THE BUDGET THE BUDGET MAKING PROCESSMAKING PROCESS

Congress, the President, and Congress, the President, and the Budget: The Politics of the Budget: The Politics of

Taxing & SpendingTaxing & Spending

The Federal BudgetThe Federal Budget

• THE PROCESS:THE PROCESS:– The President advises, Congress delegates.The President advises, Congress delegates.

• KEY QUESTIONS:KEY QUESTIONS: – Who bears the burden of paying for Who bears the burden of paying for

government?government?– Who receives the benefits? Who receives the benefits?

• BUDGETARY SQUEEZE:BUDGETARY SQUEEZE:– Americans want P & Congress to balance Americans want P & Congress to balance

the budget while maintaining or the budget while maintaining or increasing the level of government increasing the level of government spending on most policies spending on most policies ANDAND keeping keeping taxes low at the same time.taxes low at the same time.

The Federal BudgetThe Federal Budget

• BudgetBudget is a policy document allocating is a policy document allocating burdens (taxes) and benefits burdens (taxes) and benefits (expenditures).(expenditures).

• Government collects $$$ by taxes and Government collects $$$ by taxes and spends it via expenditures. spends it via expenditures.

• If tax allocations are higher…it’s a If tax allocations are higher…it’s a surplussurplus (it did happen in ’99!) (it did happen in ’99!)

• If expenses are higher. . .it’s a If expenses are higher. . .it’s a deficitdeficit which is then added to the which is then added to the national debt national debt and you get a shortfall in the trillions …and you get a shortfall in the trillions …and it takes far too much of the current and it takes far too much of the current budget just to pay interest on the debt!budget just to pay interest on the debt!

Obama's 1st Term

GOVERNMENT’S SOURCES OF GOVERNMENT’S SOURCES OF REVENUEREVENUE

• THREE THREE MAJOR MAJOR SOURCES:SOURCES:

1.1. Personal & Personal & corporate corporate income taxincome tax

2.2. Social Social insurance insurance taxestaxes

3.3. Borrowing Borrowing (Bonds)(Bonds)

INCOME INCOME TAXESTAXES

• Began in Civil War…but expiredBegan in Civil War…but expired• Started again in 1894 but declared unconstitutional Started again in 1894 but declared unconstitutional

in 1895 in in 1895 in Pollock v. Farmers Loan and Trust Co.Pollock v. Farmers Loan and Trust Co.– Only states had power of direct taxation per ConstitutionOnly states had power of direct taxation per Constitution

• 1616THTH AMENDMENT AMENDMENT – 1913, explicitly permitted – 1913, explicitly permitted Congress to collect income tax; Congress to collect income tax; PollockPollock overruled overruled

• A PROGRESSIVE TAXA PROGRESSIVE TAX• Largest source of federal revenueLargest source of federal revenue

– 2011 – over $1.8 trillion in individual income 2011 – over $1.8 trillion in individual income taxestaxes

– Corporate taxes USED TO yield more revenues Corporate taxes USED TO yield more revenues than individual but today, only about 8 cents of than individual but today, only about 8 cents of every federal revenue dollar comes from corporate every federal revenue dollar comes from corporate income taxes whereas about 47 cents of every income taxes whereas about 47 cents of every dollar comes from individual income taxesdollar comes from individual income taxes

Married Taxpayers Filing Jointly

Individual Taxpayers

Internal Internal RevenuRevenu

e e ServiceService

• Started under Lincoln; Started under Lincoln; reorganized under Wilsonreorganized under Wilson

• Established to collect taxes and Established to collect taxes and enforce the internal revenue lawsenforce the internal revenue laws– Collects federal income taxes from Collects federal income taxes from

individuals and corporationsindividuals and corporations– Audits taxpayers annuallyAudits taxpayers annually– Investigates and prosecutes Investigates and prosecutes

taxpayers/nonpayerstaxpayers/nonpayers

SOCIAL INSURANCE SOCIAL INSURANCE TAXESTAXES

• Paid by both Employers and EmployeesPaid by both Employers and Employees– For example: social security – each pays in For example: social security – each pays in

