Budget

Debt

The accumulation of debt over time

Personal and Corporate Income Tax

Sixteenth Amendment- explicitly permitting Congress to establish an income tax. The Internal Revenue Service was created to collect and process tax payments. The flat tax- where everyone, regardless of income, pays the same tax rate.

Social Insurance Taxes

Social Security and Medicare taxes are withheld from your paycheck and matched by your employer. Today they account for about one third of federal revenue.

Incrementalism

-means that the best predictor of this year's budget is last year's budget. There is little flexibility for the president and Congress in the budget process. Each year, agencies expect to get a little more money than they did the previous year - an incremental increase. -When the government shifts priorities it may drastically cut the budget of an agency. NASA's budget grew rapidly when the space program was launched then plummeted when it was discontinued. But the general trend is slow but steady growth each year.

What percentage of federal spending is simply interest payments on the national debt?

6% of annual federal spending goes to servicing the national debt. These interest payments are not optional, and this money is unavailable for education or health care or other federal endeavors.

What type of bill must follow an authorization bill?

Appropriations bill

Democracy and Budgeting

Corporations want bailouts, government contracts, and subsidies. Interest groups want government to help them, too. Zoologists, for example, want aid from the National Science Foundation. Despite the demands from voters that have caused government to grow, the American government taxes and spends far less than the governments of other wealthy democracies. One of the most common criticisms of the federal government is that it cannot balance its budget. But consider how members of Congress are rewarded by voters: If they cut taxes, they are re-elected. If they cut programs and benefits to their constituents, they are defeated. If they bring pork barrel projects home to their states and districts, they get re-elected. The inevitable result of these incentives is deficits.

What feature of American government tends to promote its growth?

Democracy

Congress and the Budget

Each April Congress must pass a budget resolution which binds Congress to a total expenditure level. Part of this process is reconciliation, that is, changes to laws and authorizations that will enable Congress to stick to its budget ceiling. The second part of this process is the passage of authorization bills that establish or change government programs. Later, Congress must pass appropriations bills to fund programs established by authorization bills. Congress cannot appropriate more money than is authorized, but it can give the program less money, or none at all. More often than not recently, Congress has been unable to resolve its political dickering and reach agreement on appropriations bills. To keep the government functioning, Congress has to pass continuing resolutions, which are laws that allow agencies to spend at last year's levels.

"Uncontrollable" Expenditures

Each year, the president proposes the budget and Congress approves it - or not. The budget is too large to review in its entirety each year, but it would seem that cuts could be made if they were desired. So why then do we say the budget is uncontrollable? We say the budget is uncontrollable is because about two thirds of it is automatic; it is not a fixed or lump sum that Congress can adjust downward it fi choose to. Interest on the debt, for example, must be paid. Congress has no discretion to allocate less money to interest payments next year.

Why does the federal government have so little discretion over its own budget?

Entitlements create uncontrollable obligations

The Budget and the Scope of Government

In many ways, the budget represents the scope of government. The bigger the budget, the bigger the government, and vice versa. When people see a need, such as reducing poverty among the elderly or defending the nation's borders or preventing poor children from starting the school day without breakfast, the government finds a way to pay for it. But the politics of budgeting are also the politics of scarcity because there is never enough money to meet all the demands for government activity and funding. Tough choices have to be made each year in the budget process.

The President's Budget

Now, the president's Office of Management and Budget prepares the annual budget and submits it to the president for approval. Once approved, it goes to Congress. The budget is due to Congress the first Monday in February but preparations begin a year in advance as OMB begins soliciting budget requests from agencies. Guidelines, policies, priorities, and targets all have to be established. Agency heads usually threaten to go directly to the president if their priorities are not met by OMB. The jockeying and negotiations can continue until the last minute, with the budget being rushed to the printers hours before it is due on Capitol Hill.

Taxes and Public Policy

Tax expenditures represent tax revenue that is lost due to exemptions. For example, taxpayers can deduct charitable contributions and mortgage interest payments from their taxable income, and businesses can deduct expenses for new equipment and facilities. Tax exemptions benefit the wealthy and businesses more than the majority of Americans. Tax cuts also disproportionately benefit the wealthy because they generally only affect income taxes, not excise taxes.

Borrowing

Tax revenue does not cover federal expenditures so the government borrows money. The Treasury Department sells bonds, agreeing to pay interest to the bondholders. The federal government borrows money from itself, such as by taking money from Social Security funds to pay military pensions or farm subsidies. This borrowing creates intragovernmental debt. The national debt stands at $17.5 trillion and is growing every minute. In fact, 6% of federal spending is interest on this debt. Congress imposes a debt ceiling, which is a limit on how much money the government can borrow. When the president asks Congress to raise the debt ceiling, they can make it conditional on concessions in various policy areas. Thus, the debt ceiling is a powerful bargaining chip for Congress.

Rise of the Social Service State

The biggest slice of today's budget pie goes to income security programs, the so-called social safety net. Social Security was created by FDR in 1935 to reduce poverty among the elderly. In the 1950s, disability insurance was added to the program. In 1965, as part of President Johnson's Great Society programs, a health insurance program for the elderly, called Medicare, was launched. Coverage for prescription drugs was added to this program in 2003. Where does the money for Social Security and Medicare come from? It is deducted from your paycheck. The money collected from today's workers pays current retirees. When today's workers become old enough to collect, the workers of that era will be paying their benefits. In this manner Social Security forms an intergenerational contract. It works perfectly in theory. The only problem is that as birth rates decline and the elderly live longer, the ratio of workers to beneficiaries is changing. In 1940, there were about 40 workers for each retiree; today there are 3. Medicare faces a similar problem.

The Budgetary Process

The budgetary process begins and ends with the president, but the role that Congress plays in the middle is critical. Some of the fiercest political battles in Washington are waged over the annual federal budget.

Budgetary Politics

The main actors in the budgetary process include: • interest groups • agencies • OMB • the president • Congressional committees and subcommittees on budget, taxation, authorization, and appropriations • the CBO • the GAO • and Congress as a whole. The budget process happens every year, and the part of each political actor is carefully scripted.

Deficit

When expenditures exceed revenues, the budget runs a deficit