Chapter+14+Notes

=TL;DR= (Brief Overview)

Chapter 14 focuses on the Federal budget and how the Government collects revenue and spends it. The first sections discuss the sources of federal revenue such as income tax and social insurance tax. The next section explains how the government borrows money by selling bonds and paying interest on them. Any person, company or country can purchase these bonds. Tax loopholes, expenditures, reductions and reforms are then discussed. Loopholes are tax breaks or benefits that can be applied for to receive money back from the government. Expenditures are losses that stem from the aforementioned loopholes.Reductions and reforms seek to simplify and improve tax policies in response to the current economy and loopholes. The next section deals with federal expenditures:mainly those spent on defense and social services. Over the years, defense spending has decreased, and spending on social services has increased, including additions such as disability insurance and Medicare.Uncontrollable expenditures are expenditures that are determined not by a fixed amount of money appropriated by Congress, but by how many eligible beneficiaries there are for a program or by previous obligations to the government. Because of this, a set annual budget is not used. Actually creating and editing the budget now involves both the Congress AND the President, following a set calendar to have the next fiscal year's budget put into place. Congress also has many ways of reforming the budget including budget reconciliation, authorization bills, appropriations bills, and continuing resolutions. The chapter finishes up with a discussion of how democracy and the budget effect each other, mainly how politicians use the budget to secure votes for themselves because each citizen in America receives one vote regardless of income, and how the scope of the government is directly related to the size of the budget. As the size of the budget increases, so does the government, but it is not the government that controls the budget, it is the budget that controls the government.Depending on the situation, the budget can actually limit the governments effectiveness in certain situations.

Caleb Foster-February 8, 2012

= = =What are the sources of revenue for the government?= **__3 Major Sources of Federal Revenues:__** (**Note:** Revenues - the financial resources of the federal government)
 * 1) ** Personal and Corporate Income Tax **
 * What is it?
 * Income Tax - Shares of individual wages and corporate revenues collected by the government.
 * It is generally progressive, meaning that those with more income pay higher rates of tax on their income.
 * Why do we have it?
 * In 1913, the Sixteenth Amendment explicitly permitted Congress to levy an income tax. The Internal Revenue Service was established to collect it.
 * The US Government had used income taxes before the 16th Amendment.
 * The first peacetime income tax was enacted in 1894 but was struck down as unconstitutional. ( // Pollock v. Farmer's Loan and Trust Co. // 1895 )
 * This is why we passed the 16th Amendment
 * Do corporations pay income taxes?
 * Yes, corporations, like individuals, pay income taxes. Although corporate taxes once yielded more revenues than individual income taxes, this is no longer true.
 * 1) ** Social Insurance Taxes **
 * Who pays Social Security taxes?
 * Both employers and employees pay Social Security taxes. Money is deducted from employee's paychecks and matched by their employers.
 * Where does the money go?
 * Unlike other taxes, these payments do not go into the government's general money fund but are earmarked for a specific purpose: the Social Security Trust Fund that pays benefits to the elderly, the disabled, the widowed, and the unemployed.
 * How much have Social Security taxes grown?
 * Social Security taxes have grown faster than any other source of federal revenue, and they will continue to grow as the population ages.
 * In 1957, these taxes made up a mere 12 percent of federal revenues; today they account for nearly 40 percent.
 * 1) ** Borrowing **
 * How does the federal government borrow money?
 * When the federal government wants to borrow money, the Treasury Department sells bonds, guaranteeing to pay interest to the bondholder. Citizens, corporations, mutual funds, and other financial institutions can all purchase these bonds.
 * What are disadvantages of borrowing?
 * The federal government adds to the federal debt.
 * The federal debt is all the money borrowed by the federal government over the years that is still outstanding. Today the federal debt exceeds $7 trillion.
 * Government borrowing also crowds out private borrowers, both individuals and businesses, from the loan marketplace.
 * Large deficits also make the American government dependent on foreign investors, including other governments, to fund its debt (not a favorable position for a superpower).
 * Most economists believe that this competition to borrow money increases interest rates and makes it more difficult for businesses to invest in capital expenditures that produce economic growth.
 * Every dollar that the government borrows today will cost taxpayers many more dollars in interest over the next 30 years.
 * Does the federal government have a capital budget?
 * No, the federal government does not have a capital budget, a budget for expenditures on items that will serve for the long term, such as equipment, roads, and buildings. For example, 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.

