THE BUDGET MAKING PROCESS

1. THE BUDGET MAKING PROCESS Congress, the President, and the Budget: The Politics of Taxing & Spending Chapter 14

2. The Federal Budget • THE PROCESS: • The President advises, Congress delegates, somewhat harmoniously. • KEY QUESTIONS: • Who bears the burden of paying for government? • Who receives the benefits? • BUDGETARY SQUEEZE: • Americans want P & Congress to balance the budget while maintaining or increasing the level of government spending on most policies AND keeping taxes low at the same time.

3. The Federal Budget • Budget is a policy document allocating burdens (taxes) and benefits (expenditures). • Government collects $$$ by taxes and spends it via expenditures. • If tax allocations are higher…it’s a surplus (it did happen in ’99!) • If expenses are higher. . .it’s a deficit which is then added to the national debt and you get a shortfall in the trillions …and it takes almost 10% of the current budget just to pay interest on the debt!

8. GOVERNMENT’S SOURCES OF REVENUE • THREE MAJOR SOURCES: • Personal & corporate income tax • Social insurance taxes • Borrowing (Bonds)

10. INCOME TAXES • Began in Civil War…but expired • Started again in 1894 but declared unconstitutional in 1895 in Pollock v. Farmers Loan and Trust Co. • Only states had power of direct taxation per Constitution • 16TH AMENDMENT – 1913, explicitly permitted Congress to collect income tax; Pollock overruled • A PROGRESSIVE TAX • Largest source of federal revenue • 2011 – over $1.8 trillion in individual income taxes • Corporate taxes USED TO yield more revenues than individual but today, only about 8 cents of every federal revenue dollar comes from corporate income taxes whereas about 47 cents of every dollar comes from individual income taxes

11. Married Taxpayers Filing Jointly

12. Individual Taxpayers

13. INDIVIDUAL INCOME TAX BRACKETS, 2012Married, filing jointly Taxable income between Tax Bracket 0 and 17,400 10% 17,400 and 70,700 15% 70,700 and 142,700 25% 142,700 and 217,450 28% 217,450 and 388,350 33% 388,350 and above 35% • Congress establishes these annual tax rates.

14. Internal Revenue Service • Started under Lincoln; reorganized under Wilson • Established to collect taxes and enforce the internal revenue laws • Collects federal income taxes from individuals and corporations • Audits taxpayers annually • Investigates and prosecutes taxpayers/nonpayers

15. SOCIAL INSURANCE TAXES • Paid by both Employers and Employees • For example: social security – each pays in 4.2% now • 36% of today’s revenues (were only 12% in the 1950s) • Social Security fastest growing source of government income • Do NOT go into the general budget fund but, instead, are earmarked for a specific purpose – what type of expenditure are they?

16. BORROWING • Done through BONDS • Treasury Dept. sells bonds, guaranteeing to pay interest to bondholder. • Citizens, corporations, mutual funds, etc. purchase bonds • WHY does federal government borrow? • Federal government has NEVER defaulted on its bonds. • DEBT – all of the $ borrowed over the years & still outstanding… now at over $15 trillion • Shifts burden to future taxpayers; provokes thoughts of a “balanced budget” amendment • What does a “billion” dollars look like? • A “trillion?”

18. Regan’s Description of a Trillion Dollars: In a speech to Congress in February 1981: “A few weeks ago I called such a figure, a trillion dollars, incomprehensible, and I’ve been trying ever since to think of a way to illustrate how big a trillion really is. And the best I could come up with is that if you had a stack of thousand-dollar bills in your hand only 4 inches high, you’d be a millionaire. A trillion dollars would be a stack of thousand-dollar bills 67 miles high.”

21. LOST INCOME: FED TAX “LOOPHOLES” • Loopholeis a tax break or tax benefit to the individual; it is lost income to federal gov’t • TAX EXPENDITURES = loopholes, deductions, exemptions • The difference between what the gov’t actually collects in taxes and what it COULD have collected without special exemptions • Over $800 billion in 2011 • Deductions for mortgage interest, charitable contributions, etc. • Mostly benefit middle & upper income taxpayers & corporations since poor don’t buy homes, etc.

22. TAX REDUCTIONS • REAGAN – 1981 • Income taxes down but social insurance and excise taxes (regressive taxes) up • CLINTON – 1993 • Raised rates for those in higher brackets (up to 40%), reduced tax deductions, took millions of low-income families off the tax rolls • BUSH – 2001 • Tax cuts that lowered rates over extended time • Extended by Obama Administration

23. FEDERAL EXPENDITURES • Primary Federal Expenditures: • Social Service State (social security, Medicare, etc.) • Interest on the national debt • National Defense • Rise of large governments is one of most important changes seen in 20th century • American governments (national & state) spend annually an amount equal to 1/3 of the GDP • BUT, US actually has one of the smallest public sectors among Western nations relative to the size of the GDP • Rise of the NATIONAL SECURITY STATEhas caused much of the growth

