1. The Congress, the President, and the Budget: The Politics of Taxing and Spending Chapter 14 Government in America: People, Politics, and Policy Thirteenth Edition, and Texas Edition Edwards/Wattenberg/Lineberry

2. Introduction  Two central questions: Who bears the burden of paying for government? Who receives the benefits?  Remember: Big budget = big government  Budget:  A policy document allocating burdens (taxes or revenues) 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

3. Sources of Federal Revenue  Income Tax  Shares of individual wages and corporate revenues collected by the government  The 16 th Amendment permitted Congress to levy an income tax. This tax is collected by the IRS (Internal Revenue Service). They receive over 130 million individual tax returns each year.  Individual taxes are the largest single revenue source for the government. In 2005, corporate taxes made up 13 cents of every federal revenue dollar, and individual income taxes made up 43 cents.  Income tax is progressive: Those with more income pay higher rates of tax on their income. Some argue in favor of a “flat tax”

4. Figure 14.1 Sources of Federal Revenue  Social Insurance Taxes-  Additional taxes for specific funds: Social Security and Medicare. Taken from employees pay checks and matched by employers. They are earmarked for the Social Security Trust Fund

5. Sources of Federal Revenue  Borrowing  The Treasury Department sells bonds—this is how the government borrows money. Individuals, corporations, mutual finds, financial institutions, and even foreign countries can buy these bonds.  The federal debt is the sum of all the borrowed money that is still outstanding. It currently amounts to more than $9 trillion. 9% of federal expenditures go to pay the interest on this debt. This is not optional. Foreign investors hold 1/5 of the national debt.  The government competes with other borrowers. They are a lower risk for banks than you and I are.

6. Figure 14.2 Sources of Federal Revenue Federal Debt: all money borrowed over the years and still outstanding

7. 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. It’s the difference between what the government collects in taxes and what they could have collected without these exemptions  Examples – charitable donations, mortgage interest deduction  They generally benefit middle and upper class  Tax Reduction: the general call to lower taxes  Tax Reform: rewriting the tax laws to change the rates and who pays them  Tax Reform Act of 1986—extensive tax reform that reduced the value of many tax deductions, removed many low income people from the tax rolls, reduced the number of tax brackets

8. Sources of Federal Revenue

9. Figure 14.3 Federal Expenditures

10.  The policies and programs the government spends money on change over time  Expenditures keep rising  Big Governments, Big Budgets  A big government requires lots of money.  As the size of government increases, so does its budget.  The government grows because of the public’s demand for more services.

11. 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.  Eisenhower: “military industrial complex”  Defense now constitutes about one-fifth of all federal expenditures.  Mid-1960s to early 1980s – social welfare spending doubled  Reagan – expansion of military budget, happened again under GW Bush after 9/11, war in Iraq  Much of the defense budget goes to pensions and payroll for the more than 7 million active, reserve, disabled and retired members of the military

12. Federal Expenditures

13.  The Rise of the Social Service State  The biggest part of federal spending is now for income security programs giving aid to the elderly, the poor and needy.  Social Security is largest program, designed to insure that the elderly a minimum level of sustenance.  Social Security has been expanded since 1935 to include disability benefits and Medicare (added in 1965 under Johnson)  Medicare provides hospitalization and prescription drug benefits to the elderly.  These benefit programs face financial problems with more recipients living longer.  1999 President Clinton proposed allocating the budget surplus to Social Security. It didn’t happen. Bush didn’t fix it either. By 2018 costs will exceed income from tax collection.

14. Federal Expenditures Social Security and Medicare account for more than 1/3 of the federal budget Liberals and Conservatives disagree on social services/ welfare spending

15. 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  Budgets tend to go up a little each year.  Incrementalism does not describe ALL budgetary politics  Groups and their various interests make it very hard to pare the budget

16. Federal Expenditures  “Uncontrollable” Expenditures  About 2/3 of the federal budget is made up of 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 (including Medicare) cost almost 1 trillion in 2007  The interest on the debt is also uncontrollable  The only way to control the expenditures is to change the rules. Congress can cut Social Security benefits or tighten eligibility requirements, so why don’t they?

17. The Budgetary Process  Budgetary Politics  Stakes and Strategies  All political actors have a stake in the budget.  Try and tie their budget needs to national or political needs  The Players  Lots of players, with the president and Congress playing important roles  Almost all committees are involved in the budget.

18. The Players, continued…  Interest groups  Agencies  OMB – major role  President – makes final decision on what gets proposed to Congress  Tax Committees in Congress – House (Ways and Means) Senate (Finance)  Budget Committees  Subject Matter Committees – new laws=new expenditures  Appropriations Committees – both houses  Congress – approve taxes and appropriations  GAO – Audit and monitor agencies to see what happens to the budget money

19. The Budgetary Process  The President’s Budget  Presidents originally played a limited role in the budget.  Now budget requests are directed through the OMB and president before going to Congress.  The budget process is time consuming— starting nearly a year in advance.  The OMB, the president, and the agencies negotiate budget requests.

20. The Budgetary Process

21.  Congress and the Budget  Congress must authorize ALL federal appropriations (“The power of the purse”)  Reforming the Process  The Congressional Budget and Impoundment Control Act of 1974: an act designed to reform the congressional budgetary process  It established the following:  Fixed budget calendar  A budget committee in each House  The CBO, which advises Congress on the probable consequences of its decisions, forecasts revenues, and is counterweight to OMB

22. The Budgetary Process  Congress and the Budget  Reforming the Process (continued)  Budget to be considered as a whole  A budget resolution binds Congress to a bottom line for the budget before Congress considers appropriations.  The current budget is then reconciled—program authorizations are revised to achieve required savings  The new budget is authorized and appropriated.  Authorization bill: establishes a discretionary government program; set goals and maximum expenditures  Appropriations bill: funds programs within limits established by authorization bills

23. The Budgetary Process

24.  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.  Congress passes continuing resolutions to keep the government going until it passes a budget. These are passed when Congress can’t agree and pass appropriations bills. They are passed to allow agencies to spend at the previous years level.  Omnibus budget bills often contain policies that cannot pass on their own. They lump a bunch of appropriations bills together. It forces the President to either accept the unwanted provisions or veto the entire funding.

25. Figure 14.7 The Budgetary Process Annual Federal Deficits (Figure 14.6)

26. The Budgetary Process  Congress and the Budget  More Reforms  Congress passed bills to try and control the deficits.  By 1990, Congress focused on increases in spending.  Both parties claimed victory for the budget surpluses that began in 1997.  Economic downturn, income tax cuts, and increased military expenditures brought a return to deficits by 2001.

27. More reforms…  Reagan passed budgets with HUGE deficits  Congress passed Gramm-Rudman-Hollings Act: it mandated maximum allowable deficits and said by 1993 the budget would be balanced. It was all abandoned by 1990.  There has been a shift from controlling the size of the deficit to controlling spending increases  Discretionary spending: 3 categories – domestic, defense and international. Increases in one means decreases in another

28. 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.

29. 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.

30. 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.