1. The Politics of Taxing and Spending
Chapter 14
The Politics of Taxing and Spending
Patrick Williams • David Phan • Vincent Au • Alex Verdin • Adam Jang • David Rodriguez

2. Budget Basis Who has to pay for government?
Equal taxes for all or graduated income tax?
Who receives the benefits of said government? After that, how much do they receive?
Welfare programs, Social Security, Government agencies,

3. Budget Basis
A budget is a policy document that allocates burdens (taxes) and benefits (expenditures) for the year.
Within the budget, you have:
Revenues
Any financial resource the federal government has
Mainly Social Security Tax and Income Tax
Expenditures
Government spending of said revenues
Mainly Social Services and National Defense
Deficits
When Expenditures exceed Revenues

4. Sources of Federal Revenue
Unlike past America, only a small amount comes from excise taxes (duties).
Major Sources
Personal/Corporate Income Tax
Social Insurance (Security) Taxes
Borrowing

5. Income Tax
Shares of an individual wage and of corporate revenues collected by the federal government.
1913 – Sixteenth Amendment allows Congress to levy income tax nationally
Progressive/Graduated or Flat?
Those with more income pay more taxes as well as higher rates of tax
Those will less income pay less in taxes as well as lower rates of tax
Easy to criticize but difficult to replace

6. Social Insurance Taxes
Employees have it taken out of their paychecks
Employers match the amount taken out
All tax money is earmarked for Social Security Trust, which is doled out to:
Elderly
Disabled
Widowed
Unemployed

7. Borrowing
Treasury Department sells bonds, guaranteeing to pay interest to bondholders. These bonds are for the Government to make ends meet.
Foreign governments can buy these, explaining indebtedness to other countries.
Federal debt nearing $11 Trillion, with 9% of all Federal spending going towards the interest alone.
Institutions still buy bonds, or else government would be underfunded

8. Tax and Public Policy
No Government policy affects more Americans than tax policies
Tax loopholes: a tax break or tax benefit that gives exemptions, deductions, special cases
Cost the treasury little

9. Tax Expenditures
Revenue losses attributable to provisions of the federal tax laws that allow a special exemption, exclusion, or deduction
Consists of the difference between what the government actually collects in taxes and what it would have collected without special exemptions
Ex) Charitable contributions, Mortgage, investments in new plants/ equipment

10. Tax Expenditures (Cont.)
Receive no regular review by Congress
Benefit middle/upper income taxpayers and corporations
May be seen as loopholes or public policy choices supporting a social activity

11. Tax Reduction Tax reductions are uncommon
In 1981, Congress passed Reagan’s tax – cutting proposal
High income families saved money on taxes but the lower income saw little change

12. Tax Reform In 1985, Reagan revealed a tax simplification plan
Met with protest between tax reformers and interest groups who wanted to keep their tax benefits
Finance Committee met and formed a new bill

13. Tax Reform Act of 1986
Eliminated or reduced many tax deductions, removed several million low-income individuals from the tax rolls, and reduced the number of tax brackets
Tax brackets: categories of income that are taxed at different rates

14. Federal Expenditures
Policies and Programs by the government all experience change in their budget over time.
Expenditures keeps rising.
A large government requires a large budget.
The United States has one of the smallest public sector, which is measured in GDP (Gross Domestic Products).
The public sector increases accordingly to public preference and changes in the economy and society.
Citizens enjoy and wants government services, hence the growth of government continues.

15. Federal Expenditures
During the Cold War era , the largest portion of the budget was allocated to the military. Due to the large investment in advance military technology and mass production, the cost of government drastically increased.
However during the 1900s, military spending slowly decreased, whereas social welfare expenditures doubled.
After the 9/11 attack, military spending skyrocketed but still only constituted one-fifth of the federal budget.

16. Federal Expenditures
In place of the military expenditures, income security spending now takes the largest portion of federal spending. These programs amount up to one-third of the federal budget.
Social Security Act: A federal program by President Franklin D. Roosevelt during the Great Depression which assisted elderly citizens to protect them from poverty.
Medicare: Another government program which provides elderly citizens health coverage for hospitals and physicians.
Liberals tend to favor income security spending, whereas conservatives see them as a drain in the federal treasury.

17. Federal Expenditures
Incrementalism- the best predictor of this year’s budget is last year’s budget plus a little more.
Policymakers tend to focus little attention on the amount agencies have had over the previous years.
Agencies usually can assume that they will at least get the same amount of budget as the previous year.
Most of the attention of the budgetary process focus on the proposed incrementalism.
Budgets for agencies tend to increase a little every year.
Incrementalism is the generally tendency of the budget but it doesn’t describe budgetary politics.
The budgetary politics are affected by interest groups focused on taxes and expenditures.
The Federal Budget has over the years become “uncontrollable”.

18. Federal Expenditures
Uncontrollable Expenditures- Expenditures that are determined by not a fixed amount of money but rather by the amount of eligible beneficiaries.
Most expenditures are uncontrollable because Congress has obligated itself to pay benefits to a certain amount of beneficiaries. This is called entitlement, ranging from agricultural subsidies and veterans’ aid.
Eligible individuals automatically receive Social Security payments.

19. The Budgetary Process
The process of creating budgets starts and ends with the president and involves Congress in the middle.
The budgetary process is the center of political battles as they involve nearly everyone in government. This is due to their importance for all policies.