4.2% now4.2% now

• 36% of today’s revenues (were only 12% 36% of today’s revenues (were only 12% in the 1950s)in the 1950s)– Social Security fastest growing source of Social Security fastest growing source of

government incomegovernment income• Do NOT go into the general budget fund but, Do NOT go into the general budget fund but,

instead, are earmarked for a specific purpose – instead, are earmarked for a specific purpose – they are an uncontrollable expenditurethey are an uncontrollable expenditure

BORROWINGBORROWING• Done through Done through BONDSBONDS• Treasury Dept. sells bonds, Treasury Dept. sells bonds,

guaranteeing to pay interest to guaranteeing to pay interest to bondholder.bondholder.

• Citizens, corporations, mutual funds, Citizens, corporations, mutual funds, etc. purchase bondsetc. purchase bonds

• WHY does federal government WHY does federal government borrow?borrow?

• Federal government has NEVER Federal government has NEVER defaulted on its bonds.defaulted on its bonds.

• DEBTDEBT – all of the $ borrowed over the – all of the $ borrowed over the years & still outstanding… now at years & still outstanding… now at over $15 trillionover $15 trillion

• Shifts burden to future taxpayers; Shifts burden to future taxpayers; provokes thoughts of a provokes thoughts of a “balanced “balanced budget” amendmentbudget” amendment

Regan’s Regan’s Description of a Description of a Trillion Dollars:Trillion Dollars:

• In a speech to Congress in February 1981:• “A few weeks ago I called such a figure, a

trillion dollars, incomprehensible, and I’ve been trying ever since to think of a way to illustrate how big a trillion really is. And the best I could come up with is that if you had a stack of thousand-dollar bills in your hand only 4 inches high, you’d be a millionaire. A trillion dollars would be a stack of thousand-dollar bills 67 miles high.”

LOST INCOME:LOST INCOME: FED TAX FED TAX

“LOOPHOLES”“LOOPHOLES”

• LoopholeLoophole is a tax break or tax benefit to is a tax break or tax benefit to the individual; it is the individual; it is lostlost income to federal income to federal gov’tgov’t

• TAX EXPENDITURESTAX EXPENDITURES = loopholes, = loopholes, deductions, exemptionsdeductions, exemptions– The difference between what the gov’t actually The difference between what the gov’t actually

collects in taxes and what it COULD have collects in taxes and what it COULD have collected without special exemptionscollected without special exemptions

– Over $800 billion in 2011 Over $800 billion in 2011 – Deductions for mortgage interest, charitable Deductions for mortgage interest, charitable

contributions, etc.contributions, etc.• Mostly benefit middle & upper income taxpayers & Mostly benefit middle & upper income taxpayers &

corporations since poor don’t buy homes, etc.corporations since poor don’t buy homes, etc.

FEDERAL FEDERAL EXPENDITUREXPENDITUR

ESES• Primary Federal Expenditures:Primary Federal Expenditures:

– Social Service State (social security, Medicare, Social Service State (social security, Medicare, etc.)etc.)

– Interest on the national debtInterest on the national debt– National DefenseNational Defense

• Rise of large governmentsRise of large governments is one of most is one of most important changes seen in 20important changes seen in 20thth century century– American governments (national & state) spend American governments (national & state) spend

annually an amount equal to 1/3 of the GDPannually an amount equal to 1/3 of the GDP– BUT, US actually has one of the smallest public BUT, US actually has one of the smallest public

sectors among Western nations relative to the sectors among Western nations relative to the size of the GDPsize of the GDP

• Rise of the Rise of the NATIONAL SECURITY STATENATIONAL SECURITY STATE has caused much of the growthhas caused much of the growth

NATIONAL SECURITY NATIONAL SECURITY STATESTATE• Military used to be largest Military used to be largest

part of expenditures – part of expenditures – permanent military & permanent military & expensive technology in expensive technology in Cold Cold War yearsWar years

