Financing Government
Chapter 16
Learning Target
EXPLAIN how government is
financed.
Taxes
•  Constitution gives taxing power to
Congress.
•  Congress must tax in accordance with
Constitution
–  Set taxes for public purposes only
–  Cannot tax exports
Taxes
•  Americans pay several
kinds of federal taxes.
•  Income Tax – largest
source of federal revenue.
Collected from a person’s
yearly earnings. Income tax
is a progressive tax, which
means the more $ you
make, the more $ you pay.
•  Tax Return – a form that
every U.S. income-earner
completes, that shows the
tax owed. Businesses pay
corporate income taxes.
Social Insurance Taxes
Federal Government collects large amounts of
money to finance 3 major social welfare
programs
1.  Social Security - Old-Age, Survivors, and
Disability Insurance (OASDI)
2.  Medicare – health care for the elderly
3.  Unemployment Compensation Program –
benefits paid to jobless workers.
These taxes are paid as payroll taxes - $ your
employers withhold from your paychecks and send
to government. These are also called regressive
taxes which means that everyone pays the same
rate.
Other Taxes
•  Excise Tax – a tax laid on the
manufacture, sale, or consumption of
goods and/or performance of services.
•  Estate Tax – Taxes that must be paid on
the assets of a person who has died.
•  Gift Tax – when someone receives a gift
of over $10,000, they are subject to this.
•  Custom Duty – a tax laid on goods
brought into the U.S. from another country.
Nontax Revenues & Borrowing
The Federal Government receives tons of $
from various nontax sources.
•  A large portion comes from the earnings of
the Federal Reserve System, mostly in
interest charges.
–  Interest – a charge for borrowed money. A % of
the amount borrowed.
•  Fees from items like copyrights and
trademarks.
Congress and Borrowing
•  Government borrows money at lower interest
rates than do private borrowers – no limit on how
much it can borrow.
•  This practice allowed the Federal Government to
spend more $ than it took in between 1929 and
1968. This is called, running up a deficit.
•  Surplus – when the government takes in more
than it spends.
•  Congress must authorize all federal
borrowing. Borrowing money produces debt.
•  The public debt is the result of the federal
government’s borrowing over many years.
Spending and the Budget
•  The largest area of government spending is
entitlements, which are payments made to people
whom federal law says are entitled or have a right to
them. i.e.) social security. The next largest is payment on
the public debt and national defense.
•  Uncontrollable Spending – payments the government
is obliged, by law, to make every year.
•  Controllable Spending – spending that can be adjusted
every year. i.e.) environment or education.
•  Budget – the Federal Government’s spending plan for
one year. Put together by the President and the Office of
Management and Budget (OMB).
Creating the Federal Budget
President and OMB create budget.
President sends budget to Congress.
Congress gives budget to Budget and
Appropriations
Committees in each house.
Congress approves final budget.
Congress sends appropriations bills to President
To authorize spending for the coming year.