CHAPTER 14 THE FEDERAL BUDGET AND SOCIAL SECURITY

Sources of Federal Income: Corporate Taxes

-Corporations pay a tax that ranges from 15 to 35 percent of taxable income -corporate income taxes generated approximately 12 percent of federal tax revenue

Social Security: Background

-FDR signed the Social Security Act into law in 1935 -in 1965, Congress added Medicare to the Social Security program, Medicare is designed to assist the elderly with medical costs -Social Security and Medicare are the most expensive programs in the federal budget. they currently comprise approximately 44% of all federal expenditures

Sources of Federal Income: Estate and Gift Taxes

-an estate tax is a levy imposed on the assets of someone who dies. a gift tax is a levy imposed on a gift from a living person to another -estate taxes generate 1.2 percent of federal tax revenue

Sources of Federal Income: Excise Taxes

-an excise tax is a tax on the manufacture, sale, or consumption of a good or service -federal excise taxes are currently imposed on the sale of gasoline, tobacco, alcohol, airline tickets, and many other things -excise taxes currently generate 2.7 percent of federal tax revenue

The Budgetary Process: Consequences of Budget Deficits

-budget deficits require huge interest payments -place a heavy burden on future generations -make it difficult to fully fund key policy goals

Federal Expenditures: Uncontrollable Spending

-congress and the president have no power to directly change uncontrollable spending -over 60% of all federal spending now falls into the uncontrollable category -entitlement programs are by far the largest portion of uncontrollable spending in the federal budget -borrowing: ~the federal debt now exceeds $12 trillion

Sources of Federal Income: Custom Duties

-custom duties or tariffs are taxes levied on goods brought into the United State from abroad -prior to the income tax, custom duties were the federal government's most important source of income -currently generate just 1.1 of federal tax revenue

Federal Expenditures: Discretionary Spending

-discretionary spending programs are not required by law -defense, education, agriculture, highways, research grants, and government operations are all examples of discretionary programs -defense currently accounts for about 20 percent of the total federal budget

Sources of Federal Income: Social Insurance Taxes

-employers and employees each pay a Social Security tax equal to 6.2 percent of the first $106, 800 of earning -for Medicare, employees pay 1.45 percent tax on their annual income -the social insurance taxes are regressive because they are levied at a fixed rate without regard to the level of a tax payer's income -now generate 36 percent of federal tax revenue

The Budgetary Process: Budget Barriers to Achieving a Balanced Budget

-entitlement programs account for 60 percent of the total federal budgets, cant take them away -federal agencies assume that their annual budgets will increase by a small amount each year, this process of small but regular increases is called incrementalism -the fragmented federal system enables interest groups to successfully resist tax increases

The Budgetary Process: Congress and the Budget

-the Congressional Budget and Impoundment Control Act of 1974 ~designed to reform the congressional budgetary process and regain power previously lost ~created a fixed budget calendar ~established a budget committee in each house of Congress ~created the Congressional Budget Office to advise Congress by forecasting revenues and evaluating the probable consequences of budget decisions -the president's budget is sent to both the House and the Senate Appropriations Committees, which hold hearings on key items -all tax proposals are sent to the House Ways and Means Committee and to the Senate Finance Committee -Congress is required to pass thirteen major appropriations bills by the beginning of the federal government's fiscal year

Sources of Federal Income: Individual Income Tax

-the Sixteenth Amendment permitted Congress to levy an income tax -income taxes can be progressive or regressive: ~a progressive tax is proportionate to income, as a taxpayer's income increases, so does the tax rate ~a regressive tax is levied at a flat rate without regard to the level of a taxpayer's income or ability to pay. as a result, poor citizens pay a higher percentage of their income compared with wealthier citizens -individual income taxes generate approximately 46% of federal tax revenue

The Budgetary Process: The President and the Budget

-the president initiates the budge process by submitting a proposed budget to Congress -the Office of Management and Budget has the primary responsibility for preparing the federal budget -the budget reflects the priorities and goals of the president's policy agenda

Social Security: Demographic Trends that Threaten the Future of the Social Security Program

-when the Social Security program began, there were 25 workers for 1 beneficiary. now it is 3.3 workers to 1 beneficiary -the Baby Boom generation includes 76 million people born between 1946 and 1964. as the Baby Boom generation begins to retire, the number of workers who fund Social Security will decline while the number of people eligible will increase -as a result of improved health care, average life expectancy is increasing. this will put additional pressure on the Social Security System

Introduction: Policy Tools for Influencing the Economy

1. Monetary policy -monetary policy is controlled by Federal Reserve Board -monetary policy includes regulating the money supply, controlling inflation, and adjusting interest rates 2. fiscal policy -fiscal policy is controlled by the executive and legislative branches. the president proposes the federal budget and Congress passes it -fiscal policy includes raising and lowering taxes and government spending programs

Introduction: Key Terms

1. budget -a financial plan for the use of money, personnel, and property -the federal budget for 2010 was $3.6 trillion 2. balanced budget -when expenditures equal revenues in a fiscal year 3. budget deficit -when expenditures exceed revenues in a fiscal year -the total federal debt now exceeds $12 trillion