1. THE BUDGET MAKING PROCESS
Congress, the President, and the Budget: The Politics of Taxing & Spending

2. The Federal Budget THE PROCESS:
The President advises, Congress delegates.
KEY QUESTIONS:
Who bears the burden of paying for government?
Who receives the benefits?
BUDGETARY SQUEEZE:
Americans want P & Congress to balance the budget while maintaining or increasing the level of government spending on most policies AND keeping taxes low at the same time.

3. The Federal Budget
Budget is a policy document allocating burdens (taxes) and benefits (expenditures).
Government collects $$$ by taxes and spends it via expenditures.
If tax allocations are higher…it’s a surplus (it did happen in ’99!)
If expenses are higher. . .it’s a deficit which is then added to the national debt and you get a shortfall in the trillions …and it takes far too much of the current budget just to pay interest on the debt!
Deficit spending has been in place since 1969 almost continuously (with a short break in the 90s) & picked up again in 2002 (9-11, war in Afghanistan, Iraq.

6. When Mr. Obama became president in January 2009, the total federal debt stood at $10.6 trillion. This week, it hit $16.7 trillion — an increase of 57 percent. In the same time frame under President George W. Bush, total federal debt rose 38 percent. Under President Clinton, it rose 32 percent.
Read more: 

7. Obama's 1st Term

8. GOVERNMENT’S SOURCES OF REVENUE
THREE MAJOR SOURCES:
Personal & corporate income tax
Social insurance taxes
Borrowing (Bonds)

9. Payroll taxes – social insurance, Medicare, unemployment, federal workers’ pensions

10. INCOME TAXES Began in Civil War…but expired
Started again in 1894 but declared unconstitutional in 1895 in Pollock v. Farmers Loan and Trust Co.
Only states had power of direct taxation per Constitution
16TH AMENDMENT – 1913, explicitly permitted Congress to collect income tax; Pollock overruled
A PROGRESSIVE TAX
Largest source of federal revenue
2011 – over $1.8 trillion in individual income taxes
Corporate taxes USED TO yield more revenues than individual but today, only about 8 cents of every federal revenue dollar comes from corporate income taxes whereas about 47 cents of every dollar comes from individual income taxes
Facts of the Case 
The Constitution gave the states the power to impose direct taxation. The federal government could impose direct taxes as well, but only if those taxes were apportioned among the states in proportion to their representation in Congress. In this case the Court examined a national income tax passed by Congress in This case was decided together with Hyde v. Continental Trust Company of the City of New York.
Question 
Was the income tax a direct tax in violation of the Constitution (Article I, Section 9)?
Conclusion 
Yes. The Court held that the act violated the Constitution since it imposed taxes on personal income derived from real estate investments and personal property such as stocks and bonds; this was a direct taxation scheme, not apportioned properly among the states. The decision was negated by the adoption of the Sixteenth Amendment in 1913.

11. Married Taxpayers Filing Jointly

12. Individual Taxpayers

13. Internal Revenue Service
Started under Lincoln; reorganized under Wilson
Established to collect taxes and enforce the internal revenue laws
Collects federal income taxes from individuals and corporations
Audits taxpayers annually
Investigates and prosecutes taxpayers/nonpayers
The IRS has its National Capital offices in the greater Washington, DC area, and in particular does most of its computer programming in Maryland. It operates various service centers around the country (currently ten; these are the locations to which taxpayers mail their returns); these centers do the actual tax processing; different types of tax processing take place in various centers (such as the distinction between individual and business tax processing). It also operates three computer centers in different locations around the country. Name change and reorganization: As early as the year 1929, the Bureau of Internal Revenue began using the name "Internal Revenue Service" on at least one tax form. In 1953 the name change to the "Internal Revenue Service" was formalized in Treasury Decision 6038.