Kimberly Varadi - February 5, 2012 Edited by Mike Spires - February 6, 2012

=Explain the history of our government collecting revenue. Comment on the changing of the tax burden, especially after 1980.=

1913: Income Tax passed in Revenue Act of 1913. In 1921, these contributed 4.5% of the GDP. 1920s Tax Cuts bring this number down to 2.0%. During the Great Depression: Income tax revenue drops to about 1.5%. During World War II: Income tax soars to 15%.

The trend since then: Income tax Revenue has stayed at 7% to 8% for most of the time. However, Corporate Income tax Revenue has decreased from 5.9% in 1952 to about 2% in the late 1990s. After 2008 meltdown: Corporate Revenue drops to about 1%. > As the Corporate Revenue decreases, and the tax Revenue stays constant, the tax burden shifts toward the lower-income classes.

**So, where has the rest of the Revenue come from?** before the 1913 Revenue Act, most government revenue came from import tariffs, as well as property taxes, etc. (aka, **ad-valorem** taxes)

The contribution from these fluctuates as Income Tax Revenue fluctuates.

In 2000, they were at their lowest up until that point, with 7.5% of GDP.

**Anything else?** In 1937, FICA's Social Insurance taxes begin to fund Social Security. These started at .85% of GDP. They were heightened in the 1960s to pay for Medicare.

This tax is REGRESSIVE: higher income households pay a smaller percentage of their income.

This tax's contribution will continue rising as more and more people enter various Social Security Programs. = = [Diego Farias - February 8th, 2012]

=Balanced Budget Amendments (arguments for and against)=

Balanced Budget Amendments propose requring Congress
 * To balance peacetime Federal budgets
 * Only a super majority vote in both houses of Congress could authorize a specific expenditure beyond the government's expected revenues.

A. Pro balanced budget arguments
 * The national debt can shift burden to future generations.
 * The national debt is growing at an alarming rate
 * Government borrowing crowds out private borrowers, both individuals and businesses, from the loan marketplace which hurts the economy.
 * Debt makes the American govt dependent on foreign investors
 * Borrowing money can increase interest rates and make economic investment harder.
 * Therefore, by requiring a Balanced Budget Amendment, Congress is forced to spend only that which it collects.
 * Congress can then start to pay away its debt.

B. Against Balanced Budget Arguments
 * It is difficult to estimate both expenditures and revenues more than a year ahead, so it would be hard for Congress to accurately make a balanced budget
 * The economy changes rapidly, which changes estimated expenditures and revenues, and this would effect Congress making a balanced budget
 * Congress and the president could circumvent the amendment by adjusting economic assumptions or changing the dates of the fiscal year.

Mike Spires - February 6, 2012

=Explain the following:=

Tax Loopholes:

 * What is a tax loophole?
 * A tax loophole is a tax break or tax benefit. The IRS Code, which specifies what income is subject to taxation, contains many legal exemptions, deductions, and special cases. They may offend Americans' sense of fair play, but they cost the treasury relatively little because they apply to only a few people.

Kimberly Varadi - February 5, 2012

Tax Expenditures:

 * What are tax expenditures?
 * The system of tax expenditures was defined by the 1974 Budget Act as "revenue losses attributable to provisions of the federal tax laws which allow a special exemption, exclusion, or deduction." These expenditures represent the difference between what the government actually collects in taxes and what it would have collected without special exemptions. Thus tax expenditures are like subsidies for different activities. The Office of Management and Budget (OMB) estimates that the total tax expenditures equal about one-third of the federal government's total receipts.
 * Examples:
 * The government //could// send checks for billions of dollars to charities. Instead, it permits some taxpayers to deduct their contributions to charities from their income. Thus the government encourages charitable contributions.
 * The government //could// give cash to families with the desire and financial means to buy a home. Instead, it permits homeowners to deduct from their income the billions of dollars they collectively pay each year in mortgage interest.
 * The government //could// write a check to all businesses that invest in new plants and equipment. Instead, it allows such businesses to deduct these expenses from their taxes at a more rapid rate than they deduct other expenses.
 * Who benefits from tax expenditures?
 * On the whole, tax expenditures benefit middle- and upper-income taxpayers and corporations.
 * How do people view tax expenditures?
 * Some see tax expenditures, such as business-related deductions, tax credits, and capital gains tax rates, as loopholes.
 * Some view tax expenditures as public policy choices that support a social activity worth subsidizing.
 * Overall - Tax expenditures are revenues that the government loses because certain items are exempted from normal taxation or are taxed at lower rates.

