Establishing the Federal Budget “The President proposes, and Congress disposes”

1. Establishing the Federal Budget“The President proposes, and Congress disposes” • The government’s fiscal year is Oct. 1- Sept. 30. • 1st step: President confers with his advisors and drafts a budget to submit to Congress • Second step: Congress accepts, rejects, or modifies. House sets budget targets and bills are referred to committees and subcommittees. Full house must vote, and this process must be completed by September 15. Process is repeated in the Senate. • President may approve or veto the budget • Different political parties distribute discretionary funds VERY differently. Republicans—Military spending Democrats--Welfare • Now, let’s look at the results….

2. Government Spending (Ugh!) • 2006 Government spending at all levels: $3 Trillion • $10,000 for each American • At Federal level, deficits since 2000 • Government spending increased because of 3 events: The Great Depression, World War II, and LBJ’s Great Society • Governments buy everything from F-22s to toilet paper for government buildings • Government spending creates competition within the private sector. EX: Lockheed “Skunk Works” F-117 • The National government gives money to local and regional governments to spend. See next slide.

3. Cooperative Federalism • Ways of Distributing $ to states: • Grants-in-Aid: grants of federal mone to cities (land-grant colleges too)…allows Congress to become enmeshed in public ed. And mental health • Block grants—fewer strings. EX: TANF • Revenue Sharing—no strings, done away with in 1986 by Reagan • Federal Agency Aid--FBI aid, other agency aid, FEMA, Census Bureau

4. Mandatory spending refers to money that lawmakers are required by law to spend on certain programs or to use for interest payments on the national debt. Includes Social Security, Income Security, Medicare, Debt Interest, Veterans benefits Discretionary spending is spending about which government planners can make choices. VERY small!! (Education, Employment, Social Services, Transportation, Justice, Environment Federal Spending 2% 15% 1% 16% 1% 1% 2.5% 0.7% 2% 3% 23% 8% 12% 14% Health Defense Medicare Science, space and technology Income security Energy, natural resources,&environment Social Security Veteran’s benefits Agriculture Administration of Justice Other Transportation Net interest Education Note: Because of rounding, totals may be less or greater than 100%. Source: Statistical Abstract of the United States Mandatory and Discretionary Spending

5. Entitlements • An entitlement program is a social welfare program that people must receive to if they meet certain eligibility requirements. Social Security • Social Security is the largest category of government spending. Medicare • Medicare pays for certain health benefits for people over 65 or people who have certain disabilities and diseases. Medicaid • Medicaid benefits low-income families, some people with disabilities, and elderly people in nursing homes. Medicaid costs are shared by the federal and state governments.

6. Discretionary Spending Defense Spending • Spending on defense accounts for about half of the federal government’s discretionary spending. • Defense spending pays military personnel salaries, buys military equipment, and covers operating costs of military bases. • Other Discretionary Spending • Other discretionary spending categories include: • education • training • environmental cleanup • national parks and monuments • scientific research • land management • farm subsidies • foreign aid

7. The Budget Process 1. President submits budget. 2. House and Senate budget committees analyze the budget, with the Congressional Budget Office. 3. Each committee proposes to its house a budget resolution that sets a total budget ceiling and ceilings for each of several spending areas. 4. Congress is supposed to adopt these resolutions, to guide its budget debates. 5. Congress considers appropriations bills and sees whether they are congruent with the budget resolution. 6. Appropriations bills cannot make big changes in the budget because approximately two-thirds of government spending in on entitlements. 7. Nothing requires Congress to make cuts, but the process has made some links between spending and revenues. 8. Reagan secured large cuts in 1981, but was unsuccessful in subsequent years.

8. Case Study: Social Security • Passed by liberals in 1935 as OASDI—Constitutional by 5-4 decision • Funded by a payroll tax paid by all workers (deduction on paycheck). Only workers with enough credits are eligible. • 6.2% tax on salary up to $90,000 limit • 1.45% Medicare tax on all earned income • Medicare and Medicaid added in 1965 (health insurance--Medicare 65+; Medicaid poor)

9. Problems with Social Security • Problem: there will soon be insufficient people paying Social Security taxes to provide benefits for every retired person. Baby boomers aging, will retire soon and require more health care. AARP strong influence demands policy favorable to members. • Solutions opposed by the public include… a) Raising the retirement age to 70, freezing retirement benefits, and raising Social Security taxes • Privatizing Social Security • Combine the first two reforms, and allow citizens to invest a portion of their Social Security taxes into mutual funds And now, Medicare Part B (Prescription Drug coverage) makes the problem even worse.

