Chapter 14
THE CONGRESS, THE PRESIDENT,
AND THE BUDGET: THE POLITICS OF
TAXING AND SPENDING
Key Terms
Section I
Introduction: Key Terms

Budget:
 Policy document allocating/assigns burdens
(taxes) and benefits (expenditures)
 The federal budget for 2016 was $3.54 trillion.
Introduction: Key Terms

Fiscal Year:
 Begins on October 1 and ends the following
September 30.
 Fiscal years are notated with FYXXXX or FYXX.
The year notates the calendar year when the
fiscal year will end.
Introduction: Key Terms



Expenditures:
 What the government spends money on
Revenues:
 Sources of money for the government
Balanced Budget:
 When expenditures equal revenues in a fiscal
year.
Introduction: Key Terms


Budget Deficit:
 An excess of federal expenditures over federal
revenues
Budget Surplus:
 An excess of federal revenue over federal
expenditures
Introduction: Key Terms

Monetary Policy:
 Controlled by the Federal Reserve Board
 Includes regulating the money supply, controlling
inflation and adjusting interest rates.
 Think Money!
Introduction: Key Terms

Fiscal Policy:
 Controlled by the executive and legislative
branches.
 President proposes the federal budget and
Congress passes it.
 Includes raising and lowering taxes and
government spending programs.
Sources of Federal Revenue
Section II
Sources of Federal Revenue
A.
Individual Income Tax
 The 16th Amendment
permitted Congress to
levy an income tax.
 Individual taxes are the
largest single revenue
source for the
government—
approximately 46% of
tax revenue.
How marginal (progressive) tax rates work.
Hooper makes $100,000 a year.




The first $8,350 of Hooper’s $100,000 income would be taxed at 10%,
for a total of $835 in taxes due.
The next $25,600 of her income would be taxed at 15%, for a total of
$3,840.
The next $48,300 of her income would be taxed at 25%, for a total of
$12,075.
The final $17,750 of her income would be taxed at 28%, for a total of
$4,970.
Because Hooper earns $100,000 of taxable income, she is said to be in the
28% tax bracket. That’s the percentage she’s taxed on the last dollar she
earns. But most of her dollars are taxed at a lower rate. In fact, as a single
filer earning $100,000 in taxable income, she’ll owe $21,720 in taxes, which
means her effective tax rate will be 21.72% — not 28%.
Sources of Federal Revenue
C.
Social Insurance Taxes aka Payroll Taxes
 Additional taxes for specific funds
 Social
Security: 6.2% of the first $106,800 of
earnings.
 Medicare; 1.45% of all earnings and employer match.
 Generates
about 36% of federal tax revenue
Sources of Federal Revenue
B.
Corporate Taxes
 Corporate taxes are paid by corporations
 Corporate taxes generate approximately 12% of
federal tax revenue
Sources of Federal Revenue
D.
Excise Taxes
 Tax on manufacture, sale or
consumption of a good or
service.
 Currently imposed on
gasoline, tobacco, alcohol,
airline tickets and many
other goods and services.
 Generates about 2.7% of
federal tax revenue.
Sources of Federal Revenue
E.
Estate and Gift Taxes
 Estate tax is levied on
assets of someone who
dies. Heir pays the tax
 Gift tax is levied on a
gift from a living person
to living person.
 Generates about 1.2%
of federal tax revenue.
Sources of Federal Revenue
F.
Custom Duties
 Custom duties or
tariffs are taxes
levied on goods
brought into the
U.S. from
abroad.
 Generates about
1.1% of federal
tax revenue.
Sources of Federal Revenue
Sources of Federal Revenue

Borrowing
 The Treasury Department sells bonds—this is how
the government borrows money.
 The government competes with other lenders.
 The government does not have a capital budget.
Federal Expenditures
Section III
Mandatory v. Discretionary Spending
Federal Expenditures: Mandatory Spending
1.
“Uncontrollable” (Mandatory) Expenditures
 Congress and the president have no power to
directly change uncontrollable spending.
 Over 60% of all federal spending now falls into
the uncontrollable category.
 Examples
include Social Security, Medicare, Medicaid,
food stamps, unemployment insurance, veteran’s
benefits
 Social Security, Medicare and Medicaid are
approximately 44% of all federal expenditures.
Federal Expenditures: Mandatory Spending
Entitlement Programs
 Program that guarantees a specific level of
benefits to all people that meet the requirements
 Person is “entitled” to benefits if they meet the
criteria set by the federal government
 Spending on entitlements is mandated by the
Federal law
 Examples include Social Security, Medicare,
Medicaid, food stamps, unemployment insurance,
veteran’s benefits
 Entitlements are by far the largest portion of
uncontrollable benefits in the federal budget
Entitlements
Positives


