1. PG. 434-444 CH. 14: THE CONGRESS, THE PRESIDENT, & THE BUDGET: THE POLITICS OF TAXING & SPENDING

2. DLT By the end of class, I will be able to identify the three major sources of federal revenues as evidenced by discussing the three sources mentioned in your textbook with a partner.

3. SOURCES OF FEDERAL REVENUE In The Past: Tariffs and excise taxes were the major sources of federal revenue. Income tax of 2% passed in 1894. was ruled unconstitutional by Supreme Court since it was not proportional to state populations. Pollock v. Farmer’s Loan & Trust Co. (1895) The U.S. Supreme Court ruled the tax unconstitutional since it was not proportional to state populations. 1913, the 16 th Amendment authorized Congress to levy a tax on income.

4. SOURCES OF FEDERAL REVENUE Presently (2007 figures): Individual income taxes Individual income taxes (progressive taxes): 43% of all federal revenue. Social insurance (payroll) taxes Social insurance (payroll) taxes (regressive taxes): 32% of all federal revenue. Corporate taxes Corporate taxes: 13% of all federal revenue.

5. SOURCES OF FEDERAL REVENUE Presently (2007 figures): Excise taxes Excise taxes: 2% of all federal revenue. Borrowing Borrowing: 6% (this has risen due to resumption of deficit spending). Other Other: 4%.

6. SOURCES OF FEDERAL REVENUE Income Tax: The Internal Revenue Service (IRS) Income tax is generally progressive. Those with more taxable income pay more taxes. They also pay higher rates of tax on their income. 10% of taxpayers with the highest income pay about 2/3 of all the income taxes in the country. The bottom 50% of taxable income pay less than 4% of all income taxes.

8. SOURCES OF FEDERAL REVENUE Social Insurance Taxes: Employers & employees pay Social Security taxes. Money is deducted from the employees’ check and matched by their employer. The Social Security Trust Fund pays benefits to the elderly, the disabled, the widowed, and the unemployed.

9. SOURCES OF FEDERAL REVENUE Borrowing: The U.S. Treasury Department sells bonds. Citizens, corporations, mutual funds, other financial institutions, and foreign governments may purchase these bonds. “Intragovernmental” debt is what the Treasury owes various Social Security and other trust funds. Most government borrowing is for its day-to-day expenses.

10. PEER-2-PEER TIME You & your partner will review the three major sources of federal revenues, that were mentioned in your textbook. Part 1: Partner “A” will say each of the 3 sources & Partner “B” will explain what they are. Part 2: Partner “B” will describe each of the 3 sources & Partner “A” will have to identify each one.

11. SOURCES OF FEDERAL REVENUE Taxes & Public Policy: Tax Loopholes Tax Loopholes A tax break or tax benefit. In 1975, H. Ross Perot hired a former IRS commissioner to lobby for a change in the tax code. The change would save Perot $15 million in taxes. The amendment passed the House Ways & Means Committee, but was killed on the House floor.

12. SOURCES OF FEDERAL REVENUE Taxes & Public Policy: Tax Expenditures Tax Expenditures 1974 Budget Act – “revenue losses attributable to provisions of the federal tax laws which allow a special exemption, or deduction.” Taxpayers can deduct their contributions to charities from their income. Home owners can deduct what they pay in mortgage interest.

13. SOURCES OF FEDERAL REVENUE Taxes & Public Policy: Tax Expenditures Tax Expenditures Benefit middle- and upper-income taxpayers. The Office of Management and Budget estimates that the total tax expenditures equal more than a 1/3 of the federal government’s total receipts.

14. SOURCES OF FEDERAL REVENUE Taxes & Public Policy: Tax Reduction Tax Reduction 1981, Congress passes Reagan’s tax-cutting proposal. Over a 3 year period, the federal tax bills of Americans were reduced by 25%, corporate income taxes were also reduced, new tax incentives were provided for personal savings & corporate investment, & taxes were indexed to the cost of living.

15. SOURCES OF FEDERAL REVENUE Taxes & Public Policy: Tax Reduction Tax Reduction Indexing taxes meant that beginning in 1985, government no longer received a larger share of income when inflation pushed income into higher brackets while the tax rates stayed the same. Families with high incomes saved many thousands of dollars on taxes.

16. SOURCES OF FEDERAL REVENUE Taxes & Public Policy: Tax Reform Tax Reform The Tax Reform Act of 1986, was one of the most sweeping alterations in federal tax policy history. Eliminated or reduced the value of many tax deductions, removed several million low-income individuals from the tax rolls, and greatly reduced the number of tax brackets.