10. Government Revenue • Citizens of the United States authorize the government, through the Constitution and elected officials, to raise money through taxes. • Taxation is the primary way that the government collects money. • Without revenue, or income from taxes, government would not be able to provide goods and services. • Taxes affect resource allocation and encourage/discourage certain activities

11. The Power to Tax Article 1, Section 8, Clause 1 of the Constitution grants Congress the power to tax. The Sixteenth Amendment gives Congress the power to levy an income tax. Limits on the Power to Tax The power to tax is also limited through the Constitution. According to the Constitution: 1. The purpose of the tax must be for “the common defense and general welfare.” 2. Federal taxes must be the same in every state. 3. The government may not tax exports. The Constitution and Taxation

12. Tax Structures Proportional Taxes • A proportional tax is a tax for which the percentage of income paid in taxes remains the same for all income levels.EX: “Flat Tax” proposal Progressive Taxes • A progressive tax is a tax for which the percent of income paid in taxes increases as income increases. EX: Federal Income Tax Regressive Taxes • A regressive tax is a tax for which the percentage of income paid in taxes decreases as income increases. EX: National Sales Tax proposal, Social Security Taxes

13. What Makes a Good Tax? (As of there is such a thing) • Certainty--It should be clear to the taxpayer when the tax is due, how much is due, and how it should be paid. (Value-Added Tax bad for this) • Simplicity--Tax laws should be simple and easily understood. (Look at a 1040—ha!) • Economy--Government administrators should be able to collect taxes without spending too much time or money. • Equity--The tax system should be fair, so that no one bears too much or too little of the tax burden. No loopholes.

14. Section 1 Review 1. The power to tax is granted by the United States Constitution to (a) the Treasury Department. (b) Congress. (c) the President. (d) the Supreme Court. 2. All of the following are characteristics of a good tax except (a) economy. (b) certainty. (c) revenue. (d) equity.

15. Individual Income Taxes “Pay-as-You-Earn” Taxation • Federal income taxes are collected throughout the course of the year as individuals earn income. Tax Withholding • Withholding is the process by which employers take tax payments out of an employee’s pay before he or she receives it. Tax Brackets • The federal income tax is a progressive tax. In 2002, there are 6 rates, each of which applied to a different range of income. See handout.

16. HOURS AND EARNINGS TAXES AND DEDUCTIONS Hours Earnings Description Amount 20 200.00 FICA Federal State City Total Taxes 15.20 10.25 5.10 1.00 31.55 TOTAL Taxable Wages Less Taxes Net Pay 200.00 31.55 168.45 • A tax return is a form on which you declare your income to the government and determine your taxable income. • Taxable income is a person’s total (or gross) income minus exemptions and deductions. • Exemptions are set amounts that you subtract from your gross income for yourself, your spouse, and any dependents. • Deductions are variable amounts that you can subtract from your gross income.

17. In the Beginning… • Taxes originally were only applied against the extremely wealthy • The New Deal and World War II changed that, maybe forever • 94% Tax rate during WW2 for the highest income earners

18. Benefit Principle Those who benefit the most form taxes should pay in proportion to the benefits they receive EX: Turnpike tolls Limitations: Benefits hard to measure, and those who get the most can hardly pay for them. EX: Large family gets huge benefits from public schools, low cost subsidized health care Ability-to-Pay Principle People should be taxed according to their ability to pay, regardless of benefits they receive Argument: It’s the system that allows you to be wealthy. Limitations: Fairness, destroys incentive, punishes people for doing well. 2 Principles of Taxation

19. Individual Income Taxes • The government gets 48% of its revenue from the individual income tax (more than any other method) • Taxes are typically withheld, but individuals must file a tax return on or before April 15th of every year. 1099s must be send out by the end of January. • The tax is progressive in structure, but can be regressive in reality because of loopholes that allow wealthier citizens to deduct more expenses. • Some loopholes have been closed—Alternative Minimum Tax makes sure people with lots of tax-sheltered income still pay their fair share.

20. Corporation Income Tax • Like an individual, a corporation must pay a federal tax on its taxable income. • Corporate income taxes are progressive – as a company’s profits increase so does the amount paid in taxes. • 3rd largest source of government revenue

21. What the heck is this FICA?(2nd largest source of Gov’t revenue) Social Security Taxes-This program is funded by the Federal Insurance Contributions Act (FICA). Most of the FICA taxes you pay go to Social Security, or Old-Age, Survivors, and Disability Insurance (OASDI) Medicare Taxes-Medicareis a national health insurance program that helps pay for health care for people over 65 and for people with certain disabilities. Medicare is also funded by FICA taxes. Unemployment Taxes-Unemployment taxes are collected by both federal and state governments. Workers can collect “unemployment compensation” if they are laid off through no fault of their own and if they are actively looking for work. • Side note: Totalization agreements with the SSA exist

