1. Financing the Government
Chapter 16

2. Taxes: Section 1 The Power to tax: granted by the Constitution
Article I, section 8, Clause 1
Expressed Limits on taxation
Must be used for public purposes only
Taxes cannot be levied on exports
Commerce Compromise 1787
Taxes must equally apportioned (distributed) according to their populations.
Exception: income tax
All indirect taxes levied by the US government must be set at the same rate in all parts of the country.

3. Implied Limitations
Federal government cannot tax states when they are exercising their government functions.
Money used to run schools
Health care provision
Caring for roads
They can tax for those items outside of government
Liquor
tobacco

4. Current Federal Taxes

5. Income Tax The Income Tax What is a progressive tax? Flexible Tax
Authorized by the 16th amendment
Largest source of income for federal government
Progressive tax
What is a progressive tax?
A tax that gets higher as one’s income gets higher
Flexible Tax
Congress can adjust it to produce whatever rates are necessary.
File a tax return each year

7. Corporate Taxes Rates paid above the cost of doing business
What is the cost of doing business?
Wholesale products
Employee wages
Purchases
Mileage
Services
Postage
Facilities
Advertising
Supplies
Utilities

8. Entitlement Programs Social Security Medicare Unemployment
Assessed at a flat rate
Does not mean that all pay the same amount
All pay the same proportion

9. Other Taxes Estate Tax : levy on assets of who dies
Gift Tax: money given to a living person
$10, limit
Custom Duties: payments on items brought into the US from abroad.
$800 tourist allowance
Coffee
Bibles
Bananas

10. Tax for nonrevenue purposes
Taxation is not just for revenue generation.
Discourage activity
Matches
Phosphorus
Marchetti v. United States
$50 license on bookies.
Tax was allowable
Ruled against under the 5th amendment

11. Nontax and borrowing Nontax monies Patents Interest Passports
Trademarks
Sale of public lands
Sale of public assets
Sales of minted coins
Stamps for collections

12. Power to borrow Originally viewed as a way to meet costs of crisis
Finance large scale projects
Only recently has the government borrowed money for the purpose of deficit spending.
What is a deficit?
What is a surplus?

13. Public Debt
The public debt is all of the total outstanding indebtness, which include money borrowed AND interest owed.
1 million dollars would be a stack of $1,000 dollar bills 4 inches high.
1 trillion dollars (the amount owed during the Reagan administration) would be 67 miles high.
No Constitutional limits on amount
Congress has put limits on the debt limit or ceiling

14. Spending and the budget

15. Federal Spending Spending priorities
Entitlements : must be paid to all those who meet eligibility requirements.
Social Security
Medicare
Medicaid
Food stamps
Unemployment compensation
Veteran’s pensions
Welfare programs
Interest on the public debt

16. Controllable v. Uncontrollable
Controllable- discretionary
Uncontrollable-fixed
President and Congress decide how much will be spent each year.
Environmental
Military equipment
Aid to education
80 % falls into uncontrollable spending.
Interest on debt
Public programs
Social Security
Could be redefined
Percent of uncontrollable gets larger each year.

17. Federal Budget President’s Budget Congress
Agencies estimate the cost of doing business for the upcoming year.
Agencies submit them up through the agencies to OMB.
President sends budget to Capital Hill.
Congress
Budget Committee in each chamber
Reviews President’s budget
Congressional Budget Office studies the budget and helps the Budget Committee.
Also sent to the House and Senate Appropriations Committee
After budget is studied measures are drawn by committees to appropriate the funding.

18. Concurrent resolutions in respective chambers
Concurrent resolutions in respective chambers. The measures must be passed by May 15 to act as guides for the budget committees.
By September 15 a second resolution must be passed to set expenditure limits for agencies.
There are no appropriation measure can provide for spending beyond those limits.

19. Congress (hopes) to pass 13 major appropriations each year.
If appropriations are not passed emergency legislation has to be passed in the form of a Continued Resolution.
Agencies without appropriations passed operate based on the previous year’s appropriations.