Government Finances

1. Government Finances

2. Budget Process • President must submit a budget proposal to Congress by the 1st Monday in February • Congress then passes a budget resolution through both Houses of Congress

3. Budget Process Spending is divided into 2 types: Mandatory Spending: Spending that does not need annual approval. EX: Social Security Payments Discretionary Spending: Spending that must be approved each year EX: Highway construction

4. Federal Revenues • Incometaxes account for half of all federal government revenues • Most of this comes from tax withholdings- money taken from each person’s paycheck to cover their taxes • At the end of the year, you file a tax return. If the government took too much in your checks, you get a refund. Otherwise you pay the balance. • Corporations also pay taxes on their profits. This is about 10% of all federal government revenue.

5. Federal Revenues • The second largest source of gov’t income is payroll taxes-money taken from your paycheck to pay for social security and Medicare • The government also collects excise taxes-taxes on specific goods such as gas, tobacco, alcohol, & legal betting (also called sin taxes) • Another tax is the estate tax-tax on money left in a will • Another tax is a gift tax-tax on large gifts

6. Forms of Taxes Proportional tax- • a tax that has the same percentage no matter how much you make • collects less money than other methods for the government

7. Forms of Taxes Progressive tax- • the more you make, the higher the percentage you pay • collects the most money for the government

8. Forms of Taxes Regressive tax- • opposite of progressive in that the percentage you pay goes down the more you make • ex: social security and sales taxes

9. Federal Expenditures • Expenditures-where the government spends its money • 21% on Social Security • 17% on national defense • 14% on Medicare • 8% on interest on debt

10. Sources of State Government Revenue • Main source is intergovernmentalrevenue-money received from the national government, about $.22 per all dollars received. • Sales tax-tax on the purchase of most items. Stores pay a lump amount each month. Ranges in amount from 2% to 8%. Some states don’t have any sales taxes at all.

11. Sources of State Government Revenue • Contributions-states take the money collected from it’s employees for their retire and invest it. • Income taxes-many states have their own income tax systems. Some states simply take a percentage from your federal return. Others charge a flat rate to all it’s citizens. Some charge a progressive rate while 7 states have no income tax at all.

12. State Expenditures • State welfare programs called entitlement programs. These programs provide health, nutrition, or income payments to people who meet basic requirements • Higher education-states help to subsidize the cost of a college education for the poor. • Highway construction

13. Sources ofLocal Government Revenue • Property taxes- must pay a certain percentage on real property such as buildings and land. May also charge property taxes on stocks, bonds, cars, jewelry, furniture, and fine works of art. • Revenue from utility companies • Also collect sales taxes • Fines from traffic violations and other user fees

14. Local Government Expenditures • Education-in charge of setting up local school districts • Police and fire protection • Water supply • Sewage and sanitation

15. Budget Issues Difficulties in planning • Hard to predict tax revenues • Hard to predict all government expenses • Never know when a unique event will occur (hurricane, blizzard, terrorist attack)

16. Budget Issues • Try to have a surplus-when revenues are more than expenditures • States also try to put money away for unforeseen events

17. Budget Issues • When expenditures are more than revenues you have a deficit • Another problem is that the national government is forcing states to pay for more programs leading to large state debts

18. Government Debt • When the government runs into debt it must borrow money to pay it’s bills • May use bonds-an agreement to pay back a loan with interest • Surpluses may help to pay for these debts, or governments may cut programs • Raising taxes is another unpopular option

19. Government Debt • Governments try to have a balanced budget, where spending equals expenditures • The business cycle can make this difficult as government spending in recessions can make a balanced budget difficult

20. Government Debt Impact of National debt: • More tax dollars go to paying interest on loans, leaving less for government programs • Higher taxes to pay off debt mean less money for your expenses • The more money the government borrows the less available for its citizens to borrow, slowing down the economy

21. Automatic Stabilizers • These are programs that are in place to stimulate the economy when needed • The main advantage is that are always in place with no government action needed • Ex: unemployment insurance to help people till they can find a job • Ex: Medicaid and other welfare programs to help people maintain a basic standard of living • Ex: progressive taxes