Chapter 16: “Financing Government”



Chapter 16: “Financing Government”

Section1: Where the Money Comes From: Taxes

During fiscal year 2001, the Federal Government expects to spend just about $1.8 trillion. On average, it now costs every man, woman, and child in this country more than $6500 a year to support the activities of the Federal Government

I. The Power to Tax

A. Reasons to tax

1. Raise money to finance government

2. Common defense

3. General Welfare

B. Constitutional Limitations

1. Taxes must be for public purposes only

2. Export taxes are prohibited

3. Direct taxes must be equally apportioned

4. Indirect taxes levied by the Federal Government must be laid at the same rate in all parts of the country

C. The Implied Limitation

1. Federal Government cannot tax the states or any of their local governments in the exercise of their governmental functions

II. Current Federal Taxes

A. The Income Tax

1. Largest source of federal income today

2. Its rates can be adjusted to produce whatever amount of money Congress thinks is necessary

3. A progressive tax

a. The higher the income and the ability to pay, the higher the tax rate

B. The Individual Income Tax

1. For FY 2000, the individual income tax is expected to provide just about $900 billion

2. Tax is levied on each person’s taxable income

a. One’s total income in the previous year minus certain exemptions and deductions

b. In 1999, each taxpayer had a personal exemption of $2750, plus another exemption of that amount for each dependent

c. Other deductions

1) Costs of some medical care, most State and local taxes (not sales taxes), interest paid on home mortgages, charitable contributions

3. By April 15, all persons earning taxable income must file a tax return

a. Declarations of that income and of the exemptions and deductions claimed

4. Most who pay income taxes do so through withholding

C. The Corporate Income Tax

1. Business must pay taxes on their earnings

2. Complicated-many deductions are allowed

3. Nonprofit organizations are not taxed

D. Social Insurance Taxes

1. Taxes for social welfare programs

a. The Old-Age, Survivors, and Disability Insurance (basic Social Security program)

b. Medicare-health care for the elderly

c. Unemployment Compensation Program

2. Social Security and Medicare are payroll taxes

a. Social Security (6.2% employee, matched by employer)

b. Medicare (1.45% employee, matched by employer)

3. Unemployment

a. Financed by a combination of federal and State taxes

4. These are regressive taxes

a. Levied at a flat rate, regardless of income

E. Excise Taxes

1. A tax laid on the manufacture, sale, or consumption of goods and/or the performance of services

a. Gasoline, oil, tires, tobacco, liquor, firearms, telephone services, airline tickets, etc.

b. Included in the cost of the product

c. “Sin taxes”

F. Estate and Gift Taxes

1. Estate Tax

a. A levy imposed on the assets of one who dies

b. The first $675,000 of an estate is exempt from the federal tax

c. Deductions are allowed for state death taxes and bequeaths to religious and charitable groups

d. Anything a husband or wife leaves to the other is taxed, if at all, only when the surviving spouse dies

2. Gift Tax

a. A tax imposed on the making of a gift by a living person

b. Any person may make up to $10,000 in tax-free gifts to any other person in a year

c. Gifts husband/wife are not taxed in any amount

3. These taxes are under a lot of public scrutiny

G. Custom Duties

1. A tax laid on goods brought into the United States from abroad

a. Coffee, Bibles, bananas, and up to $300 of a tourist’s purchases abroad are some things that are not taxed

III. Taxing for Nonrevenue Purposes

A. Should “sin taxes” be allowed?

B. Should foreign gas guzzling cars face high import taxes?

Section 2: Nontax Revenues and Borrowing

I. Nontax Revenues

A. Most comes from the Federal Reserve System via interest rate charges

B. Interest on loans made by several other federal agencies, canal tolls, and fees for such items as passports, copyrights, patents, and trademarks also make up large sums

C. Sale or lease of public funds, sale of surplus property, and premiums on veterans’ life insurance policies

D. Seigniorage

1. Profit the United States Mint makes in the production of coins (difference between value of the metals used and other costs versus the monetary value of the minted coins)

2. More than $500 million in most years

II. Borrowing

A. Why?

1. To meet the costs of short- and long- term crisis situations

2. Finance large-scale projects that could not be paid for out of current income

3. Deficit financing-government spent more money than it collected in tax revenue

a. Deficit-the yearly shortfall between income and outgo

b. 1969-1998 our government had a deficit every year

c. See p. 417

III. The Public Debt

A. The government’s total outstanding indebtedness, all of the money borrowed and not yet repaid, plus the accrued interest

1. Page 414 shows how this has grown because of certain circumstances

B. There is no constitutional limit on the amount that may be borrowed, and so there is no constitutional limit on the public debt

Section 3: Spending and the Budget

I. Federal Spending

A. Social Security spending tops the spending list for our government

1. Entitlements

a. Benefits that federal law says must be paid to all those who meet the eligibility requirements

B. Interest on the federal debt is second

C. Controllable and Uncontrollable Spending

1. Controllable-Congress and the President decide how much will be spent each year on many of the individual expenditures the government makes

2. Uncontrollable-things that must be paid when they come due and at the rate the government agreed to pay (interest on the debt)

a. Social Security, food stamps, other entitlements

II. The Federal Budget

A. The budget process

1. President prepares the budget and then submits it to Congress

2. Congress reacts to the President’s proposals over several months

B. The President and the Budget

1. Begins 18 months before the start of the fiscal year

2. Each federal agency prepares detailed estimates of its spending needs for that 12 month period and submits its spending plans to the Office of Management and Budget

3. The OMB reviews the requests, holds hearings, and revises the proposals

4. Submitted to the executive branch to be a part of the President’s budget program

C. Congress and the budget

1. President’s budget is referred to the Budget Committee

2. Also sent to the House and Senate Appropriations Committees

3. Committees hold hearings, make changes, compromise

4. A second budget resolution is proposed by the Budget Committees in early September

a. Must be passed by September 15

D. Sent to the White House for Presidential action

E. If this is not done by October 1

1. Congress must pass emergency spending legislation to avoid a shutdown of those agencies for which appropriations have not yet been signed into law

2. Continuing resolution

a. A measure that, when signed by the President, allows the affected agencies to continue to function on the basis of the previous year’s appropriations

See page 420 “How to File a Tax Return”

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