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3. Chapter 14: Congress, The President, and the Budget The Politics of Taxing and Spending Federal Revenue and Borrowing Federal Expenditures Understanding Budgeting Summary

4. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Chapter Outline and Learning Objectives Federal Revenue and Borrowing LO 14.1: Describe the sources of funding for the federal government and assess the consequences of tax expenditures and borrowing. Federal Expenditures LO 14.2: Describe the major categories of federal expenditures, and explain why the budget has grown.

5. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Chapter Outline and Learning Objectives Understanding Budgeting LO 14.3: Assess the impact of democratic politics on budgetary growth, and explain how the budget can constrain the scope of government.

6. Federal Revenue and Borrowing LO 14.1: Describe the sources of funding for the federal government and assess the consequences of tax expenditures and borrowing. Budget A policy document allocating burdens (taxes) and benefits (expenditures). Deficit Excess of federal expenditures over federal revenues. Total debt will be about $15 trillion by 2011. AHHHH!!!!! Now $18 and climbing… To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman

7. To Learning Objectives LO 15.1 Copyright © 2011 Pearson Education, Inc. Publishing as Longman

8. Government Shutdown Read the article on the most recent government shutdown. Take notes regarding the cause/consequences of this shutdown Reaction?

9. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Revenue and Borrowing Expenditures Government spending – Major areas are social services and national defense. Revenues Financial resources of the government – Individual income tax and Social Security tax are two major sources. To Learning Objectives LO 15.1

10. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Revenue and Borrowing Personal and Corporate Income Tax Social Insurance Taxes Borrowing Taxes and Public Policy To Learning Objectives LO 15.1

11. To Learning Objectives LO 15.1 Copyright © 2011 Pearson Education, Inc. Publishing as Longman

12. Federal Revenue and Borrowing Personal and Corporate Income Tax Income tax – Shares of individual wages and corporate revenues collected by the government. Sixteenth Amendment – Explicitly authorized Congress to levy a tax on income 1913 Corporations also pay income taxes, but now do not yield as much revenue as individual income taxes To Learning Objectives LO 15.1

13. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Revenue and Borrowing Social Insurance Taxes Both employers and employees pay Social Security and Medicare taxes. Earmarked for the Social Security Trust Fund to pay benefits In 2010, employees and employers each paid a Social Security tax equal to 6.2 percent of the first $106,800 of earnings, and for Medicare they paid another 1.45 percent on all earnings. To Learning Objectives LO 15.1

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15. Federal Revenue and Borrowing Borrowing Treasury Department sells bonds when the federal government wants to borrow money. Federal debt – All the money borrowed by the federal government over the years and still outstanding. Today the federal debt is about $18 trillion. Led to calls for a balanced budget amendment Federal gov. does not have a capital budget, a budget that will serve for the long-term. These purchases are counted as current expenditures and run up the deficit. To Learning Objectives LO 15.1

16. To Learning Objectives LO 15.1 Copyright © 2011 Pearson Education, Inc. Publishing as Longman

17. Federal Revenue and Borrowing Taxes and Public Policy Tax Expenditures – Revenue losses from special exemptions, exclusions, or deductions allowed by federal tax law. Represent the difference between what the government actually collects in taxes and what it would have collected without special exemptions. Individuals receive most of the tax expenditures and corporations get the rest. Tax expenditures amount to subsidies for some activity, such as deductions for contributions to charities, business deductions of investment in new plants and equipment. To Learning Objectives LO 15.1

18. To Learning Objectives LO 15.1 Copyright © 2011 Pearson Education, Inc. Publishing as Longman

19. To Learning Objectives LO 15.1 Copyright © 2011 Pearson Education, Inc. Publishing as Longman

20. The Balanced Budget Amendment Read the arguments for/against and take notes. Write an argument either for or against the balanced budget amendment (2 pages) Due Friday Examine the costs and benefits of balancing the budget given that most of the budget expenditures are mandated. Identify which benefits and which obligations should be the first to go.