20. Budgetary Politics
Political actors all have a stake in the budget as a result of their different needs for money.
The primary actors in the budgetary process are…
Interest Groups: Use lobbyists to influence decisions in budget.
Agencies: The heads of agencies typically push for higher budget requests.
The Office of Management and Budget: Helps the president with budgetary matters.
The President: Makes final decisions on the budget to propose to Congress.
Tax Committees : Congress uses both the House Ways and Means Committee and the Senate Finance Committee to write the tax codes, subject to the approval of Congress as a whole.

21. Budgetary Politics (cont.)
Budget Committees and the Congressional Budget Office: Examines revenues and expenditures in order to set the parameters of the congressional budget process.
Subject-matter Committees: Write new laws that require new expenditures.
Appropriations Committees: Decides who gets what. Takes policies from subject-matter committees and decides how much to spend.
Congress: Must approve taxes and appropriations as well as funding their constituents.
The Government Accountability Office: Monitors what agencies do with their budgets.

22. The President’s Budget
Until 1921, the Executive Branch sent its budget requests to the secretary of the treasury, who then forwarded it to congress.
Budget and Accounting Act of 1921
Requires the president to propose an executive budget to congress, and create a Bureau of the Budget for the branch.
Name changed to the Office of Management and Budget (OMB) under Nixon

23. The President’s Budget
The OMB leadership
Director: presidential appointee who must receive Senate approval to obtain this position
Oversees creating of the executive budget and advises the president in budgetary matters

24. The President’s Budget
The Process
1) The OMB discusses with each executive agency and hears their requests for the budget.
2) The president sets his own guidelines for what he wants the budget to be used for/focused on
3) The president communicates his guidelines for the budget to the agencies of the executive branch
4) Executive agencies push their requests for the budget unto the president for approval
5) The president must submit a budget by the first Monday of February

25. The President’s Budget
General Schedule
Spring
Budget Policy Developed
The OMB presents the president with an analysis of the economic situation, and they discuss the budgetary outlook and policies.
Summer
Agency Estimates Submitted
The OMB conveys the president’s decisions to the agencies and advises and assists them in preparing the budget.
Fall
Estimates Reviewed
The agencies submit to the OMB formal budget estimates for the coming fiscal year, along with projections for the future.
Winter
President’s Budget Determined and Submitted
The president revises and approves the budget message and transmits the budget document to Congress.

26. Congress and the Budget
Reforming the Process
Congressional Budget and Impoundment Control Act of 1974: reformed the congressional budgetary process to be less dependent on the president’s budget.

27. Congress and the Budget
What does the Congressional Budget and Impoundment Control Act of 1974 accomplish?
A fixed budget calendar: each step in the budgetary process has an established completion date.
A budget committee in each house: these two committees are supposed to recommend target figures to Congress for total budget size.
A Congressional Budget Office: (CBO) advises Congress on the probable consequence of its budget decisions; counterweight to the president’s OMB

28. Congress and the Budget
Purpose of this new budget system
Force Congress to see the big picture of the budget rather than nit pick individual expenditures
Make budget resolutions: limits Congress’ expenditures for any agency based on its revenue projections

29. Congress and the Budget
There’s always loopholes
Two methods which Congress uses to get around budget resolutions
1) Reconciliation: A congressional process through which program authorization are revised to achieve required savings. It usually also includes tax or other revenue adjustments.
2) Authorization Bill: It specifies program goals and maximum expenditures for discretionary programs.
Requires an appropriation bill to fund programs within limits established by the authorization bill

30. Evaluating the 1974 Reforms
Did they work?
In terms of bringing spending in line with its revenues, then No.
Congressional budgets were in the red(debt) every year between 1974 and 1998.
Congress failed its budgetary timetable
Congress resorted to Continuing Resolutions.
Continuing Resolutions: when Congress cannot reach agreement and pass appropriations bills, these resolutions allow agencies to spend at the level of the previous year.

31. Evaluating (Cont. )
On the other hand, the 1974 reforms helped Congress view the entire budget early in the process.

32. More reforms
Amended in 1987, the Gramm-Rudman-Hollings Act (Emergency Deficit Control Act) mandated maximum allowable deficit levels for each year until 1993.
If Congress failed to meet deficit goals, sequestrations were to be ordered by the president.
Sequestrations: automatic across-the-board budget cuts.
Near end of 1990, Congress abandoned GRHA.
Changed budgeting policy from controlling the size of the deficit to controlling increases in spending

33. More Reforms (Cont.)
Divided discretionary spending into 3 categories: Domestic, Defense, and International.
New spending in any of the categories had to be offset by decreases elsewhere within the category.
In 1995, Republicans argued for cuts in the rate of growth of popular entitlement programs (Medicaid etc.)
Democrats opposed, while President agreed with balancing the budget, but on his terms, which led to divided government.

34. Democracy and Budgeting
Democracies have seen substantial growth in government.
Politicians spend money to “buy” votes via pork-barreling, constituency services, etc.
People vote for who can benefit them.
The poor vote for those that promise to redistribute benefits from the rich to the poor.
Government does what the people want, which leads to the budget problem.
People want to spend more, but not pay taxes.

35. The budget and the scope of government
The budget is the scope of the government.
The bigger the budget, the bigger the government.
The budget controls the agenda of the president.
For example, President Clinton wanted to invest in education, worker training, and the country’s physical infrastructure (roads, bridges), but there was no money to fund.
The government is limited without money.

36. Summary Budget making is complex, with many actors playing many roles.
President sets the budgetary agenda, whereas Congress and its committees approve the budget.
Larger budgets mean larger government.
The budget serves as a constraint on government growth.