of Federal Revenue
Borrowing
The federal debt is the sum of all the borrowed money that is still outstanding.
Debt
Debt vs. Deficit
The government does not have a capital budget.
Purchases counted as current expenditures and run up the deficit
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14. Sources of Federal Revenue
Federal Debt: all money borrowed over the years and still outstanding
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17. Sources of Federal Revenue
Borrowing
The government borrows money through the Treasury Department selling bonds
Sell bonds, guaranteeing to pay interest to the bondholder
The federal government has intragovernmental debt where the Treasury owes other government trust funds.
Most federal borrowing is for day-to-day expenses, such as farm subsidies, military pensions, and aid to states and cities.
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23. Sources of Federal Revenue
Taxes and Public Policy
Tax Loopholes: tax breaks or benefits for a few people
Tax Expenditures: revenue losses that result from special exemptions, exclusions, or deductions on federal tax law
Benefit middle and upper income taxpayers and corporations
Loopholes or support activities worth subsidizing
Tax Reduction: the general call to lower taxes
Tax Reform: rewriting the taxes to change the rates and who pays them
Tax Reform Act of 1986—extensive tax reform
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Federal Expenditures
The policies and programs on which the government spends money change over time.
Expenditures keep rising.
Why are budgets large, where does the money go?
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Federal Expenditures
Big Governments, Big Budgets
A big government requires lots of money.
As the size of government increases, so does its budget.
Broken down into
Mandatory
Discretionary
Interest on debt
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Federal Expenditures
The Rise and Decline of the National Security State
In the 1950s and 1960s the Department of Defense received more than half the federal budget.
Defense now constitutes about one-sixth of all federal expenditures.
Payrolls, pensions, veterans pensions, disability compensation, research, development, procurement of military hardware
One reason for growth of government
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Federal Expenditures
The Rise of the Social Service State
The biggest part of federal spending is now for income security programs.
Social Security is largest program
Social Security has been expanded since 1935 to include disability benefits and Medicare.
These benefit programs face financial problems with more recipients living longer.
Another reason for government growth
Assistance vs. drain on federal funds
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Federal Expenditures
“Uncontrollable” Expenditures
Spending determined by the number of recipients, not a fixed dollar figure
Mainly entitlement programs where the government pays known benefits to an unknown number of recipients
Social Security
The only way to control the expenditures is to change the rules.
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Federal Expenditures
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Federal Expenditures
Incrementalism
The idea that last year’s budget is the best predictor of this year’s budget, plus some.
Agencies can safely assume they will get at least what they got last year.
Focus & debate on the increase over last year
Constant call for budgetary reform
Affected by groups with interests in taxes and expenditures
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Bellringer
Which of the following statements about the OMB is false?
A. The OMB advises the president on budgetary matters
B. The OMB is one of the few government agencies created by the Constitution
C. The OMB supervises preparation of the federal budget.
D. Government agencies send their budget estimates to the OMB
E. none of the above
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41. The Budgetary Process Budgetary Politics Process overview
President submit budget proposal to Congress
Congressional Budget Office (CBO) evaluates budget and submits a report to the Budget Committees.
Budget committees proposes a budget resolution
Both chambers must pass a budget that includes 13 major appropriation bills by October 1st.

42. The Budgetary Process Budgetary Politics Process overview
Congress creates a new budget for our country every year, the appropriation process.
Appropriation bills specify how much money will go to different government agencies and programs.
Congress must also pass legislation that provides the federal government the legal authority to actually spend the money called authorization bills
Authorizations often cover multiple years, so authorizing legislation does not need to pass Congress every year the way appropriations bills do.

43. The Budgetary Process Budgetary Politics Process overview
Budget process is for annually appropriated programs because funding must be renewed each year to keep government agencies open and operating
Discretionary spending because Congress has the discretion to set funding levels each year.
Nearly all of the tax code and more than half of federal spending is ongoing.
Mandatory spending because are not controlled by annual appropriations and authorization bills provide the authority for spending.

