Federal Revenue and the Federal Budget

Transcription

1 U.S. HISTORY AND GEOGRAPHY Essential Question: How has government raised revenue and how have these approaches changed over time? Introduction: This lesson explores the ways in which the federal government has generated revenue as part of its budget-making over time. It can be taught over one or two days and teachers can modify it to suit their time constraints. The lesson presented here includes a brief lecture by the teacher on concepts and background knowledge for students to understand. It also includes a set of inquiry-oriented exercises that should be used as the basis of discussion and analysis by students. Moreover, it provides a possible homework assignment that involves students writing a response to their learning on this topic. Key Information The following terms and concepts are used in this lesson: budget revenue tariff excise tax income tax Background How do governments raise revenue for their budgets? Merriam-Webster s online dictionary offers the following as one of the definitions of a budget: a plan for the coordination of resources and expenditures. This lesson explores the resources side of this equation and asks how the U.S. government has raised resources (funds) for its expenditures since the nation was founded. One historical note is important for teachers to share with their students as background regarding any discussion of a federal budget. The following statement is from: L.E. Davis and J. Legler (1966, December), The Government in the American Economy: : A Quantitative Study, The Journal of Economic History, 26 (4), The teacher needs to share this information with students at an appropriate point in this lesson. it is quite misleading to talk of federal budgetary policy in the nineteenth century. In fact there was not even a federal budget document before Revenues were raised by taxing or selling whatever was close at hand, and 183

2 U.S. History and Geography aside from an apparent resistance to tariff cuts there appear to have been few elements of planning in the nation s revenue policy. On the expenditure side, military considerations dictated a large portion of the total, and the costs of dayto-day governmental administration most of the rest. Federal revenues came from three main sources: tariffs, the internal revenue, and land sales. Tariffs produced about three quarters of total revenues in the antebellum decades and from one half to two thirds thereafter; internal excises accounted for between one third and one half of the total in the postbellum period; and the proceeds from land sales contributed about one fifth over the first half of the (nineteenth) century. (pp ) This situation changed gradually in the 20th century with the advent of the income tax in 1913 through ratification of the Sixteenth Amendment. However, in the years just after ratification of the Sixteenth Amendment, only a tiny fraction of the population was required to pay income taxes. So the federal government continued to rely on other forms of revenue (excise taxes, land sales, and tariffs) to support its activities. The federal budget did not become a reality until the passage of the Budget and Accounting Act of 1921, almost a decade after passage of the Sixteenth Amendment. Students Will Understand: The way in which the federal government has addressed the nation s fiscal challenges has changed over time as the economic and/or political realities of the nation have changed. The government has a legitimate role to play in addressing our nation s fiscal challenges and uses revenue generation through various forms of taxes to meet its obligations. Students Will Be Able To: Analyze graphs, tables, and charts. Recognize, explain, and analyze causes and consequences. Recognize, explain, and analyze continuity, change, and development over time. Recognize, explain, and analyze causes and consequences. Related Curriculum Standards: National Center for History in the Schools Historical Thinking Standards: 1.F. Reconstruct patterns of historical succession and duration in which historical developments have unfolded, and apply them to explain historical continuity and change. 4.B. Obtain historical data from a variety of sources, including: library and museum collections, historic sites, historical photos, journals, diaries, eyewitness accounts, newspapers, and the like; documentary films, oral testimony from living witnesses, censuses, tax records, city directories, statistical compilations, and economic indicators. 5.B. Marshall evidence of antecedent circumstances and current factors contributing to contemporary problems and alternative courses of action. 5.D. Evaluate alternative courses of action, keeping in mind the information available at the time, in terms of ethical considerations, the interests of those affected by the decision, and the long- and short-term consequences of each. National Council for the Social Studies Standards: II: Time Continuity and Change VI: Power Authority and Governance 184 Understanding Fiscal Responsibility