14. SOCIAL INSURANCE TAXES
Paid by both Employers and Employees
For example: social security – each pays in 4.2% now
36% of today’s revenues (were only 12% in the 1950s)
Social Security fastest growing source of government income
Do NOT go into the general budget fund but, instead, are earmarked for a specific purpose – they are an uncontrollable expenditure

15. BORROWING Done through BONDS
Treasury Dept. sells bonds, guaranteeing to pay interest to bondholder.
Citizens, corporations, mutual funds, etc. purchase bonds
WHY does federal government borrow?
Federal government has NEVER defaulted on its bonds.
DEBT – all of the $ borrowed over the years & still outstanding… now at over $15 trillion
Shifts burden to future taxpayers; provokes thoughts of a “balanced budget” amendment
Unlike state & local, fed. gov’t borrows just to meet everyday expenses, not military, future development, etc.
$1,000,000,000
How many zeros in a billion? This is too true to be funny.  The next time you hear a politician use the Word 'billion' in a casual manner, think about Whether you want the 'politicians' spending YOUR tax money. A billion is a difficult number to comprehend, but one advertising agency did a good job of putting that figure into some perspective in one of it's releases in 2011: A billion seconds ago it was 1959.  A billion minutes ago Jesus was alive.  A billion hours ago our ancestors were Living in the Stone Age. A billion days ago no-one walked on the earth on two feet.  A billion dollars ago was only 8 hours and 20 minutes, at the rate our government is spending it.
What about a trillion dollars? According to Reagan:
Stack of $1,0000 bills in your hand 4 inches high = a million dollars
Stack would have to be 67 MILES high to = a trillion dollars so for 15 trillion……

17. Regan’s Description of a Trillion Dollars:
In a speech to Congress in February 1981:
“A few weeks ago I called such a figure, a trillion dollars, incomprehensible, and I’ve been trying ever since to think of a way to illustrate how big a trillion really is. And the best I could come up with is that if you had a stack of thousand-dollar bills in your hand only 4 inches high, you’d be a millionaire. A trillion dollars would be a stack of thousand-dollar bills 67 miles high.”

19. LOST INCOME: FED TAX “LOOPHOLES”
Loophole is a tax break or tax benefit to the individual; it is lost income to federal gov’t
TAX EXPENDITURES = loopholes, deductions, exemptions
The difference between what the gov’t actually collects in taxes and what it COULD have collected without special exemptions
Over $800 billion in 2011
Deductions for mortgage interest, charitable contributions, etc.
Mostly benefit middle & upper income taxpayers & corporations since poor don’t buy homes, etc.
So, tax expenditures amount to subsidies for certain activities:
Charitable contributions – fed. gov’t could make them but instead, it allows us to make them and take deductions on our tax return….so fed is actually encouraging charitable contributions
Gov’t could give cash to families to encourage buying of homes but instead allows us to deduct mortgage interest.

20. FEDERAL EXPENDITURES Primary Federal Expenditures:
Social Service State (social security, Medicare, etc.)
Interest on the national debt
National Defense
Rise of large governments is one of most important changes seen in 20th century
American governments (national & state) spend annually an amount equal to 1/3 of the GDP
BUT, US actually has one of the smallest public sectors among Western nations relative to the size of the GDP
Rise of the NATIONAL SECURITY STATE has caused much of the growth

21. NATIONAL SECURITY STATE
Military used to be largest part of expenditures – permanent military & expensive technology in Cold War years
From mid-60s to 1980, defense spending down & social welfare spending doubled
By 1980s, defense spending under Reagan up again & then down again in 90s – end of Cold War
Up again after 9-11 BUT, defense spending still only about 1/6 of all federal expenditures

22. RISE OF SOCIAL SERVICE STATE
Biggest slice of budget goes to income security expenditures – policies of direct & indirect aid to elderly, poor, needy
Makes up over 1/3 of the federal budget
Social Security Act 1935
Disability insurance added to it in 1950
Medicare 1965 – hospitals/doctors for elderly
Prescription benefits added -2003
Medicaid also added in 60s
aid to the poor/needy
Other social service expenditures
involve health, education, job training