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The Budgetary Process
Budgetary Politics
Process overview
The President submits a budget request to Congress
House and Senate pass budget resolution
House and Senate Appropriations subcommittees "markup" appropriations bills
House and Senate vote on appropriations bills and reconcile differences
President signs each appropriation bill and the budget becomes law
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The Budgetary Process
Budgetary Politics
Who is involved:
Interest groups
Media
Public
Executive staff and agencies
Agencies submit budget requests to OMB
OMB prepares president’s budget
Congress
President
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The Budgetary Process
The President’s Budget
Presidents first played a limited role in the budget.
Now budget requests are directed through the Office of Management and Budget and president before going to Congress.
OMB: prepares budget and measures quality of programs and policies and if align with agenda of president.
Budget tells congress what president recommends for fiscal policy
Lays out president’s priorities
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The Budgetary Process
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The Budgetary Process
Congress and the Budget
Reforming the Process
The Congressional Budget and Impoundment Control Act of 1974: an act designed to reform the congressional budgetary process
Made Congress less dependent on president budget
Removed presidential power of impoundment
Required budget be considered as a whole
It established the following:
Fixed budget calendar
A budget committee in each House
The Congressional Budget Office
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The Budgetary Process
Congress and the Budget
The Process: Step 1
Congress develops a resolution created by budget committees.
Resolution sets limits on how much Congress is supposed to spend in broad areas
Not a true bill
Supposed to be completed by April 15th
Other congressional committees that can propose legislation directly providing or changing spending and taxes
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The Budgetary Process
Congress and the Budget
The Process: Step 2
Appropriation Committees determine precise levels of allowed spending for discretionary programs
Subcommittees come up draft of appropriation bill abiding by spending limits set in the resolution.
Goes to Appropriation Committee for review
The Process: Step 3
House and Senate vote on appropriation bills and reconcile any differences.
The Process: Step 4
President must sign each appropriation bill after Congress has passed it to become law.
When the president has signed all 12 appropriation bills the budget is complete.
GAO will monitor, audit, and evaluate what agencies are doing with their budget.
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The Budgetary Process
Congress and the Budget
Reforming the Process
Congress may use a procedure known as reconciliation as a deficit reduction tool, to force committees to produce spending cuts or tax increases.
Authorizations are revised to achieve savings.
If Congress does not complete action on an appropriations bill before the start of the fiscal year on October 1, it must pass, and the President must sign, a continuing resolution 
Continuing resolution: when Congress cannot reach agreement and pass appropriation bills, these resolutions allow agencies to spend at the level of the previous year.
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The Budgetary Process
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The Budgetary Process
Congress and the Budget
The Success of the 1974 Reforms
Between 1974 and 1998, every budget was a deficit budget.
Congress misses most of its own deadlines.
Omnibus budget bills often contain policies that cannot pass on their own.
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The Budgetary Process
Annual Federal Deficits (Figure 14.6)
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The Budgetary Process
Congress and the Budget
More Reforms
Congress enacted the Balanced Budget and Emergency Deficit Control Act to try and reduce annual budget deficits.
Mandated maximum allowable deficits levels and if Congress failed to meet deficit goals sequestrations were ordered.
In the 1990s shift to focus on controlling spending.
Any new spending in domestic, defense, and international required a decreased elsewhere within the category.
Budget surpluses began in 1997.
Economic downturn, income tax cuts, and increased military expenditures brought a return to deficits by 2001.
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61. Understanding Budgeting
Democracy and Budgeting
Many politicians “spend” money to buy votes.
With many groups and people asking for government assistance, the budgets get bigger.
Some politicians compete by trying not to spend money.
People like government programs, but they really do not want to pay for them, thus there are deficits and federal debt.
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62. Understanding Budgeting
The Budget and the Scope of Government
In sum, the budget represents the scope of government.
The bigger the government, the bigger the budget
Limits on funding (taxes) can limit what the government can do.
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Summary
Federal budget consumes one-fifth of GDP
Government growth has meant higher taxes to pay for additional services, often through deficit spending.
The budgetary process is complex.
The budget is used, some argue, to buy votes, leading to an ever larger government.
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