1. Copyright © 2011 Pearson Education, Inc. Publishing as Longman

2. 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

3. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 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.

4. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 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.

5. 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. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman

6. LO 14.1 To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman

7. Federal Revenue and Borrowing 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. To Learning Objectives LO 14.1

8. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Revenue and Borrowing The three major sources of federal revenue are: Personal and Corporate Income Tax Social Insurance Taxes Borrowing EXCISE TAXES (tax on gasoline) and other sources are a small portion of revenue (this is one but also a political nightmare-Taxes and Public Policy ) To Learning Objectives LO 14.1

9. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 14.1

10. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Revenue and Borrowing 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. Personal taxes is around 44 cents to the dollar, corporate is 12 cents to the dollar Who pays more? To Learning Objectives LO 14.1

11. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Revenue and Borrowing Social Insurance Taxes Both employers and employees pay Social Security and Medicare taxes.- go into Social Security Trust fund- not general fund 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. 1957- 12% of federal revenue, today 36%- why? To Learning Objectives LO 14.1

12. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Revenue and Borrowing 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 and growing trillion. To Learning Objectives LO 14.1

13. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 14.1

14. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Revenue and Borrowing Taxes and Public Policy Tax Expenditures – Revenue losses from special exemptions, exclusions, or deductions allowed by federal tax law.(ex mortgage interest, business deductions for R and D) – benefits middle and upper income people/corporations 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. To Learning Objectives LO 14.1

15. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 14.1

16. 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 To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman

17. LO 14.2 To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman

18. Federal Expenditures 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. To Learning Objectives LO 14.2

19. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Expenditures 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. To Learning Objectives LO 14.2

20. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 14.2

21. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 14.2

22. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Expenditures 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. To Learning Objectives LO 14.2

23. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 14.2

24. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Expenditures 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.” To Learning Objectives LO 14.2

25. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Expenditures 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. To Learning Objectives LO 14.2

26. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Expenditures “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. To Learning Objectives LO 14.2

27. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Federal Expenditures “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. To Learning Objectives LO 14.2

28. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 14.2

29. 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 To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman

30. The Budgetary Process 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. LO 14.3 To Learning Objectives

31. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Budgetary Process 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. To Learning Objectives LO 14.3

32. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Budgetary Process Budgetary Politics (cont.) The Players – Tax committees in Congress write the tax codes –House Ways and Means, Senate Finace; 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. To Learning Objectives LO 14.3

33. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Budgetary Process 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. To Learning Objectives LO 14.3

34. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 14.3

35. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Budgetary Process 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). To Learning Objectives LO 14.3

36. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Budgetary Process 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. To Learning Objectives LO 14.3

37. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 14.3

38. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Budgetary Process 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. To Learning Objectives LO 14.3

39. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 14.3

40. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Budgetary Process 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. To Learning Objectives LO 14.3

41. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Budgetary Process 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. To Learning Objectives LO 14.3

42. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Budgetary Process Congress and the Budget (cont.) Budgets were in red every year between 1974 reforms and 1998. 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. To Learning Objectives LO 14.3

43. To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman LO 14.3

44. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The Budgetary Process 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. To Learning Objectives LO 14.3

45. 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 To Learning Objectives Copyright © 2011 Pearson Education, Inc. Publishing as Longman

46. Understanding Budgeting 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. LO 14.4 To Learning Objectives

47. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Understanding Budgeting 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. To Learning Objectives LO 14.4

48. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 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. To Learning Objectives

49. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 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. To Learning Objectives

50. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Approximately what percentage of federal expenditures goes to paying interest on the federal debt? A.1 percent B.7 percent C.15 percent D.25 percent E.40 percent LO 14.1 To Learning Objectives

51. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Approximately what percentage of federal expenditures goes to paying interest on the federal debt? A.1 percent B.7 percent C.15 percent D.25 percent E.40 percent To Learning Objectives LO 14.1

52. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 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. To Learning Objectives

53. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 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. To Learning Objectives

54. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Which of the following comprises the largest slice of the budgetary pie? A.Defense expenditures. B.Income security expenditures. C.Foreign aid expenditures. D.Domestic policy expenditures other than for income security. LO 14.2 To Learning Objectives

55. Copyright © 2011 Pearson Education, Inc. Publishing as Longman Which of the following comprises the largest slice of the budgetary pie? A.Defense expenditures. B.Income security expenditures. C.Foreign aid expenditures. D.Domestic policy expenditures other than for income security. To Learning Objectives LO 14.2

56. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 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. To Learning Objectives

57. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 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 LO 14.3 To Learning Objectives

58. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 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 To Learning Objectives LO 14.3

59. Copyright © 2011 Pearson Education, Inc. Publishing as Longman 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. To Learning Objectives

60. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The budget the scope of government, but the budget may also constrain the scope of government. A.decreases B.reduces C.expands D.none of the above LO 14.4 To Learning Objectives

61. Copyright © 2011 Pearson Education, Inc. Publishing as Longman The budget the scope of government, but the budget may also constrain the scope of government. A.decreases B.reduces C.expands D.none of the above To Learning Objectives LO 14.4