Kimberly Varadi - February 5, 2012

Tax Reduction:
Tax Reduction - Reducing the tax rates and creating new incentives

A. Recent Tax Reduction
 * Congress passed President Reagan's massive tax-cut bill in 1981
 * Over a three year period
 * Federal tax bills of Americans were reduced 25%
 * Corporate income taxes were also reduced
 * New tax incentives were provided for personal savings and corporate investment
 * Taxes were indexed to the cost of living
 * Thus, beginning in 1985, government no longer received a larger share of income when inflation pushed incomes into higher brackets while the tax rates stayed the same.
 * This tax reduction benefited families with high incomes, but did not offer much relief to families of lower income.
 * Many blame the massive deficits of the 1980s and 1990s on these tax reductions since Congress did not also reduce its spending.

Mike Spires - February 6, 2012

Tax Reform:
A. Tax Reform in the 1980s
 * President Reagan introduced his massive tax simplification plan in 1985
 * It proposed to eliminate many tax deductions and tax expenditures
 * The insurance industry and other interest groups fought against the end of these tax deductions
 * Tax Reform Act of 1986
 * This bill was based on Reagan's, but created by the Senate due to the original bill being loaded with special tax treatments for a wide variety of groups.
 * This bill was one of the most sweeping alterations in federal tax policy history
 * Eliminated or reduced the value of many tax deductions
 * Removed several million low-income individuals from the tax rolls
 * Greatly reduced the number of tax brackets

Mike Spires - February 6, 2012

=What have been the trends in budget politics in the areas on National Defense, Social Services, and Entitlements=

A. National Defense
 * **In the 1950s and early 1960s, more than half of the federal budget was devoted to paying for past, current, and future wars. (Remember this)**
 * Gradually beginning in mid 1960s to the early 1980s, defense expenditures gradually decreased.
 * ** This trend continued in the 1990s due to the end of the Cold War and tension in Europe. (But since the 90's their budget has decreased) **
 * The defense budget now only occupies about 1/6 of the federal budget.
 * Most of the defense budget now goes toward p<span style="background-color: #ffffff; font-family: Verdana,Arial,Helvetica,sans-serif; font-size: small;">ayrolls, pensions, research, development, and procurement

B. Social Services/Entitlements
 * The government started paying for social services with the Social Security Act of 1935.
 * Its goal was to save older Americans from poverty.
 * Disability insurance was added to Social Security in the 1950s.
 * Medicare was added in 1965 under LBJ's great society program.
 * Social security began having problems in the 1980s.
 * As baby boomers start to retire, they start to put a drain on the system.
 * Longer life expectancies exacerbate this strain on the system.
 * ** The biggest part of the federal budget now deals with social service expenditures. (Remember this) **

C. Entitlements
 * Entitlements occur when Congress obligates the government to pay X level of benefits to Y number of recipients.
 * Entitlements are "uncontrollable expenditures" because Congress can only control these expenditures by changing a law or altering existing benefit levels.
 * The biggest uncontrollable expenditure is Social Security.
 * It is estimated that 2/3 of the federal budget is uncontrollable.
 * Uncontrollable expenditures result from policies that make some group automatically eligible for some benefit.

D. Incrementalism
 * Incrementalism is a general tendency of the budget, but doesn't always occur.
 * The term means that the best indicator of this year's budget is last year's budget plus a little more.
 * Incrementalism budgeting has the following features
 * Congress does not give a lot of attention to the budgetary base.
 * Agencies can assume they will get at least the same amount of funding as last year.
 * Thus, most of each year's budget debate centers around how much the increment will be.
 * Generally, the budget for any agency grows a little each year.