22. Other Taxes • Excise Taxes-- a tax on the sale or production of a good. Federal excise taxes range from gasoline to telephone services. Alcohol and cigarettes are subject to excise taxes, frequently called “sin taxes.” You can also include “gas guzzler” tax on a Viper and Luxury tax on yachts, etc (Thank goodness that one’s gone. Why?) • Estate Taxes--a tax on the estate, or total value of the money and property, of a person who has died. Estate taxes are paid before inheritors receive their share. • Gift Taxes--tax on the money/property that a person gives to another. $10,000/person per year is exempted • Tariffs--Taxes on imported goods. Usually protective. EX: Bush slapped 30% tax on imported steel to help American steelworkers. Result? Prices go up 30%. • Customs Duties—levy on goods from another country • Capital Gains--Investments taxed at different rate from income. Even home sales count as capital gains.

23. Recent Tax History • Economic Recovery Act of 1981 reduced taxes, 1986 act cut top rate to 28%. • President Bush (41) went along with a Democrat-controlled Congress and raised taxes to 31%. • Omnibus Budget Reconciliation Act of 1993 added 2 higher tax brackets, 36% and 39.6% • 1997: Taxpayer Relief Act passed by Congressional Republicans. Additional tax credits for children and educational expenses and reduced long term capital gains taxes (25%20%). No income rate reductions. • 2001--Top rate cut to 35%; • 2003- Tax on dividends and capital gains slashed to 15% (5% if you’re in the lower two brackets)

24. The Supply-Side Theory of Taxation • Supply-Side Economics (a.k.a. “Trickle down theory”) • If you cut taxes on the wealthy, they will spend and invest their additional discretionary income. • This spending picks up business, and businesses must hire new workers. • Now that these new workers have a paycheck, they spend and their purchases put businesses in a position to higher even more workers.The cycle continues indefinitely. • Revenues actually increase; people are wealthier and pay more taxes, even though the % taxed is LESS!!! • Proof: Revenues doubled in 1980s after 2 Reagan cuts • Key believers: Andrew Mellon, Ronald Reagan • Why does this make sense? Laffer Curve (see next slide)

25. The Laffer Curve

26. Proposals for Reform • Value-Added Tax: Places a tax on manufactured goods at each level of production. Simple, but potentially misleading to consumers. Used extensively in Europe. • Flat Tax: Exceedingly simple, would save time and money in collecting. It is progressive as long as there is some level of exempted income. Seen as a giveaway to the very rich, but consider trickle-down. • National Sales Tax (Consumption tax)

27. Taxation Section Review 1. Taking taxes out of an employee’s wages before he or she receives them is called (a) tax return. (b) social security. (c) FICA. (d) withholding 2. How is the federal income tax a progressive tax? (a) The higher the income a person has, the higher the percentage that person pays as tax. (b) A person with a higher income pays more money in taxes, although the percentage he or she pays as tax is less. (c) Two married people who file their taxes together will pay more taxes than a single person will. (d) Children pay no taxes, regardless of whether they earn a large income

28. State Budgets Operating Budgets • A state’s operating budget pays for day-to-day expenses. These include salaries, supplies, and maintenance of state facilities. Capital Budgets • A state’s capital budget pays for major capital, or investment, spending. Balanced budgets • Some states have laws requiring balanced budgets. These laws, however, only apply to a state’s operating budget. Budgets mean TAXATION IS PRESENT!

29. State Government Revenue Sources • Intergovernmental revenues are funds collected by one level of government and distributed to another. They make up ¼ of all state revenues and are the largest source. • Most states have sales taxes—2nd largest source. • Employee retirement contributions are the 3rd largest source of income • Individual income taxes—4th largest (depends on state) • Other sources: Interest on surpluses, fees from state-owned colleges, corporate income taxes, fees from licensing • Public lotteries are another source of funding (In Michigan, all lottery money goes to public education)

30. State and Local Taxation Limits to State Taxation • Because trade and commerce are considered national enterprises, states cannot tax imports or exports. They also cannot tax goods sent between states. Sales Taxes • Sales taxes are the main source of revenue for many states Other State Taxes • Different states have various other means to collect revenue, such as state income taxes, excise taxes, corporate income taxes, business taxes, and property taxes.

