1. Copyright, 2000 © Prentice Hall Magruder’s American Government C H A P T E R 16 Financing Government

2. Financing Government C H A P T E R 16 Financing Government SECTION 1 Where the Money Comes From: Taxes SECTION 2 Nontax Revenues and Borrowing SECTION 3 Spending and the Budget Spending and the Budget Chapter 16

3. Chapter 16, Section 1 Where the Money Comes From: Taxes S E C T I O N 1 Where the Money Comes From: Taxes The power to tax is granted to Congress by the Constitution, but that power is not unlimited and taxes may be levied only for public purposes. Direct taxes must be apportioned among the States according to their populations and indirect taxes must be uniform in every State. Income taxes levied on individuals and corporations are progressive taxes and are the largest source of federal revenue. Excise taxes, estate and gift taxes, and custom duties also contribute. Nonprofit organizations such as churches and schools are not subject to an income tax. Social insurance taxes are regressive and pay for three major social welfare programs: (1) Old-Age, Survivors, and Disability Insurance (2) Medicare (3) Unemployment compensation

4. Nontax Revenues and Borrowing S E C T I O N 2 Nontax Revenues and Borrowing Many nontax sources contribute to the federal treasury: (1) interest on loans made by federal agencies (2) the “conscience fund” (3) the profit the U.S. Mint makes in the production of coins (4) the sale of mint stamps to collectors by the U.S. Postal Service The Constitution gives Congress the power to borrow money on the credit of the United States for crisis situations such as war or for large-scale projects. No constitutional limits exist on the amount of money the Federal Government can borrow and the government has built up a huge debt financing past federal deficits. In recent years, the annual deficit has been eliminated. Chapter 16, Section 2

5. Chapter 16, Section 3 Spending and the Budget S E C T I O N 3 Spending and the Budget The Federal Government spends the largest amount of money every year for social security and other entitlement programs. Interest on the public debt is now the second largest part of the federal budget, followed by defense. The executive branch submits a budget to Congress each year and each federal agency submits a detailed spending plan to the Office of Management and Budget. These become part of the budget document sent to Congress by the President. Once in Congress, it is referred to the Budget and Appropriation committees. Congress reviews the budget, holds hearings, and makes appropriations; funds cannot be spent until appropriated by Congress. Congress passes 13 major appropriations bills every year, each covering a broad slice of federal spending; these must each be signed by the President.