21. Federal Expenditures LO 14.2: Describe the major categories of federal expenditures, and explain why the budget has grown. Big Governments, Big Budgets The Rise of the National Security State The Rise of the Social Service State Incrementalism “Uncontrollable” Expenditures To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman

22. To Learning Objectives LO 15.2 Copyright © 2011 Pearson Education, Inc. Publishing as Longman

23. Federal Expenditures Big Governments, Big Budgets Big budgets are necessary to pay for big governments. National, state, and local governments spend an amount equal to one-third of the gross domestic product (GDP). National government spending alone currently represents about one-fourth of the GDP. GDP: Gross national product minus the value of goods and serviced produced outside the country. To Learning Objectives LO 15.2

24. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Expenditures The Rise of the National Security State In the 1950s and 1960s the Department of Defense received more than 50% of the federal budget. Defense now gets about one-sixth of all federal expenditures. This is one reason for growth of government. To Learning Objectives LO 15.2

25. To Learning Objectives LO 15.2 Copyright © 2011 Pearson Education, Inc. Publishing as Longman

26. To Learning Objectives LO 15.2 Copyright © 2011 Pearson Education, Inc. Publishing as Longman

27. Federal Expenditures The Rise of the Social Service State The biggest federal spender is now income security programs. Social Security is #1 spender, now it includes disability benefits and Medicare, and its recipients are living longer. This is another reason for government growth. To Learning Objectives LO 15.2

28. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Social Security Essentially, money is taken from working members of the population and spent on retired members; but demographic and economic realities now threaten to dilute this intergenerational agreement. In 1945, 50 workers paid taxes to support each Social Security beneficiary. In 1990, about three workers supported each beneficiary. By the year 2025, fewer than two workers will be supporting each beneficiary.

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30. To Learning Objectives LO 15.2 Copyright © 2011 Pearson Education, Inc. Publishing as Longman

31. Social Security Read the article regarding the issue over Social Security. What do you think is the best solution? Why?

32. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Expenditures Incrementalism A description of the budget process where the best predictor of this year’s budget is last year’s budget, plus a little bit more (an increment). According to Aaron Wildavsky, “Most of the budget is a product of previous decisions.” To Learning Objectives LO 15.2

33. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Expenditures Incrementalism (cont.) Policymakers focus little attention on the budgetary base, the amounts agencies have had over the previous years. Agencies can safely assume they will get at least the budget they had the previous year. Most of the debate and attention is on the proposed increment. Any given agency’s budget tends to grow a little bit every year. To Learning Objectives LO 15.2

34. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Expenditures “Uncontrollable” Expenditures Expenditures are determined by how many eligible beneficiaries there are for a program or by previous obligations of the government; Congress therefore cannot easily control. Social Security benefits are an example of uncontrollable expenditures; mandated under current law or by previous obligation To Learning Objectives LO 15.2

35. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Expenditures “Uncontrollable” Expenditures (cont.) Entitlements – Policies for which Congress has obligated itself to pay X level of benefits to Y number of recipients. Social Security benefits are an example of entitlements. To Learning Objectives LO 15.2

36. Copyright © 2011 Pearson Education, Inc. Publishing as Longman FRQ 14.1: Incrementalism/Expenditures Since the 1970s, the national debt has grown from $1 trillion to over $18 trillion. Two factors that have contributed to this growth are incrementalism and uncontrollable expenditures Define incrementalism and uncontrollable expenditures. Explain how each contribute to the increasing national debt of the past 40 years. Describe one other factor that has contributed to the growing national debt of the past 40 years.