• From mid-60s to 1980, From mid-60s to 1980, defense spending down & defense spending down & social welfare spending social welfare spending doubleddoubled

• By 1980s, defense spending By 1980s, defense spending under Reagan up again & under Reagan up again & then down again in 90s – end then down again in 90s – end of Cold Warof Cold War

• Up again after 9-11 BUT, Up again after 9-11 BUT, defense spending still only defense spending still only about 1/6 of all federal about 1/6 of all federal expendituresexpenditures

RISE OF SOCIAL SERVICE RISE OF SOCIAL SERVICE STATESTATE

• Biggest slice of budget goes to Biggest slice of budget goes to income income security expendituressecurity expenditures – policies of direct – policies of direct & indirect aid to elderly, poor, needy& indirect aid to elderly, poor, needy

• Makes up over 1/3 of the federal budgetMakes up over 1/3 of the federal budget• Social Security Act 1935Social Security Act 1935

– Disability insurance added to it in 1950Disability insurance added to it in 1950– MedicareMedicare 1965 – hospitals/doctors for elderly 1965 – hospitals/doctors for elderly

• Prescription benefits added -2003Prescription benefits added -2003

– MedicaidMedicaid also added in 60s also added in 60s• aid to the poor/needyaid to the poor/needy

• Other social service expendituresOther social service expendituresinvolve health, education, job traininginvolve health, education, job training

INCREMENTALISM & INCREMENTALISM & UNCONTROLLABLE UNCONTROLLABLE

EXPENDITURESEXPENDITURES• INCREMENTALISM INCREMENTALISM prevails in budget making:prevails in budget making:

– Increase last year’s budget by an “increment” to Increase last year’s budget by an “increment” to satisfy this year’s budgetsatisfy this year’s budget

– What do you think Executive Branch agencies do when What do you think Executive Branch agencies do when making their budget requests?making their budget requests?

• UNCONTROLLABLE EXPENDITURESUNCONTROLLABLE EXPENDITURES have have increased in federal spending – are now about 2/3 of increased in federal spending – are now about 2/3 of spending – “mandatory spending” such asspending – “mandatory spending” such as– ENTITLEMENTSENTITLEMENTS – if you qualify, you get them, no – if you qualify, you get them, no

matter what the cost to the government, even if matter what the cost to the government, even if all the funds are depleted…all the funds are depleted…• Expenditures are determined by how many people are Expenditures are determined by how many people are

eligible for the program….Congress has obligated itself eligible for the program….Congress has obligated itself to pay to pay XX level of benefits to level of benefits to YY number of recipients. number of recipients.

• SOCIAL SECURITY, MEDICARE!!!SOCIAL SECURITY, MEDICARE!!!

• Difference between Mandatory and Discretionary Difference between Mandatory and Discretionary Spending?Spending?

The Budgetary ProcessThe Budgetary Process

• POWER OF THE PURSEPOWER OF THE PURSE belongs to Congress! belongs to Congress!– House Ways & Means Committee deals with House Ways & Means Committee deals with

taxing aspects; House Budget Committee; taxing aspects; House Budget Committee; Senate Budget CommitteSenate Budget Committe

• 1921, BUDGET AND ACCOUNTING ACT1921, BUDGET AND ACCOUNTING ACT– Requires Presidents to propose an Requires Presidents to propose an

executive budget to Congress; created executive budget to Congress; created Bureau of BudgetBureau of Budget

• 1970s, Nixon reorganized Bureau of Budget & 1970s, Nixon reorganized Bureau of Budget & renamed it renamed it OFFICE OF MANAGEMENT AND OFFICE OF MANAGEMENT AND BUDGET (OMB)BUDGET (OMB)– P’s Budgetary ArmP’s Budgetary Arm– Supervises preparation of the federal Supervises preparation of the federal

budget and advises the P on budgetary budget and advises the P on budgetary mattersmatters

Budgetary ReformBudgetary Reform• CONGRESSIONAL BUDGET AND CONGRESSIONAL BUDGET AND

