Chapter 13 Questions

What is a flat tax?

A tax that is neither progressive nor regressive; everyone pays at the same rate.

How did the 'military-industrial' complex operate differently after WWII?

After WWII, America maintained a large permanent army (due to the Cold War), which greatly increased the costs of government.

What is agencies' usual relationship to the OMB?

Agencies petition the OMB for higher budgets.

What is the role of an appropriations bill?

Appropriations bills are necessary to fund programs established by authorization bills.

What is intragovernmental debt?

Debt that the Treasury owes various Social Security and other trust funds, because some social insurance revenue is spent on general purposes.

How is the CBO similar yet at odds with the OMB?

Both advise on the implications of economic actions, but the CBO advises Congresss while the OMB advises the Executive, creating conflict due to differing interests between each branch of government.

How are Congressional reconciliation and authorization similar, yet different?

Both allow Congress to modify the budget to save more. Reconciliations are the Congressional avenue through which authorization bills are revised.

How is debt created?

Debt is created through budget deficits, which cause the treasury to borrow funds by selling bonds.

How are social insurance taxes different from income tax? (particularly in regards to employer relationship)

Employers match social insurance taxes; additionally, social insurance taxes go towards the care of other citizens.

What are some major examples of tax expenditures, listed in table 13.1?

Exclusion of employer contributions to health care and insurance Exclusion of net inputted rental income Deduction of mortgage interest on owner-occupied houses Deductions for state and local taxes

How has democracy and the freedom to petition (lobbying interest) necessarily resulted in ever increasing debt to GDP ratio?

Government grows by responding to groups and their demands, thus creating corresponding economic costs. As such, government spending increases without matching increases in GDP.

What are the most important committees on this matter in each chamber?

House Ways and Means Committee and the Senate Finance Committee

How is the vast majority of the federal allocation pie uncontrollable spending? (using words: entitlements, eligibility based legislation, and interest on debt)

However, the budgetary process, like all aspects of government, is affected by groups with interests in taxes and expenditures; these interests make it difficult to pare the budget. Congress writes eligibility rules; the number of people eligible and their level of guaranteed benefits determine how much Congress must spend. The government does not decide each year whether it will pay the interest on the debt or send checks to Social Security recipients.

How have these programs grown?

In the 1950s, disability insurance became a part of the SS program. In 1965, as part of the Great Society, Congress expanded the system to include Medicare. In 2003, Congress added a prescription drug benefit to Medicare.

What are the percentages of these taxes?

Income tax rates range from 10% to 39.6%. In 1957, social insurance taxes composed a mere 12% of federal revenues; today, they account for more than a third. The top 10% pay 68% of all federal income taxes while those in the bottom 50% of taxable income pay about 3%.

How would incrementalism describe why in Washington giving an agency the same budget as last year is considered a massing 'draconian' cut?

Incrementalist budgets anticipate growing governmental allocations from year-to-year, and thus giving an agency the same budget as last years amounts to a budget cut and symbolizes the agency's decreasing importance to the federal government.

What is the relationship between interest rates charged by the market and the likelihood of a country to pay back

Interest rates increase with a greater risk in lending a government money.

How is the budget, itself, a policy document?

It allocates taxes and expenditures for the federal government, thus setting the size and scope of the government for the next year.

Why was Pollock (1895) significant and what would it lead to?

It declared income taxes to be unconstitutional, and led to Congress passing the 16th amendment in 1913.

What did Bush agenda do to taxation rates from 2001-2011?

It enacted a tax cut that gradually lowered tax rates over the next 10 year; in 2003, Congress reduced the tax rates on capital gains and dividends.

(Broad brush) politically the Democrats see any government debt problem as a problem of __; while Republicans see it largely as a problem of _____.

Low taxes on the wealthy; size of government

What trends in procurement of military spending are shown, with what explanations, in figure 13.5 from 1960 to 2015?

Military spending increased drastically following the start of the Vietnam War, and then sharply decrease following its end. Beginning in 1980, with the Reagan Administration, defense spending increased in efforts of ending the Cold War. After the Cold War ended in the early 1990s, defense spending decreased until 9/11, where it exponentially increased in order to engage the War on Terror.

Describe trends shown in figure 13.4, and what entities are driving the trends in the graph?

Overall, every sector of the federal budget increases each decade. National defense is more responsive to national crisis, which is why it decreases following the end of the Cold War and increases following 9/11. The sizable drop in every sector around 2008 is due to the Great Recession. The budget expands year-to-year because of increases in the Congressional debt ceiling, as well as citizens' demands for more government assistance.

