1. Federal Government and the Economy
Political Science I

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3. How does the US government raise money?

4. 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

5. 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

6. 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

7. 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

8. 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)

9. 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

10. 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

11. 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)

12. 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

13. How does the US government manage the economy?

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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. Resources
Remy, Ph.D., R. C. (2010), United States Government: Democracy in Action, Glencoe McGraw-Hill.