Provides needed
benefits to American
citizens
Government cannot
delay or avoid
payment in the budget
Negatives



No Congressional
discretion on money
allotted
2/3 of budget
Less money for
discretionary spending
Test Tip

Be sure you understand that
entitlement programs represent
the largest portion of
uncontrollable spending in the
federal budget. Entitlements,
therefore are a formidable
barrier to achieving a balanced
budget.
Federal Expenditures: Mandatory Spending
2.
Borrowing “uncontrollable spending”
 The federal debt now exceeds $18 trillion
 Approximately 5-9% of all federal
expenditures go to pay interest on this debt.
 The money going to pay interest depends on
interest rates. If interest rates rise, then the
amount required to service the debt also rises.
Federal Expenditures: Discretionary Spending
B.
Discretionary Expenditures
 Not required by law.
 Spending that goes through the appropriations
process in Congress each year
 Defense, agriculture, education, highways,
research grants, parks, environment and
government operations are all examples of
discretionary programs
Federal Expenditures: Tax Expenditures

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
 Tax Reduction: the general call to lower taxes
 Tax Reform: rewriting the tax laws to change the
rates and who pays them
Federal Expenditures

Big Governments, Big Budgets
 A big government requires lots of money.
 As the size of government increases, so does its
budget.
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.
 Defense now constitutes about one-sixth of all
federal expenditures.
 One reason for growth of government
Federal Expenditures

The Rise of the Social Service State
 The biggest part of federal spending is now for
income security programs.
 Social Security is largest program
 Social Security has been expanded since 1935 to
include disability benefits and Medicare.
 These benefit programs face financial problems
with more recipients living longer.
 Another reason for government growth
Test Tip

The AP U.S. Government and
Politics exam has devoted a
number of questions—both
MCQs and FRQs—to Social
Security. It is very important for
you to understand the
demographic forces that are
combining to threaten the
solvency of the Social Security
system.
The Budgetary Process
Section IV
The Budgetary Process

Budgetary Politics
 Stakes
 All
 The
and Strategies
political actors have a stake in the budget.
Players
 Lots
of players, with the president and Congress playing
important roles
 Almost all committees are involved in the budget.
The Budgetary Process: Terms

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.
The Budgetary Process: The Theory





Office of Management and Budget (OMB) sends
instructions to agencies
Agencies send requests to OMB
OMB revises the budget
The budget reflects the priorities and goals of the
president’s policy agenda.
The budget process is time consuming—starting
nearly a year in advance.
The Budgetary Process: The Theory
1.
2.
The President submits a budget request to Congress
by 2/1
House and Senate Appropriations subcommittees
"markup" appropriations bills

3.
4.
Tax proposals go to House Ways and Means and Senate
Finance committees
The House and Senate vote on appropriations bills
and reconcile differences
The President signs each appropriations bill and the
budget becomes law
12 Appropriations Subcommittees
Note: Only
discretionary
spending
Video
Reconciliation Bills

Reconciliation bills are used to change laws
around fiscal policy
 Mandatory
 Debt
 Taxes
spending
Finalizing the Budget


By October 1st, all
appropriations bills
should be passed
If they are not passed,
Congress has to pass a
continuing resolution
where agencies run on
last year’s budget
The Budgetary Process

Congress and the Budget
 Reforming the Process
 The Congressional Budget and Impoundment
Control Act of 1974

 It
designed to reform the congressional budgetary process
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
Deficits and the National Debt
Section V
The Budgetary Process

Barriers to a Balanced Budget
1. Entitlement programs
2. Incrementalism




3.
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.
Interest groups
The Budgetary Process

Consequences of Budget Deficits
1. Huge interest payments

2.
3.
2016 - $433 billion
Heavy burden on future generations
Makes it difficult to fully fund other policy goals
The Federal Budget

Congress and the Budget: Problems
 Between
1974 and 1998, every budget was a deficit
budget. Since 2002 every budget was a deficit
 Congress misses most of its own deadlines.
 Congress passes continuing resolutions to keep the
government going until it passes a budget.
 Omnibus budget bills often contain policies that cannot pass
on their own.
The Federal Budget

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.
Debt v. Deficit
:
Budget Deficits
The amount by which
government spending
exceeds government
revenues in a single
year.
National Debt
The total amount of
money the federal
government owes to
pay for accumulated
deficits.
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.