Chapter 14: Congress, The President and the Budget Politics in Action: The Politics of Budgeting

President Obama’s proposed budget for fiscal year 2011 was going to increase the U.S. deficit…but he felt it was necessary to try and stimulate the economy. He new he wasn’t going to have much success increasing taxes. Budget is one of the key issues in presidential elections, and it remains at the center of American politics. Two questions that are central to public policy are: Who bears the burdens of paying for government? and Who receives the benefits? Budgets are central to the issue of the scope of government…budgeting is policy: The amount of money spent on a program determines how many people are served, how well they are served, how much of something the government can purchase.

Every year the president and Congress must appropriate funds. If they fail, the government will shut down. A BUDGET is a policy document allocating burdens (taxes) and benefits (expenditures)…it’s a series of goals with price tags attached. A budget DEFECIT occurs when expenditures exceed revenues in a fiscal year…when a govt. spends more $ then it takes in. About 7% of all current budget spending goes to paying the interest on the debt.

Federal Revenue and Borrowing “Taxes are what we pay for civilization” Oliver Wendell Holmes. Income Tax: Citizens are required to pay a portion of the $ they earn. 16 th Amendment (1913): permitted Congress to levy an income tax (why then?). It is generally “progressive”…those with more wealth tend to pay more taxes and higher rates of tax. The top 1% pay about 40% of all the federal income taxes, more than the bottom 95% of tax filers. Some (Conservatives) advocate a “flat tax” which would require all citizens to pay the same rate, which is much less progressive. Others favor abandoning the income tax and have a national sales tax, similar to the sales taxes in most states. Corporations, like citizens, also pay income taxes, but usually at lower rates.

Borrowing Tax revenues do not cover the federal governments expenditures….this leads the government to borrow money. Most government borrowing is not for capital needs (buildings/machinery) but for day to day expenses (farm subsidies, military pensions aid to states and cities)> Federal Debt.: All the $ borrowed over the years that is still outstanding; about $15 trillion. 7% goes to pay the interest on this debt. Dollars spent servicing the debt cannot be spent on health care, education and infrastructure. This is not optional. Large deficits make the government dependent on foreign investors, including other governments, to fund its debt. Capital budget: Budget for expenditures on items that will serve for the long term, such as equipment, roads and buildings.

Taxes and Public Policy No other area of government affects as many Americans as tax policy. The govt. can use taxes to: Make citizens’ incomes more equal Encourage or discourage growth in the economy Promote specific interests.

Tax Expenditures The 1974 Budget Act defines tax expenditures as: “revenue losses attributable to provisions of the federal tax laws which allow a special exemption, exclusion or deduction.” Tax expenditures amount to subsidies for different activities. In general, tax expenditures benefit the upper or middle classes: Homeowners or businesses….and students. Some view tax expenditures such as business related deductions, tuition tax credits and capital gains tax rates as “loopholes.”

Tax Reduction Presidents like Ronald Reagan have cut taxes, especially on the wealthy, which was popular, but help to balloon the massive deficits we have today. In 1993, President Clinton tried dealing with these deficits by raising rates on the top 2% on income and top corporate income tax rates. When this created a budget surplus in the late 1990s, president elect Bush used this as a rally point to promise to lower taxes if elected…which he did…plus he tried to pay for two wars. Usually govt. grows following tax cuts. The U.S. has one of the smallest tax burdens.