IMPOUNDMENT ACT OF 1974IMPOUNDMENT ACT OF 1974::• P had the ability to P had the ability to impound impound (withhold) (withhold)

fundsfunds• Frustrated by this and the entire Frustrated by this and the entire

disjointed budget process, Congress disjointed budget process, Congress passed this act to try and regain some passed this act to try and regain some control over budget processcontrol over budget process

• P P requiredrequired to spend the funds that to spend the funds that Congress appropriatesCongress appropriates– Ends P’s ability to kill programs by withholding Ends P’s ability to kill programs by withholding

funds (Nixon did this quite a bit)funds (Nixon did this quite a bit)• Act also ensures Congress will look at Act also ensures Congress will look at

taxing and spending at least twice during taxing and spending at least twice during each budget cycleeach budget cycle

The Budgetary Process:The Budgetary Process: Federal fiscal year is Oct. 1 - Sept. 30Federal fiscal year is Oct. 1 - Sept. 30 OMB starts reviewing budgetary requests in FallOMB starts reviewing budgetary requests in Fall P submits the budget recommended by OMB in P submits the budget recommended by OMB in

JanuaryJanuary Then, 2-step process begins in Congress:Then, 2-step process begins in Congress:

1.1. Authorization billAuthorization bill – authorizes/changes a program – authorizes/changes a program or entitlement & sets a spending limit on it – what or entitlement & sets a spending limit on it – what they they might might getget

2.2. Appropriations billAppropriations bill – final – final fundingfunding of the programs of the programs set by the authorization bill; can’t go higher, but set by the authorization bill; can’t go higher, but can give lower amounts. can give lower amounts.

Huge numbers in budget – for ex., in 2011 Obama’s Huge numbers in budget – for ex., in 2011 Obama’s budget called for 3.83 trillion in spendingbudget called for 3.83 trillion in spending 2013 budget - $3.7 trillion … but revenues only 2013 budget - $3.7 trillion … but revenues only

2.56 trillion so…..deficit2.56 trillion so…..deficit

• Both houses of Congress must agree upon Both houses of Congress must agree upon FIRST FIRST BUDGET RESOLUTIONBUDGET RESOLUTION by May of each year – sets by May of each year – sets the the overall revenue goals and spending targetsoverall revenue goals and spending targets Budget committee in each house – lots of Budget committee in each house – lots of

bargaining all summerbargaining all summer CONGRESSIONAL BUDGET OFFICE (CBO)CONGRESSIONAL BUDGET OFFICE (CBO)

Congressional Budgetary arm – reviews; gives Congressional Budgetary arm – reviews; gives advice to Congress, forecasts of revenues, etc.advice to Congress, forecasts of revenues, etc.

• Congress to agree to Congress to agree to SECOND BUDGET SECOND BUDGET RESOLUTIONRESOLUTION by September by September– Sets binding limits on taxes and spending for fiscal Sets binding limits on taxes and spending for fiscal

year beginning Oct. 1year beginning Oct. 1

• If Congress does not meet Oct. 1 deadline for If Congress does not meet Oct. 1 deadline for new budget for the new fiscal year…? new budget for the new fiscal year…? – Passes weekly Passes weekly continuing resolutionscontinuing resolutions to keep gov’t to keep gov’t

going. going. – Do the same thing as last year with same amount of Do the same thing as last year with same amount of

$$

DEMOCRACY & GROWTH DEMOCRACY & GROWTH OF GOVERNMENTOF GOVERNMENT

• According to political scientists Allen According to political scientists Allen Meltzer & Scott RichardMeltzer & Scott Richard::

• Government grows in a democracy Government grows in a democracy because of the equality of suffragebecause of the equality of suffrage

• Poorer voters will ALWAYS use their Poorer voters will ALWAYS use their votes to support public policies that votes to support public policies that redistribute benefits from the rich to redistribute benefits from the rich to the poor.the poor.

• Social Security, Medicare, Medicaid, Social Security, Medicare, Medicaid, WelfareWelfare