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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 The Budgetary Process Understanding Budgeting Summary
4 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: Analyze federal expenditures and the growth of the budget.
5 Chapter Outline and Learning Objectives The Budgetary Process LO 14.3: Outline the budgetary process and explain the role that politics plays. Understanding Budgeting LO 14.4: Assess the impact of democratic politics on budgetary growth and of the budget on 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.
7 LO 14.1
8 Federal Revenue and Borrowing LO 14.1 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.
9 Federal Revenue and Borrowing LO 14.1 Personal and Corporate Income Tax Social Insurance Taxes Borrowing Taxes and Public Policy
10 LO 14.1
11 Federal Revenue and Borrowing LO 14.1 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.
12 Federal Revenue and Borrowing LO 14.1 Social Insurance Taxes Both employers and employees pay Social Security and Medicare taxes. 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.
13 Federal Revenue and Borrowing LO 14.1 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 $15 trillion.
14 LO 14.1
15 Federal Revenue and Borrowing LO 14.1 Taxes and Public Policy Tax Expenditures Revenue losses from special exemptions, exclusions, or deductions allowed by federal tax law. Tax Reduction In 2001, tax cut gradually lowered tax rates over the next ten years, and in 2003, Congress reduced the tax rates on capital gains and dividends.
16 LO 14.1
17 Federal Expenditures LO 14.2: Analyze federal expenditures and the growth of the budget. Big Governments, Big Budgets The Rise of the National Security State The Rise of the Social Service State Incrementalism Uncontrollable Expenditures
18 LO 14.2
19 Federal Expenditures LO 14.2 Big Governments, Big Budgets Big budgets are necessary to pay for big governments. National, state, and local government spend an amount equal to one-third of the gross domestic product (GDP). National government s spending alone currently represent about one-fourth of the GDP.
20 Federal Expenditures LO 14.2 The Rise of the National Security State In the 1950s and 1960s the Department of Defense received more than 50% of federal budget. Defense now gets about one-sixth of all federal expenditures. This is one reason for growth of government.
21 LO 14.2
22 LO 14.2
23 Federal Expenditures LO 14.2 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.
24 LO 14.2
25 Federal Expenditures LO 14.2 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.
26 Federal Expenditures LO 14.2 Incrementalism (cont.) Policymakers focus little attention on the budgetary base. 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.
27 Federal Expenditures LO 14.2 Uncontrollable Expenditures Expenditures determined by how many eligible beneficiaries there are for a program or by previous obligations of the government and that Congress therefore cannot easily control. Social Security benefits are an example of uncontrollable expenditures.
28 Federal Expenditures LO 14.2 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.
29 LO 14.2
30 The Budgetary Process LO 14.3: Outline the budgetary process and explain the role that politics plays. Budgetary Politics The President s Budget Congress and the Budget
31 The Budgetary Process LO 14.3 Budgetary Politics Stakes and Strategies Every political actor has a stake in the budget. Think of budgetary politics as a game in which players adopt various strategies. There are plenty of players in the budgetary politics game, and they have their own strategies.
32 The Budgetary Process LO 14.3 Budgetary Politics (cont.) The Players Interest groups lobby for their needs; agencies push for higher budget requests; Office of Management and Budget (OMB) prepares the president s budget; and the president makes the final decisions on what to propose to Congress.
33 The Budgetary Process LO 14.3 Budgetary Politics (cont.) The Players Tax committees in Congress write the tax codes; Budget Committees and the Congressional Budget Office (CBO) set the parameters of the congressional budget process; and subject-matter committees write new laws, which require new expenditures.
34 The Budgetary Process LO 14.3 Budgetary Politics (cont.) The Players Appropriations Committees decide who gets what and their subcommittees hold hearings on agencies requests; Congress as a whole approves taxes and appropriations; and the Government Accountability Office (GAO) audits, monitors, and evaluates what agencies are doing with their budgets.
35 LO 14.3
36 The Budgetary Process LO 14.3 The President s Budget Budget and Accounting Act (1921) requires presidents to propose an executive budget to Congress and created the Bureau of the Budget to help them. In the 1970s, President Nixon reorganized the Bureau of the Budget and renamed it the Office of Management and Budget (OMB).
