Chapter 14: Congress, The President, and the Budget

The Politics of Taxing and Spending

I. Federal Revenue and BorrowingII. Federal ExpendituresIII. The Budgetary Process

I. Federal Revenue and Borrowing

A. RevenuesB. ExpendituresC. Personal and Corporate Income TaxD. Social Insurance TaxesE. BorrowingF. Taxes and Public Policy

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I. Federal Revenue and Borrowing

A. Expenditures1. Government spending – Major areas are social

services and national defense.

B. Revenues1. Financial resources of the government –

Individual income tax and Social Security tax are two major sources.

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I. Federal Revenue and Borrowing

C. Personal and Corporate Income Tax1. Income tax – Shares of individual wages and

corporate revenues collected by the government.

2. Sixteenth Amendment – Explicitly authorized Congress to levy a tax on income.

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I. Federal Revenue and Borrowing

D. Social Insurance Taxes1. Both employers and employees pay Social

Security and Medicare taxes.

2. In 2010, employees and employers EACH paid a Social Security tax equal to 6.2 percent of the first $106,800 of earnings, and for Medicare they paid another 1.45 percent on all earnings.

1. Total social security & medicare tax rate: 15.3%

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I. Federal Revenue and Borrowing

E. Borrowing1. Treasury Department sells bonds when the

federal government wants to borrow money.

2. Federal debt – All the money borrowed by the federal government over the years and still outstanding.

3. Today the federal debt is about $16.6 trillion.

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I. Federal Revenue and Borrowing

E. Taxes and Public Policy1. Tax Expenditures – Revenue losses from special

exemptions, exclusions, or deductions allowed by federal tax law.

2. Tax Reduction – In 2001, tax cut gradually lowered tax rates over the next ten years, and in 2003, Congress reduced the tax rates on capital gains and dividends.

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II. Federal Expenditures

A. Big Governments, Big BudgetsB. The Rise of the National Security StateC. The Rise of the Social Service StateD. IncrementalismE. “Uncontrollable” Expenditures

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II. Federal Expenditures

A. Big Governments, Big Budgets1. Big budgets are necessary to pay for big

governments.

2. National, state, and local government spend an amount equal to one-third of the gross domestic product (GDP).

3. National government’s spending alone currently represent about one-fourth of the GDP.

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II. Federal Expenditures

B. The Rise of the National Security State1. In the 1950s and 1960s the Department of

Defense received more than 50% of federal budget.

2. Defense now gets about one-sixth of all federal expenditures.

3. This is one reason for growth of government.

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II. Federal Expenditures

C. The Rise of the Social Service State1. The biggest federal spender is now income security

programs.1. Social security2. Medicare3. Pensions4. Unemployment insurance

2. Social Security is #1 spender, now it includes disability benefits and Medicare, and its recipients are living longer.

3. This is another reason for government growth.

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II. Federal Expenditures

D. Incrementalism1. A description of the budget process where

the best predictor of this year’s budget is last year’s budget, plus a little bit more (an increment).

2. According to Aaron Wildavsky, “Most of the budget is a product of previous decisions.”

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II. Federal Expenditures

D. “Uncontrollable” Expenditures1. Expenditures determined by how many eligible

beneficiaries there are for a program or by previous obligations of the government and that Congress therefore cannot easily control.

2. Social Security benefits are an example of uncontrollable expenditures.

3. Entitlements – Policies for which Congress has obligated itself to pay X level of benefits to Y number of recipients.

a) Social Security & medicare benefits are an example of entitlements.

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III. The Budgetary Process

A. Budgetary PoliticsB. The President’s BudgetC. Congress and the Budget

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III. The Budgetary Process

A. Budgetary Politics1. Stakes and Strategies – Every political actor has

a stake in the budget.

2. Think of budgetary politics as a game in which players adopt various strategies.

3. There are plenty of players in the budgetary politics game, and they have their own strategies.

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III. The Budgetary Process

A. Budgetary Politics (cont.)4. The Players –

a) Interest groups lobby for their needs;

b) agencies push for higher budget requests;

c) Office of Management and Budget (OMB) prepares the president’s budget;

d) president makes the final decisions on what to propose to Congress.

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III. The Budgetary Process

A. Budgetary Politics (cont.)4. The Players –

e) Tax committees in Congress write the tax codes;

f) Budget Committees and the Congressional Budget Office (CBO) set the parameters of the congressional budget process;

g) subject-matter committees write new laws, which require new expenditures.

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III. The Budgetary Process

A. Budgetary Politics (cont.)4. The Players –

h) Appropriations Committees decide who gets what and their subcommittees hold hearings on agencies’ requests;

i) Congress as a whole approves taxes and appropriations;

j) Government Accountability Office (GAO) audits, monitors, and evaluates what agencies are doing with their budgets.

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III. The Budgetary Process

B. The President’s Budget1. Budget and Accounting Act (1921) requires

presidents to propose an executive budget to Congress and created the Bureau of the Budget to help them.

2. In the 1970s, President Nixon reorganized the Bureau of the Budget and renamed it the Office of Management and Budget (OMB).

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The Budgetary Process

B. The President’s Budget (cont.)3. Budget timeline:

a) Spring – Budget policy developed.b) Summer – Budget decisions conveyed to agencies.c) Fall – Estimates reviewed.d) Winter – President’s budget determined and

submitted.

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III. The Budgetary Process

C. Congress and the Budget1. Congressional Budget and Impoundment

Control Act of 1974 was designed to reform the congressional budgetary process.

2. It established: a) a fixed budget calendar; b) a budget committee in each house; c) a congressional budget office.

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III. The Budgetary Process

C. Congress and the Budget (cont.)3. Congressional Budget Office – To advise

Congress on the probable consequences of its decisions and to forecast revenues.

4. Budget Resolution – A resolution binding Congress to a total expenditure level, supposedly the bottom line of all federal spending for all programs.

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The Budgetary Process

C. Congress and the Budget (cont.)5. Reconciliation – How program authorizations

are revised to achieve required savings.

6. Authorization Bill – Establish, continue, or change programs.

7. Appropriations Bill – Funds programs established by the authorization bills.

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III. The Budgetary Process

C. Congress and the Budget (cont.)8. Budgets were in red every year between

1974 reforms and 1998.

9. Continuing Resolutions – Allow agencies to spend at last year’s level when Congress can not pass appropriations bills on time.

10. Omnibus Bills – Appropriations bills all together in one bill and not 13 appropriations bills.

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III. The Budgetary Process

C. Congress and the Budget (cont.)11. The 1974 reforms have helped Congress view

the entire budget early in the process.

12. The problem is not so much the procedure as disagreement over how scarce resources should be spent.

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