24. INCREMENTALISM & UNCONTROLLABLE EXPENDITURES
INCREMENTALISM prevails in budget making:
Increase last year’s budget by an “increment” to satisfy this year’s budget
What do you think Executive Branch agencies do when making their budget requests?
UNCONTROLLABLE EXPENDITURES have increased in federal spending – are now about 2/3 of spending – “mandatory spending” such as
ENTITLEMENTS – if you qualify, you get them, no matter what the cost to the government, even if all the funds are depleted…
Expenditures are determined by how many people are eligible for the program….Congress has obligated itself to pay X level of benefits to Y number of recipients.
SOCIAL SECURITY, MEDICARE!!!
Difference between Mandatory and Discretionary Spending?
Mandatory spending = gov’t is required by law to do so
SS, Medicare, veterans’ pensions, debt
Discretionary Spending:
not required by law and would include defense, education, highways, research grants and all gov’t operations

25. The Budgetary Process POWER OF THE PURSE belongs to Congress!
House Ways & Means Committee deals with taxing aspects; House Budget Committee; Senate Budget Committe
1921, BUDGET AND ACCOUNTING ACT
Requires Presidents to propose an executive budget to Congress; created Bureau of Budget
1970s, Nixon reorganized Bureau of Budget & renamed it OFFICE OF MANAGEMENT AND BUDGET (OMB)
P’s Budgetary Arm
Supervises preparation of the federal budget and advises the P on budgetary matters

26. Budgetary Reform CONGRESSIONAL BUDGET AND IMPOUNDMENT ACT OF 1974:
P had the ability to impound (withhold) funds
Frustrated by this and the entire disjointed budget process, Congress passed this act to try and regain some control over budget process
P required to spend the funds that Congress appropriates
Ends P’s ability to kill programs by withholding funds (Nixon did this quite a bit)
Act also ensures Congress will look at taxing and spending at least twice during each budget cycle
Impoundment is an act by a P of not spending money that has been appropriated by Congress. Jefferson was the first president to exercise the power of impoundment in 1801 – wouldn’t spend $ Congress had appropriated for gunboats. The power was available to all presidents up to and including Nixon and was regarded as a power inherent to the office. The CBI Act was passed in response to perceived abuse of the power under President Nixon. Title X of the act essentially removed the power and the President's ability to reject congressionally approved spending thus became severely inhibited.
The Impoundment Control Act of 1974 provides that the president may propose rescission of specific funds, but that rescission must be approved by both the House and Senate within 45 days. In effect, the requirement removed the impoundment power, since Congress is not required to vote on the rescission and, in fact, has ignored the vast majority of presidential requests.
Forty-three states in the U.S. give their governors authority not to spend money allocated by the their state legislatures. The states which deny their governor the authority are Indiana,Maryland, Nevada, New Hampshire, North Carolina, Rhode Island, and Vermont.[3] The Mayor of Washington, D.C. also has the impoundment power.[

27. The Budgetary Process:
Federal fiscal year is Oct Sept. 30
OMB starts reviewing budgetary requests in Fall
P submits the budget recommended by OMB in January
Then, 2-step process begins in Congress:
Authorization bill – authorizes/changes a program or entitlement & sets a spending limit on it – what they might get
Appropriations bill – final funding of the programs set by the authorization bill; can’t go higher, but can give lower amounts.
Huge numbers in budget – for ex., in 2011 Obama’s budget called for 3.83 trillion in spending
2013 budget - $3.7 trillion … but revenues only 2.56 trillion so…..deficit

28. CONGRESSIONAL BUDGET OFFICE (CBO)
Both houses of Congress must agree upon FIRST BUDGET RESOLUTION by May of each year – sets the overall revenue goals and spending targets
Budget committee in each house – lots of bargaining all summer
CONGRESSIONAL BUDGET OFFICE (CBO)
Congressional Budgetary arm – reviews; gives advice to Congress, forecasts of revenues, etc.
Congress to agree to SECOND BUDGET RESOLUTION by September
Sets binding limits on taxes and spending for fiscal year beginning Oct. 1
If Congress does not meet Oct. 1 deadline for new budget for the new fiscal year…?
Passes weekly continuing resolutions to keep gov’t going.
Do the same thing as last year with same amount of $

29. DEMOCRACY & GROWTH OF GOVERNMENT
According to political scientists Allen Meltzer & Scott Richard:
Government grows in a democracy because of the equality of suffrage
Poorer voters will ALWAYS use their votes to support public policies that redistribute benefits from the rich to the poor.
Social Security, Medicare, Medicaid, Welfare