37 The Budgetary Process LO 14.3 The President s Budget (cont.) Spring Budget policy developed. Summer Budget decisions conveyed to agencies. Fall Estimates reviewed. Winter President s budget determined and submitted.
38 LO 14.3
39 The Budgetary Process LO 14.3 Congress and the Budget Congressional Budget and Impoundment Control Act of 1974 was designed to reform the congressional budgetary process. It established a fixed budget calendar; a budget committee in each house; and a congressional budget office.
40 LO 14.3
41 The Budgetary Process LO 14.3 Congress and the Budget (cont.) Congressional Budget Office To advise Congress on the probable consequences of its decisions and to forecast revenues. Budget Resolution A resolution binding Congress to a total expenditure level, supposedly the bottom line of all federal spending for all programs.
42 The Budgetary Process LO 14.3 Congress and the Budget (cont.) Reconciliation How program authorizations are revised to achieve required savings. Authorization Bill Establish, continue, or change programs. Appropriations Bill Funds programs established by the authorization bills.
43 The Budgetary Process LO 14.3 Congress and the Budget (cont.) Budgets were in red every year between 1974 reforms and Continuing Resolutions Allow agencies to spend at last year s level when Congress can not pass appropriations bills on time. Omnibus Bills Appropriations bills all together in one bill and not 13 appropriations bills.
44 LO 14.3
45 The Budgetary Process LO 14.3 Congress and the Budget (cont.) The 1974 reforms have helped Congress view the entire budget early in the process. The problem is not so much the procedure as disagreement over how scarce resources should be spent.
46 Understanding Budgeting LO 14.4: Assess the impact of democratic politics on budgetary growth and of the budget on scope of government. Democracy and Budgeting The Budget and the Scope of Government
47 Understanding Budgeting LO 14.4 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.
48 Understanding Budgeting LO 14.4 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.
49 LO 14.1 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.
50 LO 14.1 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.
51 Approximately what percentage of federal expenditures goes to paying interest on the federal debt? LO 14.1 A. 1 percent B. 7 percent C. 15 percent D. 25 percent E. 40 percent
52 Approximately what percentage of federal expenditures goes to paying interest on the federal debt? LO 14.1 A. 1 percent B. 7 percent C. 15 percent D. 25 percent E. 40 percent
53 LO 14.2 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.
54 LO 14.2 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.
55 Which of the following comprises the largest slice of the budgetary pie? LO 14.2 A. Defense expenditures. B. Income security expenditures. C. Foreign aid expenditures. D. Domestic policy expenditures other than for income security.
56 Which of the following comprises the largest slice of the budgetary pie? LO 14.2 A. Defense expenditures. B. Income security expenditures. C. Foreign aid expenditures. D. Domestic policy expenditures other than for income security.
57 LO 14.3 Summary The Budgetary Process The budgetary process is a long and complex one that involves the president, agencies, Congress as a whole, and many important congressional committees. The president submits the budget to Congress, whose reformed budgetary process has nonetheless not brought spending in line with revenues.
58 LO 14.3 Congress drafts a resolution establishing a total expenditure level before it embarks on making the actual budget. A. continuing B. authorization C. budget D. reconciliation
59 LO 14.3 Congress drafts a resolution establishing a total expenditure level before it embarks on making the actual budget. A. continuing B. authorization C. budget D. reconciliation
60 LO 14.4 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.
61 The budget the scope of government, but the budget may also constrain the scope of government. LO 14.4 A. decreases B. reduces C. expands D. none of the above
62 The budget the scope of government, but the budget may also constrain the scope of government. LO 14.4 A. decreases B. reduces C. expands D. none of the above
63 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 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.
64 Photo Credits 404: AP Photos 405T: Phillip Wallack/Corbis 405TC: AP Photos 405TB: Robert Matson 405B: Ted Korondy/Corbis 410: Mike Keefe/The Denver Post 416: AP Photos 417: AP Photos 419: Robert Matson 420: AP Photos 426: Ted Korondy/Corbis 427: Dana Fradon /The New Yorker Cartoon/
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