What are the Big 2 +1 revenue generators for the federal government?

Personal and Corporate Income Taxes, Social Insurance Taxes, and Sales / Excise Taxes.

What does the history of duties, tell you about the ratio/scope of our current government to that of the hundred years before the Progressive Era?

Prior to the sixteenth amendment, there had been no levied personal income tax during peacetime. The federal government was solely funded by revenue from tariffs, indicating that it was minuscule compared to today's government that is funded by hundreds of billions of dollars.

What is the difference between progressive and regressive tax schemes, what would be an example of each?

Progressive taxes have graded tax rates, meaning that the rich pay taxes at higher rates; an example is the American federal income tax. Regressive taxes are taxes that impose a higher percentage rate of taxation on low incomes than on high incomes; a technical example would be sales tax.

What has been true of the political value in pursuing a balanced budget?

Pursuing a balanced budget usually is detrimental to public approval, as the public dislikes higher taxes and cuts on social insurance programs.

How would moving to consumption based taxation (while ending income based) change market incentives?

Relying on consumption-based taxes like the sales tax would likely boost the market, as citizens would spend the money they gained from the cease of their income tax. ** However, the rich would unfairly benefit, as consumption based taxation usually consists of flat taxes.

Describe the following as progressive or regressive taxation: Social Security, Medicare

Social Insurance Taxes like Social Security and Medicare are progressive, as the rich pay the tax at higher rates than the poor.

How do capital budgets differ for federal and state governments?

States and local governments have capital budgets, meaning that long term investments don't affect the day-to-day budget. For the federal government, any capital investments are counted as current expenditures and run up the budget.

Why is the OMB director powerful?

The OMB director has independence from the president, and also determines the budgets for most government agencies.

How did FDR's New Deal, and Lyndon Baines Johnson's Great Society drastically change the federal government's allocation pie? (including term income security)

The biggest slice of the budget pie now belongs to income security expenditures, a bundle of policies extending direct and indirect aid to the elderly, the poor, and the needy.

Why does the OMB utilize such a long process?

The complexity of the product necessitates complexity within the production process. With numerous different agencies to consider, the OMB must sound out each request and issue tentative guidelines.

What does the Congressional debt limit (debt ceiling) represent (at least on paper)?

The limit of legally allowable debt set by Congress.

Who do tax expenditures tend to benefit how/why?

The upper/middle class; tax expenditures are subsidies on large purchases, purchases that only the more affluent can afford.

Why is a budget resolution important?

They are important because they set limits on expenditures based on revenue projections. They bind Congress to a total expenditure level that should form the bottom line of all federal spending for all programs.

How does a continuing resolution both empower and limit government?

They empower either House of Congress as a medium of leverage. They limit Congress in that they facilitate policy gridlock and prevent advances in funding.

What is the difference between debt and deficit? (as illustrated on the graph in figure 13.1)

When expenditures exceed revenues, the budget runs a deficit. The accumulation of debt over time composes the national debt.

What is the problem of "crowding out" in terms of economic growth?

When the economy is strong the government's desire to borrow money may lead to increased interest rates, making it more difficult for new business and individuals.

How do the two Keynesian solutions, to a depressed economy, coupled with civic realities, cause deficit spending to soar?

When the government either cuts taxes or spends money to create jobs, they add to the deficit either by having less tax revenue or spending more money.

How can interest on the debt/debt servicing/ interest rates become a semi-exponential/existential worry?

With 7% of the concurrent budget going to paying the interest on the national debt, the debt becomes an increasingly-large burden on future taxpayers. Additionally, Americas's dependence on foreign investors makes us vulnerable to the whims of foreign nations.

Going even beyond the book's explanation, what are some of the many demographic/political realities that are going to put America in the perfect debt storm from 2030-2080?

With a growing senior demographic and a smaller working-age demographic, social security taxes will have to be increased in order to provide for the entire senior demographic. This will create public backlash from the young, as well as intergenerational conflict between American citizens.

What is indexing of tax brackets?

With the indexing of taxes (beginning in 1985), inflation could no longer push income into higher brackets, and, since people in higher brackets pay a higher percentage of their incomes in taxes, tax revenues were less than what they would have been without indexing.

How would zero based budgeting create different results from incremental budgeting?

Zero-based budgeting would create a much smaller budget, as every expenditure would have to pass a cost-benefit analysis prior to being approved. Conversely, incremental budgeting results in larger budgets, as agencies anticipate a growing budget and thus engage more expenditures.