3 How has government raised revenue and how have these approaches changed over time? List of Resources: 1. Inquiry Prompts Inquiry Prompt 4: Changing Income Tax Rates 3. Inquiry Prompt 5: Tariffs 4. Inquiry Prompt 6: Other Forms of Taxation State and Federal Time Required: 1-2 class periods Entry: Two days before the start of the lesson, ask students to collect all of their merchant receipts for two days. Using their receipts, ask students to create a list of the things they purchased and the amount of tax they paid for each item based on their merchant receipts. Ask several volunteers to write their list of purchases and taxes paid on purchases on the board. Ask students what they notice. Students may observe that some items were taxed and others were not taxed, or that some were taxed at different rates. They should be encouraged to raise questions. Who is collecting these taxes? Why are some items taxed and others are not taxed? Where does the money go? What is it used for? Expand the introduction to this lesson by explaining that the taxes they have noticed in their sales receipts are consumption taxes levied at the point of purchase by state and local governments to raise revenue. These taxes are also called sales taxes. Strategies and Activities: Take your students through the set of primary sources below. They are labeled Inquiry Prompts and should be used as the basis for an investigation of the various ways, over time, government has raised revenue. Critical points of information to bring out during this inquiry-oriented lesson follow. These points might be made as part of a lecture based on information from the background to this lesson, or introduced in the progress of the lesson. The U.S. Constitution specifically stipulates that the federal government is authorized to raise revenue through the following ways: The power to levy taxes. The right to coin money and to regulate its value. Understanding Fiscal Responsibility 185

4 U.S. History and Geography Authority over foreign affairs. Regulation of interstate commerce. In the 19th century, the federal government got most of its revenue from tariffs (a tax levied on imports) and excise taxes (taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product.) During the Civil War, the federal government levied its first income tax, but it was later repealed. The first permanent income tax came in 1913 with the ratification of the Sixteenth Amendment. Income tax rates have varied over time. Governments use a variety of taxes (e.g., income taxes, sales taxes, tariffs, excise taxes, etc.) to raise revenue. The revenues needed by the government to pay for its activities have increased over time in large measure due to the increased scope of activities that the government supports today. Teachers interested in expanding this introduction on contemporary taxation should see Resources 1 and 2 on federal tax receipts and expenditures in Mathematics 24 on Taxation. Students will be able to infer a great deal of information just from looking at the graphics. Ask them to use these graphs to raise questions about how taxes were raised and spent in different historical eras. Investigation Inquiry Prompt 1: The U.S. Constitution (Resource 1) Inquiry Prompt 2: Sales Taxes Ask students to speculate about the historical context of the cartoon (Resource 1) and what it might mean. What point of view about government taxation does the cartoonist seem to hold? Ask students to generate questions they think they would want to answer by studying a snapshot of this period in history. Inquiry Prompt 3: The Sixteenth Amendment (Resource 1) The U.S. government imposed its first personal income tax on August 5, 1861 through the Revenue Act of This tax was repealed and replaced by another income tax in 1862, which was also repealed. Another income tax measure was passed in the 1890s to make up for the loss of income due to the lowering of tariffs by the federal government. Up to this time, tariffs had been one of the chief sources of revenue for the federal government. Discuss with students why the first federal Income tax was passed in the 1860s (Civil War). The income tax was permanently institutionalized with the ratification of the Sixteenth Amendment in Understanding Fiscal Responsibility

5 How has government raised revenue and how have these approaches changed over time? Under the Constitution, Congress could impose direct taxes only if they were levied in proportion to each state s population. Explain this to students so they understand why an amendment was necessary (rather than a law) to enact an income tax. Inquiry Prompt 4: Changing Income Tax Rates (Resource 2) If students have access to computers, other cartoons of interest on federal tax policy are available at HarpWeek ( Thomas Nast cartoon on an income tax proposal: 09Cartoon/BrowseByDateCartoon.asp?Month=February&Date= Thomas Nast cartoon on a tax by the federal government on oleomargarine: Remind students of the essential question organizing this lesson and ask them what they notice about the variations in tax rates over time. Ask them to think about and articulate responses about what might explain the variations and trends they observe. Right or wrong, students should be able to provide evidence for their reasoning. Inquiry Prompt 5: Tariffs (Resource 3) Inquiry Prompt 6: Other Forms of Taxation State and Federal Taxes come in different forms. Now students will look at taxes levied by both the federal and state government that are withheld from wages. Show students an image of a pay stub (Resource 4) on an overhead projector or distribute it as a handout. Use the sample here or, preferably, supply one that is local. Ask students what they notice what is clear to them and what is confusing. Ask students to compare the amount of the check the worker receives with the Gross Pay that appears on the statement. See how much they can figure out before explaining the statement. While the kind and variety of deductions made from the paycheck are interesting, focus their attention on the statutory deductions (those that are required by law) and explain those withholdings. They include income tax and payroll (FICA) taxes which are federal and would be withheld in all 50 states. Since this taxpayer lives in New York City, city and state taxes are withheld. This will vary from place to place. (The SUI/SDI tax is for state unemployment and disability insurance a withholding unique to NY and three other states.) Where students cannot supply an accurate explanation of the tax, provide one. Understanding Fiscal Responsibility 187

