1. Chapter 7 Sect 3
Mr. Plude

2. The Federal Budget

3. Paying for Government
Revenue – Sources of income
From taxes, fees, and other nontax sources.
Deficits paid with borrowing

4. Paying for Government
Income Taxes
1913: 16th Amendment taxes levied on personal or corporate income
Largest % of revenue, 47%
Progressive tax: tax whose rates increase as amount subject to taxation increases
Rates range from 10 to 37%

5. Paying for Government
Payroll Taxes
Payroll tax: money withheld to help pay for Social Security and Medicare
34% of revenues
Regressive tax: greater impact on lower-income earners (larger % of income)
Medicare is proportional tax: same rate against all income

6. Paying for Government Other Sources of Revenue
Excise taxes and tariffs: taxes on imported goods
Estate tax: (Inheritance tax) on money & property 2 million & above
State taxes are at much lower levels
Gift tax: tax on property given from one person to another
— Gift taxes exist so people will not avoid paying estate taxes by giving away property before they die.
Nontax revenue comes from many sources, including entrance fees at national parks.
Federal Reserve System—loans money to banks, charges interest

7. Paying for Government Other Sources of Revenue
Gift tax: tax on property given from one person to another
— Gift taxes exist so people will not avoid paying estate taxes by giving away property before they die.
Nontax revenue comes from many sources, including entrance fees at national parks.
Federal Reserve System—loans money to banks, charges interest

9. Paying for Government Borrowing Money Borrows money by selling bonds
Bond: financial instrument by which borrower agrees to pay back borrowed money, plus interest, at future date
Budget deficits, revenues are lower than expenses
Federal government has been running deficit in recent decades
Federal debt: total sum of money owed – $19 Trillion
Interest = 9 percent of total annual budget

11. Required by law - not subject to budget process
Government Spending
Mandatory Spending
Required by law - not subject to budget process
Entitlement programs included, like Social Security, Medicare, Medicaid
Mandatory budget spending steadily rising
1962 = 26% today = 69% of budget

12. Government Spending Discretionary Spending
Spending subject to annual budget process
Congress decides how to allocate discretionary funds
31% of budget
President proposes budget - passed by Congress

14. The Budget Process Plan for bringing in and spending money
A reflection of the nation’s priorities & policy goals.
Creates compromise
The federal budget lasts for one fiscal (“financial”) year,
From October 1 to September 30 of the next calendar year.

15. The Budget Process Budget begins with president
The President’s Budget
Budget begins with president
Reflects president’s legislative & policy priorities
Office of Management and Budget (OMB) assists president in creating budget
President sets broad budget, policy guidelines; OMB provides details
Shows revenue and spending estimates into the future
Budget State of the Union address

16. The Budget Process Budget to Congress by 1st Monday of February
The Budget in Congress
Budget to Congress by 1st Monday of February
Used as guide for discussions
Reviews proposal, makes changes deemed necessary
Nonpartisan Congressional Budget Office (CBO) provides expert economic analysis
First steps: to agree on grand totals for revenue, spending

17. The Budget Process Step 2: individual funding and revenue resolutions
Sent to House and Senate Appropriations Committees have authority over discretionary spending of budget
Final budget Series of appropriations bills
Must finalized by beginning of fiscal year Sept30
Continuing Resolution (CR) needed if not signed into law

19. Fiscal and Monetary Policy
Fiscal policy created by budget
Monetary policy control of amount of money in circulation and interest rates at which money can be borrowed by banks
Policy goals
economic growth
low unemployment
stable prices for goods and services
balanced budget

20. Fiscal and Monetary Policy
Revenues equal 20 percent of Gross Domestic Product (GDP)
GDP total value of everything produced in US
Government also spends and borrows similar amount
Tax changes, increasing government spending and borrowing shift economy
Spending and borrowing have huge effect— positive and negative—on economy

21. Fiscal Policy
Goal - provide adequate funds w/o adverse affects on overall economy
Slow economy government can spend more or cut taxes
Targeted spending can stimulate sectors of economy to produce more goods, hire more workers
Tax cuts more money in taxpayers’ pockets, spurring consumer spending, business investment

22. Fiscal Policy
Increasing spending while cutting taxes can create deficits
Deficits covered by borrowing money
Increasing borrowing = higher interest on bonds to attract investors

23. Fiscal Policy Increases % rates at which businesses borrow money
This can cause economy to slow
Too much spending causes inflation—rise in prices
Tax decreases also trigger inflation

25. Monetary Policy Influences economy by controlling
amount of money in circulation
interest rates for borrowing for banks
1913: Federal Reserve System - nation’s central bank system
Seven-person board, nominated by president, confirmed by Senate
Fed Chairperson’s guide the economy

26. Monetary Policy Federal Reserve System
Sets rules for banks’ reserves (10:1 ration on total deposits)
controls amount of money in circulation by
Adjusts interest rates for banks
Buying - selling bonds (borrowing/repaying)

27. Monetary Policy Fiscal, Monetary Policies
Changes take time to put in place
Successful policies a balancing act
Limits to what government can achieve with fiscal, monetary policy
Effect of change may not begin for months