Government Finances

Budget Process President must submit a budget proposal to Congress by the 1 st Monday in February Congress then passes a budget resolution through both Houses of Congress

Budget Process Spending is divided into 2 types: Mandatory Spending: Spending that does not need annual approval. EX: Social Security Payments Discretionary Spending: Spending that must be approved each year EX: Highway construction

Federal Revenues Incometaxes Income taxes account for half of all federal government revenues tax withholdings- Most of this comes from tax withholdings- money taken from each person’s paycheck to cover their taxes tax return refund At the end of the year, you file a tax return. If the government took too much in your checks, you get a refund. Otherwise you pay the balance. Corporations Corporations also pay taxes on their profits. This is about 10% of all federal government revenue.

Federal Revenues payroll taxes- The second largest source of gov’t income is payroll taxes-money taken from your paycheck to pay for social security and Medicare excise taxes- The government also collects excise taxes- taxes on specific goods such as gas, tobacco, alcohol, & legal betting (also called sin taxes) estate tax- Another tax is the estate tax-tax on money left in a will gift tax- Another tax is a gift tax-tax on large gifts

Forms of Taxes Proportional tax- a tax that has the same percentage no matter how much you make collects less money than other methods for the government

Forms of Taxes Progressive tax- the more you make, the higher the percentage you pay collects the most money for the government

Forms of Taxes Regressive tax- opposite of progressive in that the percentage you pay goes down the more you make ex: social security and sales taxes

Federal Expenditures Expenditures-where the government spends its money 21% on Social Security 17% on national defense 14% on Medicare 8% on interest on debt

Sources of State Government Revenue Main source is intergovernmental revenue-money received from the national government, about $.22 per all dollars received. Sales tax-tax on the purchase of most items. Stores pay a lump amount each month. Ranges in amount from 2% to 8%. Some states don’t have any sales taxes at all.

Sources of State Government Revenue Contributions-states take the money collected from it’s employees for their retire and invest it. Income taxes-many states have their own income tax systems. Some states simply take a percentage from your federal return. Others charge a flat rate to all it’s citizens. Some charge a progressive rate while 7 states have no income tax at all.

State Expenditures State welfare programs called entitlement programs. These programs provide health, nutrition, or income payments to people who meet basic requirements Higher education-states help to subsidize the cost of a college education for the poor. Highway construction

Sources of Local Government Revenue Property taxes- must pay a certain percentage on real property such as buildings and land. May also charge property taxes on stocks, bonds, cars, jewelry, furniture, and fine works of art. Revenue from utility companies Also collect sales taxes Fines from traffic violations and other user fees

Local Government Expenditures Education-in charge of setting up local school districts Police and fire protection Water supply Sewage and sanitation

Budget Issues Difficulties in planning Hard to predict tax revenues Hard to predict all government expenses Never know when a unique event will occur (hurricane, blizzard, terrorist attack)

Budget Issues surplus Try to have a surplus-when revenues are more than expenditures States also try to put money away for unforeseen events

Budget Issues deficit When expenditures are more than revenues you have a deficit Another problem is that the national government is forcing states to pay for more programs leading to large state debts

Government Debt When the government runs into debt it must borrow money to pay it’s bills May use bonds-an agreement to pay back a loan with interest Surpluses may help to pay for these debts, or governments may cut programs Raising taxes is another unpopular option

Government Debt Governments try to have a balanced budget, where spending equals expenditures The business cycle can make this difficult as government spending in recessions can make a balanced budget difficult

Impact of National debt: 1. More tax dollars go to paying interest on loans, leaving less for government programs 2. Higher taxes to pay off debt mean less money for your expenses 3. The more money the government borrows the less available for its citizens to borrow, slowing down the economy

Automatic Stabilizers These are programs that are in place to stimulate the economy when needed The main advantage is that are always in place with no government action needed Ex: unemployment insurance to help people till they can find a job Ex: Medicaid and other welfare programs to help people maintain a basic standard of living Ex: progressive taxes