POLS 206 EXAM 4 Ch 13 16 18 Chapter 13 The Budget I 13 0 II 13 1 Federal Revenue and Borrowing a Introduction i b Personal and Corporate Income Tax a Budget a policy document allocating burdens taxes and benefits expenditures b Deficit An excess of federal expenditures over federal revenues c Expenditures Government spending Major areas of federal spending are social services and national defense d Revenues The financial resources of the government The individual income tax and Social Security tax are two major sources of the federal government s revenue e The additional funds must come through borrowing f g Budgetary squeeze Americans want the government to balance the budget maintain or increase Succession of annual deficits will cause an increase in national debt the level of government spending on most policies and keep taxes low The three major sources of federal revenue are personal income taxes corporate income taxes and social insurance taxes 1 The rest comes from excise taxes a tax levied on the manufacturer transportation sale or consumption of a good e g gasoline tax Most individuals are required to pay the government a portion of the money they earn this portion is an income tax Income tax Shares of individual wages and corporate revenues collected by the government 1 The first peacetime income tax was enacted in 1894 and was only 2 The Supreme Court wasted little time in declaring the first income tax unconstitutional in Pollock vs Farmer s Loan and Trust Co 1 Congress passed the sixteenth amendment to counteract this ruling and it permitted Congress to levy an income tax Today the Internal Revenue Services IRS receives more than 140 million individual tax returns each year The income tax is general progressive meaning that those with more taxable income not only pay more taxes but also pay higher rates of taxes Some people feel that a progressive tax is the fairest type of taxation because those who have the most pay higher rates Others have proposed a flat tax with everyone taxed at the same rate Corporations like individuals pay an income tax Both employers and employees pay Social Security and Medicare taxes Money for these social insurance taxes is deducted from employee s paychecks and matched by their employers These payments are earmarked for a specific purpose Social Security trust funds pay benefits to the elderly the disabled and the widowed and help support state unemployment programs Medicare trust funds pay medical care for seniors c Social Insurance Taxes d Borrowing Tax revenues normally do not cover the federal government s expenditures i ii When the federal government wants to borrow money the Treasury Department sells bonds guaranteeing to pay interest to bondholders Citizens corporations mutual funds other financial institutions and even foreign governments may purchase these bonds The federal government has intragovernmental debt on its books 1 This debt is what the Treasury owes various Social Security and other trust funds because the government uses for its general purposes revenue collected from vii viii i ii iii iv v vi i ii iii iv v iii iv v vi vii viii ix x xi xii xiii social insurance taxes designated to fund Social Security and other specific programs Most government borrowing is not for capital needs such as buildings or machinery but for day to day expenses such as subsidies pensions aid and so on Today the national debt is about 17 trillion 1 National debt All the money borrowed by the federal government over the years and still outstanding Six percent of all federal expenditures go to paying interest on this debt Borrowing money shifts the burden to future tax payers Dollars spent servicing the debt cannot be spent of health care education or anything else 1 Paying the interest on the debt is not optional Large deficits make the American government dependent on foreign investors including other governments to fund its debt 1 Foreign investors currently hold a majority of the federal government s public debt 2 If they stop lending us money interests rates would rise and the economy would be depressed In bad economic times when tax revenues decrease because fewer people are working deficits are likely to increase 1 The president and Congress may also decide to cut taxes to stimulate the economy or they may choose to spend money to create jobs both of which happened in 2009 2 All such decisions add to the deficit and increase the need to borrow The need to borrow creates an issue in Congress which legislates a limit on how much the federal government may borrow referred to as the debt ceiling Since families and businesses and even state and local governments balance their budgets the federal government ought to be able to do the same 1 However most families to not balance their budgets they use credit cards to give them instant loans 2 And state and local governments and private businesses differ from the federal government in having a capital budget a budget for expenditures on items that will serve for the long term such as equipment roads and buildings 3 Thus for examples when airlines purchase new airplanes or when school districts 4 build new schools they do not pay for them out of current income In contrast when the federal government purchases new jets for the air force or new buildings for medical research these purchases are counted as current expenditures and run up the deficit e Taxes and Public Policy i ii No other area of government policy affects as many Americans Tax Expenditures 1 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 2 These expenditures represent the difference between what the government actually collects in taxes and what it would have collected without special exemptions 3 Tax expenditures amount to subsidies for different activities 4 Tax expenditures are among the most obscure aspects of a generally obscure budgetary process partly because they receive no regular review by Congress an advantage for those benefiting 5 On the whole tax expenditures benefit middle and upper income taxpayers and a Poorer people who don t own homes can get an expenditure for being a corporations home owner 6 To some tax expenditures are loopholes 7 To others they are public policy choices that support a social activity worth encouraging through tax subsidies iii Tax Reduction a Deductions can be abused
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