The rise of the social service state coincide with the rise of the national security state. These two trends contributed to much of the American government's growth after World War II. Incrementalism and entitlements (uncontrollable expenditures) contribute to an ever-growing federal budget and debt. This causes people to call for budgetary reform.

Mike Spires - February 8, 2012 = = =Give a timeline of the budgetary process=

**The Congressional Budget Process:**
 * ====== __**Date - Action to Be Completed**__ ======
 * First Monday in February -- Congress receives the president's budget.
 * February 15 -- The CBO submits a budget report to the House and Senate Budget Committees, including an analysis of the president's budget.
 * February 25 -- Other committees submit reports on outlays and revenues to Budget Committees in each house.
 * April 1 -- Budget Committees report concurrent resolution on the budget, which sets a total for budget outlays, an estimate of expenditures for major budget categories, and the recommended level of revenues. This resolution acts as an agenda for the remainder of the budgetary process.
 * April 15 -- Congress completes action on concurrent resolution on the budget.
 * May 15 --- Annual appropriations bills may be considered in the House.
 * June 10 -- House Appropriations Committee reports last annual appropriations bill.
 * June 15 -- Congress completes action on reconciliation legislation, bringing budget totals into conformity with established ceilings.
 * June 30 -- House completes action on annual appropriation bills.
 * October 1 -- The new fiscal year begins.

Kimberly Varadi - February 5, 2012 ** (Great timeline above) **

= = =Impact of the President on budgetary politics=

>> Kimberly Varadi - February 6, 2012
 * ** Until 1921..... **
 * Presidents played a limited role in proposing the budget. -- WHY? Various agencies of the executive branch sent their budget requests to the secretary of the treasury, who in turn forwarded them to Congress.
 * ** In 1921..... **
 * Congress passed the Budget and Accounting Act, which required presidents to propose an executive budget to Congress, and created the Bureau of the Budget to help them. Nixon reorganized this is in the 1970s and gave it a new name: the Office of Management and Budget (OMB)
 * ** Now..... **
 * Budgets are produced through a long and complex process that __starts__ and __ends__ with the president and has Congress in the middle.
 * By law, the president must submit a budget by the first Monday in February. He/She makes the final decisions on what to propose to Congress. After unveiling the proposed budget, the president then spends many days trying to ensure that Congress will stick close to the recommendations.

=Impact of Congress on budgetary politics= Before the Budget and Accounting Act of 1921
 * 1) executive agencies send their budget requests to the Secretary of the Treasury
 * 2) Sec. of Treasury sent the requests to Congress
 * 3) Congress made all the budget decisions but needed president's signature

<span style="color: #ff0000; font-family: Georgia,serif;">**By the Constitution**: Congress holds vast control over the budget since they have the power to: (1) levy taxes, (2) pay the debts, (3) provide for the defense and general welfare of the United States. In other words, they have the "**power of the purse**."

<span style="color: #ff0000; font-family: Georgia,serif;">According to modern political analysts, Congress has lost much power over the budget since the welfare state has expanded. This is because **Entitlements** - which are not really up for debate for each successive budget, as their name suggests - have become more and more prevalent.

<span style="color: #ff0000; font-family: Georgia,serif;">**Congressional Budget and Impoundment Control Act of 1974**. (Explained in more detail in the following section) <span style="color: #ff0000; font-family: Georgia,serif;">Provides for the creation of the **Congressional Budget Office**, which provides vast economic data to Congressmen. It can make projections about revenues and the National debt, among other things, with which Congressmen can work.

<span style="color: #ff0000; font-family: Georgia,serif;">[Diego Farias - February 8th, 2012]

=Explain budgetary reforms (what are they and how have they impacted the system)=

<span style="color: #ff0000; font-family: Georgia,serif;">**Before 1974 Reforms**: A subcommittee of the House and Senate Appropriations Committees looked at each agency's request. Each of these would be looked at, and the budget would result from adding all of these. Congress did not set a limit before actually deciding what to finance.

