Predicting the President

1. Predicting the President What determines the budget and foreign policy?

2. I. Reminder: How Policy Is Made • Domestic Policy: The Budget • President responsible for submitting budget: • By law: Tax policy assumed to be constant, so revenue estimates based on economic growth predictions • Spending: President estimates mandatory spending (more on this later) and then adds in requested discretionary spending • Result: Estimates of taxes and mandatory spending, plus a request for discretionary spending programs

3. 2. Congress Acts • Congressional Budget Resolution (Since 1974): Congress lays out its own spending targets. Result binds only internal Congressional action, so President cannot veto (not a law) • Using Congressional Budget Resolution, committees write 13 spending bills (sometimes rolled into one “omnibus bill”) with discretionary spending amounts  President signs or vetoes

4. 3. Reconciliation • Congress now addresses taxes and mandatory spending, if necessary to make funding equal permitted deficits • President may sign or veto reconciliation bill

5. B. Foreign Policy • War powers: President acts unilaterally but can and usually does consult Congress on major operations. Most follow War Powers Act while claiming they don’t have to do so. • Sanctions: President delegated substantial authority over trade policy by Congress. “Special 301” provision requires USTR to list potential targets on yearly basis, but USTR can list additional targets at any time. • Foreign aid: Part of the discretionary spending in the President’s proposed budget.

6. II. The Federal Budget: An Overview Who pays? Who gets what?

7. A. Revenues: Who pays? 1. Tax code is best place for political favors. Why? a. Permanence -- Tax law remains unless someone repeals it. Spending requires reauthorization every year. b. Less visible -- Public doesn’t understand tax code

8. 2. Class differences a. Progressive taxes (Wealthy pay higher % of income) • Income Tax: Tax on earned income. Does not apply to investments. • Capital-Gains Tax: Tax on investment income. • Estate Tax: Tax on wealth over $1.6 million ($3.2 million if married) after death (2006 figures)

9. Class differences b. Regressive taxes (Poor pay higher % of income) • Excise Taxes: Tobacco, Alcohol, Gasoline, etc. • Exception may be gasoline taxes (Multiple cars, Low Fuel Economy for SUVs) • State Taxes: • Sales tax (poor consume larger fraction of income) • Property tax: Effect on rent tends to make tax regressive (poor pay larger share f income for housing) Depending on definition: • Payroll Tax: Social Security and Medicare taxes. Paid only on the first $90,000 of wages. Not paid on investments or on wages over $90,000 (2005 figure).

10. Class differences c. Flat Taxes • Also known as Proportional Taxation • Definition: Everyone pays same % of income, regardless of source • US System • Consists of progressive and regressive taxes • Federal taxes > State taxes • Only moderately progressive: Middle income range is nearly “flat” • If progressive taxes become flat taxes, overall system becomes regressive

12. State and Local Taxes: Regressive

13. Is the US Tax System Flat?

14. d. Which federal taxes are most important?

15. B. Spending: Who gets what?

16. 1. Categories of Spending • Discretionary – About 1/3 of the budget • Mandatory – About 2/3 of the Budget

17. a. “Mandatory” Spending • Some laws commit Congress to spend money in the future. These programs get funding each year if Congress does nothing: • Social Security • Medicare • Medicaid • Income Security • Interest

18. Mandatory Spending Increases Every Year…

19. …partly due to new benefits…

20. …but mostly due to an aging population…

21. …and increasing health care costs.

22. Interest will grow as well.

23. b. Discretionary Spending i. Must be renewed by Congress or funding ceases ii. Defense is largest discretionary expenditure

24. iii. Defense Spending: Stability and Change

25. China Russia Japan UK France Italy India Israel Iran North Korea Germany S. Arabia S. Korea Syria iv. US vs. Everyone Else

26. C. Programs of Interest • These are already included in the earlier figures BUT • These programs have generated public and Congressional debate out of proportion to their budgets

27. 1. Programs of Interest: Homeland Security

28. a. Department Creation = “Must Pass” – Perfect for Interest Groups i. Unrelated Amendments: • Eli Lilly: Immunizes drug makers from lawsuits over vaccines • Allows formerly American companies that move to foreign tax havens like the Cayman Islands to win federal contracts ii. Winners: • Technology companies (databases) • Shipping / Trucking / Air companies (subsidized security) • Corporate tax evaders • Eli Lilly and other vaccine manufacturers iii. Losers: • Airport screeners (no unions allowed) • Plaintiffs suing over old vaccines

29. b. Large Increases in Funding = Further Opportunities for Interest Groups • Authorized in the FY2004 budget: • $2,000,000 to the Great Lakes Region to purchase an Icebreaker so that commercial ships can go through during the winter • $200,000 to project Alert, a school-based drug prevention program for middle grade youth. • $2.5 billion for “highway security,” which consists of building and improving roads. • $70,000,000 for the Homeland Security Fellowship Program for students and universities. • $50,000,000 to the National Exercise Program to provide an exercise program that meets the intent of the Oil Pollution Act of 1990. • $6,400,000 for the Intellectual Property Rights Center. The center’s focus is to combat intellectual property right crime—a long time FBI project.

30. 2. Programs of Interest: Welfare a. No budget for “welfare” • Social welfare programs include Social Security, Medicare, Medicaid, many others • Most people mean cash, food, and medical aid to the poor: “Means-Tested Assistance” b. Jointly funded: States pay about one-third

31. c. Welfare Reform: Cases have gone down….

32. …and more single mothers are working outside the home….

33. …but putting them to work is expensive!

34. d. Where does TANF money go?-- Less cash than AFDC, more Child Care and Work

35. e. TANF  State flexibility: Many states spend money on unique programs

36. 3. Programs of Interest: Foreign Aid

38. a. US Gives Very Low % of GDP for development…

39. …but still manages to be the largest donor

40. b. Top Three Recipients of US Aid: FY 2000 – FY 2007 Israel and Egypt are two of the top three every year for the past 25 years. Why?

41. 4. Programs of Interest: Research

42. D. Budget Deficits • Definition: Spending > Revenue • Balanced Budget = No Deficit • Technically, no surplus either, but no one objects to a little surplus.

43. 1. Dangers of Deficits • Interest payments – If economy grows slower than interest paid on debt, interest becomes larger fraction of GDP • Reduced private investment – Government borrowing tends to reduce overall savings and “crowd out” private investment • Increased interest rates – All else being equal, government borrowing raises the cost of borrowing for everyone else • Key variable: Does deficit spending generate high enough real growth (growth after inflation) to offset future interest payments and decreased investment?

44. 2. Recent History: Brief Surplus Followed By Deep Deficits

45. 3. The National Debt: Accumulated Deficits

47. 4. Who Does the US Owe?

48. E. Who is Responsible? • Formal procedure • Since 1921 (Budget and Accounting Act): Budget submissions by President focused responsibility • Since 1974 (Budget Act): Competing Congressional budget resolutions diffused responsibility • Informal process: Veto gives President power to prevent higher spending, but not to raise spending (use of continuing resolutions can prevent spending increases) • Relationship between requests and authorization: Congress usually appropriates about what the President requests

50. Mandatory Spending Binds Both Branches: Presidential Requests (Solid) vs. Congressional Authorization (Dashed)