24. NATIONAL SECURITY STATE • Military used to be largest part of expenditures – permanent military & expensive technology in Cold War years • From mid-60s to 1980, defense spending down & social welfare spending doubled • By 1980s, defense spending under Reagan up again & then down again in 90s – end of Cold War • Up again after 9-11 BUT, defense spending still only about 1/6 of all federal expenditures

25. RISE OF SOCIAL SERVICE STATE • Biggest slice of budget goes to income security expenditures – policies of direct & indirect aid to elderly, poor, needy • Makes up over 1/3 of the federal budget • Social Security Act 1935 • Disability insurance added to it in 1950 • Medicare 1965 – hospitals/doctors for elderly • Prescription benefits added -2003 • Medicaid also added in 60s • aid to the poor/needy • Other social service expenditures involve health, education, job training

27. INCREMENTALISM & UNCONTROLLABLE EXPENDITURES • INCREMENTALISM prevails in budget making: • Increase last year’s budget by an “increment” to satisfy this year’s budget • What do you think Executive Branch agencies do when making their budget requests? • UNCONTROLLABLE EXPENDITURES have increased in federal spending – are now about 2/3 of spending – “mandatory spending” such as • ENTITLEMENTS – if you qualify, you get them, no matter what the cost to the government, even if all the funds are depleted… • Expenditures are determined by how many people are eligible for the program….Congress has obligated itself to pay X level of benefits to Y number of recipients. • SOCIAL SECURITY, MEDICARE!!! • Difference between Mandatory and Discretionary Spending?

28. The Budgetary Process • POWER OF THE PURSE belongs to Congress! • House Ways & Means Committee deals with taxing aspects; House Budget Committee; Senate Budget Committee • All the political elites have a stake in this battle. . .and the trillions in our budget draws a lot of participants such as: (a) SIGS (b) Agencies (c) OMB - President’s budgetary arm (d) POTUS (e) CBO (Congressional Budget Office) (f) Subject matter committees, i.e. Ag, Sci (g) Appropriations committees (h) Congress as a whole (i) GAO - bean counters

29. The Budgetary Process • 1921, BUDGET AND ACCOUNTING ACT • Requires Presidents to propose an executive budget to Congress; created Bureau of Budget • 1970s, Nixon reorganized Bureau of Budget & renamed it OFFICE OF MANAGEMENT AND BUDGET (OMB) • P’s Budgetary Arm • Supervises preparation of the federal budget and advises the P on budgetary matters

30. Budgetary Reform • CONGRESSIONAL BUDGET AND IMPOUNDMENT ACT OF 1974: • P had the ability to impound (withhold) funds • Frustrated by this and the entire disjointed budget process, Congress passed this act to try and regain some control over budget process • P required to spend the funds that Congress appropriates • Ends P’s ability to kill programs by withholding funds (Nixon did this quite a bit) • Act also ensures Congress will look at taxing and spending at least twice during each budget cycle

31. The Budgetary Process: • Federal fiscal year is Oct. 1 - Sept. 30 • OMB starts reviewing budgetary requests in Fall • P submits the budget recommended by OMB in January • Then, 2-step process begins in Congress: • Authorization bill – authorizes/changes a program or entitlement & sets a spending limit on it – what they might get • Appropriations bill – final funding of the programs set by the authorization bill; can’t go higher, but can give lower amounts. • Huge numbers in budget – for ex., in 2011 Obama’s budget called for 3.83 trillion in spending • 2013 budget - $3.7 trillion … but revenues only 2.56 trillion so…..deficit

32. Both houses of Congress must agree upon FIRST BUDGET RESOLUTION by May of each year – sets the overall revenue goals and spending targets • Budget committee in each house – lots of bargaining all summer • CONGRESSIONAL BUDGET OFFICE (CBO) • Congressional Budgetary arm – reviews; gives advice to Congress, forecasts of revenues, etc. • Congress to agree to SECOND BUDGET RESOLUTION by September • Sets binding limits on taxes and spending for fiscal year beginning Oct. 1 • If Congress does not meet Oct. 1 deadline for new budget for the new fiscal year…? • Passes weekly continuing resolutions to keep gov’t going. • Do the same thing as last year with same amount of $

33. MORE REFORMSGRAMM-RUDMAN-HOLLINGS ACT, 1987 • Purpose was to help with continuingly growing budget deficits – trying for a balanced budge • Mandated maximum allowable deficit levels for each year for discretionary spending items (such as military expenses) up to 1993 but didn’t work • Replaced in 1990 with the Budget Enforcement Act • By 2002 largely expired with the budget deficits it had been designed to control being taken care of • Budget deficit continues as a source of political conflict though and beg the question – • SHOULD THE FEDERAL BUDGET BE BALANCED?

34. DEMOCRACY & GROWTH OF GOVERNMENT • According to political scientists Allen Meltzer & Scott Richard: • Government grows in a democracy because of the equality of suffrage • Poorer voters will ALWAYS use their votes to support public policies that redistribute benefits from the rich to the poor. • Social Security, Medicare, Medicaid, Welfare