6 U.S. History and Geography Closure: Lead a whole-class discussion that addresses the following questions: Why has the federal government s approach to raising revenue changed over time? What factors might have affected the use of one form of revenue generation in a particular period rather than another? Assessment: Students will write brief essays during class or for homework that address the essential question for the lesson: How has government raised revenue? How have these approaches changed over time? How were different groups within the American population likely to view these different ways of raising taxes? Who would be in favor, for example, of tariffs but opposed to the income tax? Who would be in favor of consumption taxes (sales taxes) but not tariffs? References Cited: Budget. (2010). Merriam-Webster Dictionary. Retrieved August 13, 2010: Davis, L. E., & Legler, J. (1966). The government in the American economy: : A quantitative study. The Journal of Economic History, 26(4), The Home of the American citizen after the tax bill has passed. (1862, July 19). Frank Leslie's Illustrated Newspaper, 14(355), 272. United States Constitution. Retrieved August 13, 2010 from constitution_amendments_-27.html U. S. Treasury Department. (2010). A history of the US tax system. Retrieved August 13, 2010 from Wilson, W. (1913, April 8). Address to a Joint Session of Congress on tariff reform. Retrieved August 13, 2010 from Understanding Fiscal Responsibility

7 U.S. HISTORY AND GEOGRAPHY Federal Revenue and the Federal Budget Resources The following section is formatted for the easy reproduction of resources intended for use by students. They appear in the order in which they are listed in the Introduction and are essential to the lesson. These resources may also be downloaded from the Understanding Fiscal Responsibility website: Understanding Fiscal Responsibility 189

8 U.S. History and Geography Resource 1. Inquiry Prompts 1 3 Inquiry Prompt 1: The U.S. Constitution The Constitution endowed the Congress with the power to lay and collect taxes, duties, imposts, and excises, pay the Debts and provide for the common Defense and general Welfare of the United States. Ever on guard against the power of the central government to eclipse that of the states, the collection of the taxes was left as the responsibility of the State governments. Source: History of the U.S. Tax System, a document put out by the United States Treasury Department. Available online at: Inquiry Prompt 2: Sales Taxes Scroggs says he is ready and willing to pay any amount of tax, but he would like them to leave his wife s crinoline and other domestic trifles alone. July 19, 1862, in Frank Leslie s Illustrated Newspaper (a New York weekly) Inquiry Prompt 3: The Sixteenth Amendment The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration. 190 Understanding Fiscal Responsibility

9 How has government raised revenue and how have these approaches changed over time? Resource 2. Inquiry Prompt 4: Changing Income Tax Rates The marginal income tax rate is the amount of tax paid on additional dollars of income. In other words, the federal government has taxed its citizens incomes at different rates. Citizens with the highest incomes have been taxed more steeply than citizens with lower incomes. Put another way, as incomes rise, so does the tax rate. Understanding Fiscal Responsibility 191

10 U.S. History and Geography Resource 3. Inquiry Prompt 5: Tariffs President Woodrow Wilson addressed a joint session of Congress on April 8, 1913 about problems with the tariff rates: I have called the Congress together in extraordinary session because a duty was laid upon the party now in power at the recent elections which it ought to perform promptly, in order that the burden carried by the people under existing law may be lightened as soon as possible and in order, also, that the business interests of the country may not be kept too long in suspense as to what the fiscal changes are to be to which they will be required to adjust themselves. It is clear to the whole country that the tariff duties must be altered. They must be changed to meet the radical alteration in the conditions of our economic life which the country has witnessed within the last generation. While the whole face and method of our industrial and commercial life were being changed beyond recognition the tariff schedules have remained what they were before the change began, or have moved in the direction they were given when no large circumstance of our industrial development was what it is to-day. Our task is to square them with the actual facts. The sooner that is done the sooner we shall escape from suffering from the facts and the sooner our men of business will be free to thrive by the law of nature (the nature of free business) instead of by the law of legislation and artificial arrangement. What problems did Wilson highlight here? In 1913, what might have been some of the changes Wilson was describing that were affecting the tariff rates? What do you think he wanted Congress to do? How does historical change shift the ways in which governments need to raise revenue? 192 Understanding Fiscal Responsibility

11 How has government raised revenue and how have these approaches changed over time? Resource 4. Inquiry Prompt 6: Other Forms of Taxation State and Federal Understanding Fiscal Responsibility 193