<span style="color: #ff0000; font-family: Georgia,serif;">**1974 Reforms**: The **Congressional Budget and Impoundment Control Act of 1974** reformed this process. It: <span style="color: #ff0000; font-family: Georgia,serif;">**Budget Resolution:** a budget's limits are set based on revenue projections. Both houses are expected to pass one of these. Only after it is passed is Congress allowed to begin planning the budget. <span style="color: #ff0000; font-family: Georgia,serif;">Changes wanted by Congress may need Legislation. Two ways of doing this:
 * <span style="color: #ff0000; font-family: Georgia,serif;">fixed the budget calendar: completion dates for each successive step in budgetary policy-making.
 * <span style="color: #ff0000; font-family: Georgia,serif;">Budget Committee in each House: these two are there to recommend items in the budget that is to be passed by congress.
 * <span style="color: #ff0000; font-family: Georgia,serif;">Congressional Budget Office: created by this act. Advises congress on the consequences and revenues to be earned from each decision.
 * <span style="color: #ff0000; font-family: Georgia,serif;">__Reconciliation__: program authorizations are revised to achieve required savings. Usually happens near the end of the budgetary process. This was used by Ronald Reagan in 1981.
 * <span style="color: #ff0000; font-family: Georgia,serif;">__Authorization Bills__: an Act of Congress that establishes a discretionary government program or an entitlement, or that continues or changes such programs. Basically decides how much money that program will receive, or changes a previously-debated amount.
 * <span style="color: #ff0000; font-family: Georgia,serif;">__Appropriations Bill:__ actually allots an amount of money that less than or equal to the amount decided on the Authorization bill.

<span style="color: #ff0000; font-family: Georgia,serif;">1974 Reform Efficiency: between 1974 and 1998, there wasn't a single balanced budget. Congress has not stayed on schedule. __Continuing resolutions__ - allowing an agency to receive the same amount of money they did the preceding year - are passed often. <span style="color: #ff0000; font-family: Georgia,serif;">Abuse: 1986 and 1987 --> Congress passes complex and basically unreadable appropriations bills, and the President is forced to sign them by lack of time for revision.

<span style="color: #ff0000; font-family: Georgia,serif;">**1985 Reforms**: Balanced Budget and Emergency Deficit Control Act (aka Gramm-Rudman-Hollings) mandated maximum allowable deficit levels, asking for a balanced budget by 1993. The President had the power to call Sequestrations - automatic spending cuts - if these were not met.

<span style="color: #ff0000; font-family: Georgia,serif;">**1990 Reforms**: shift from controlling the size of the deficit to focusing on limiting increases in spending. <span style="color: #ff0000; font-family: Georgia,serif;">Discretionary Spending divided into 3 categories: <span style="color: #ff0000; font-family: Georgia,serif;">By Congress' new policy, an increase in spending in one category had to be offset by a decrease in another. Any increase in Medicare, for example, would be "repaid" by a decrease in another area of spending.
 * <span style="color: #ff0000; font-family: Georgia,serif;">Domestic
 * <span style="color: #ff0000; font-family: Georgia,serif;">Defense
 * <span style="color: #ff0000; font-family: Georgia,serif;">International

<span style="color: #ff0000; font-family: Georgia,serif;">**Clinton-Era Reforms** <span style="color: #ff0000; font-family: Georgia,serif;">1993: Bill Clinton's budget: places a single cap for all discretionary spending, severely limiting new appropriations.

<span style="color: #ff0000; font-family: Georgia,serif;">1995: Republicans in Congress agree on massive cuts off Medicaid, and the elimination of many other entitlement programs. <span style="color: #ff0000; font-family: Georgia,serif;">In 1997, both the President and Congress agree to balance the budget by 2002. Massive revenues allow surpluses. <span style="color: #ff0000; font-family: Georgia,serif;">Surpluses are over by the time George Bush's administration passes the income tax cut of 2001.

<span style="color: #ff0000; font-family: Georgia,serif;">[Diego Farias - February 8, 2012]

<span style="color: #000000; font-family: Georgia,serif;">Page has been edited by LeClerc - Feb. 9th