37. Understanding Budgeting LO 14.3: Assess the impact of democratic politics on budgetary growth, and explain how the budget can constrain the scope of government. Democracy and Budgeting The Budget and the Scope of Government To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman

38. Understanding Budgeting Democracy and Budgeting Many politicians spend money to buy votes. Bigger budgets – Many groups and people ask for government assistance. People like government programs, but they really do not want to pay for them, thus there are deficits and federal debt. To Learning Objectives LO 15.3

39. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Understanding Budgeting The Budget and the Scope of Government The size of budget is the scope of government. The bigger the government, the bigger the budget. Limits on revenues can limit what the government can do. To Learning Objectives LO 15.3

40. To Learning Objectives LO 15.3 Copyright © 2011 Pearson Education, Inc. Publishing as Longman

41. FRQ 14.2: Budgetary Process The President and the Congress are both very important in the passage of the federal budget each year. 1. Describe the significance of the House Ways and Means Committee on the budget 2. Describe the significance of the Office of Management and Budget on the budget 3. Describe the significance of the Congressional Budget Office on the budget

42. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Free Response A.The President and the Congress are both very important in the passage of the federal budget each year. –Describe the significance of the House Ways and means Committee on the budget –Describe the significance of the Office of Management and Budget on the budget –Describe the significance of the Congressional Budget Office on the budget.

43. Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 15.1 Summary Federal Revenue and Borrowing The personal income tax is the largest source of revenue for the federal government, with social insurance taxes a close second. Other revenue comes from the corporate income tax and excise taxes. To Learning Objectives

44. Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 15.1 Summary Federal Revenue and Borrowing (cont.) Borrowing helps with funding the government, and the national debt and expenditures have grown rapidly in the past decade. Interest on the debt will eat up a big portion of future budgets. Tax expenditures represent an enormous drain on revenues but subsidize many popular activities. To Learning Objectives

45. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Approximately what percentage of federal expenditures goes to paying interest on the federal debt? A.1 percent B.7 percent C.15 percent D.25 percent E.40 percent To Learning Objectives LO 15.1

46. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Approximately what percentage of federal expenditures goes to paying interest on the federal debt? A.1 percent B.7 percent C.15 percent D.25 percent E.40 percent To Learning Objectives LO 15.1

47. Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 15.2 Summary Federal Expenditures Budgets have grown with the rise of the national security state and the social service state. National security and, especially, social services such as Social Security and Medicare, plus interest on the debt, make up most of the budget. To Learning Objectives

48. Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 15.2 Summary Federal Expenditures (cont.) Expenditures for most policies grow incrementally with each year’s budget building on last year’s. Much of the budget represents uncontrollable expenditures, primarily entitlements to payments that the government has committed to make at a certain level and that are difficult to limit. To Learning Objectives

49. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Which of the following comprises the largest slice of the budgetary pie? A.Defense expenditures. B.Income security expenditures. C.Foreign aid expenditures. D.Domestic policy expenditures other than for income security. To Learning Objectives LO 15.2

50. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Which of the following comprises the largest slice of the budgetary pie? A.Defense expenditures. B.Income security expenditures. C.Foreign aid expenditures. D.Domestic policy expenditures other than for income security. To Learning Objectives LO 15.2

51. Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 15.3 Summary Understanding Budgeting Budgets in democracies grow because the public and organized interests demand new and larger public services. Increasing budgets increase the scope of government, but decreases in taxes and increases in debt make it more difficult to add or expand programs. To Learning Objectives

52. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The budget the scope of government, but the budget may also constrain the scope of government. A.decreases B.reduces C.expands D.none of the above To Learning Objectives LO 15.3

53. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The budget the scope of government, but the budget may also constrain the scope of government. A.decreases B.reduces C.expands D.none of the above To Learning Objectives LO 15.3

54. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Text Credits Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010), Table 2.1. Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010),Table 7.1. Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010),Tables 16.1 and 16.3. Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010),Table 6.1. Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010), Table 3.1. Budget of the United States Government, Fiscal Year 2011: Historical Tables (Washington, DC: U.S. Government Printing Office, 2010), Table 1.1.

55. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Photo Credits 503: AP Photos 504: AP Photos 510: Mike Keefe/Denver Post 518: AP Photos