31. Property taxes are the main source of local revenue. These taxes are paid by people who own homes, apartments, buildings, or land. Michigan: Proposal A (1994) eliminated the funding of schools with property taxes Local governments sometimes collect excise, sales, and income taxes. Some taxes, such as room and occupancy taxes, are aimed at nonresidents in order for local governments to earn additional revenue. Local Government Revenue

32. What do these Monstrous Taxes Pay For? • National defense • Welfare programs • Public education (Federal prerogative?) • Interest on the national debt • Pork barrel spending

33. Ok, but where do state taxes go? • Education--State education budgets help finance public state universities and provide some aid to local governments for elementary, middle, and high schools. • Public Safety--State governments operate state police systems, as well as correctional facilities within a state. • Highways and Transportation--Building and maintaining highways is another state expense. States also pay some of the costs of waterways and airports. • Public Welfare--State funds support some public hospitals and clinics. States also help pay for and administer federal benefits programs. • Arts and Recreation--State parks and some museums and historical sites are funded by state revenues. • Administration--Like the federal government, state governments spend money just to keep running.

34. The Jobs of Local Government Public school systems Law enforcement Fire protection Public transportation Public facilities, such as libraries and hospitals Parks and recreational facilities Record keeping (birth/death certificates, wills, etc.)

35. Section Review 1. For most state governments, the main source of revenue is a (a) room tax. (b) property tax. (c) general excise tax. (d) statewide sales tax. 2. The main source of revenue for local governments is (a) a property tax. (b) an excise tax. (c) a sales tax. (d) an income tax.

36. Constitutional Rights • Found largely in the Bill of Rights • Often a battle when rights conflict • EX: Ten Commandments in Alabama

37. 1st Amendment Guarantees • Freedom of Religion—Establishment clause and Free Exercise Clause (Constitution says NOTHING about a separation of church and state, and the Ordinance of 1787 even sanctions religion!!) • Freedom of Assembly • Freedom of the Press • Right to Petition (for redress of grievances) • Freedom of Speech

38. Civil Liberties • Civil Liberties—protections against government that guarantee the safety of persons, opinions, and property from the arbitrary acts of government • Civil rights—positive acts** of government that seek to make constitutional guarantees a reality • Civil liberties are relative—you cannot infringe on the rights of others. The commitment to personal liberty stems from colonial times • Bill of Rights was the original set of civil liberties • The Bill of Rights apply only against the national government—NOT THE STATES • Sometimes rights conflict—ex. Sheppard trial

39. Freedom of Religion • Establishment Clause—Government may not establish an “official” religion. • Government, however, has undertaken a number of practices that support religion—churches tax-free, oaths include God, nat’l anthem, coins have God in them • Free Exercise Clause—Government may not place restrictions on the practice of religion (although in may inhibit certain practices)

40. Sheppard v. Maxwell (1966) • Dr. Sam Sheppard was tried for murdering his wife • Trial received extensive media coverage • Sheppard appealed; sensationalism made a fair trial impossible • Appeals court agreed; new trial granted • Gag orders now common; juries can also be sequestered

41. Role of the 9th Amendment • Ninth Amendment provides for unenumerated rights. These include: • Right of people not be tried using evidence obtained illegally • Abortion rights (?) –continually challenged

42. Who is guaranteed these rights? • Constitution covers aliens as well as citizens • At the same time, Constitution does not apply until you enter the U.S. or its territorial waters. • Article IV, Section 2, Clause 1 and the 14th Amendment contain privileges and immunities clauses

43. Korematsu v. United States (1944) • n120,000 Japanese living on U.S. Pacific coast were relocated to internment camps inland following 12/7/41. Isei and Nisei interned. • Korematsu sued to terminate policy. • Supreme court upheld the evacuation as a reasonable wartime emergency measure • This was despite the fact that the Court ruled the same day that once the loyalty of any citizen had been established, internment had to end for that citizen (Ex parte Endo) • In 1988, Congress offered an official apology and $20,000 to each internee still alive.

44. Terrorism and Civil Liberties: Provisions in the USA Patriot Act • Government may tap any telephone used by a suspect, after receiving a court order. Previously, a separate court order was required for each telephone. • Government may tap, with a court order, internet connections. • Government may seize, with a court order, voicemail. • Investigators can share information learned in grand jury proceedings. • Any non-citizen may be held as a security risk for seven days, longer if certified to be a security risk. • Federal government can track money across U.S. borders and among banks. • Statute of limitations on terrorist crimes eliminated; penalties increased. • By Executive order: A non-citizen believed to be a terrorist, or to have harbored a terrorist, will be tried by a military court. * Tried before a commission of military officers. * Two-thirds vote of the commission to find the accused guilty. * Appeal to the Secretary or Defense or the President only

45. Article III: Judicial Branch • Supreme Court and inferior courts created by Congress; life terms (in good behavior) • Federal Court jurisdiction includes federal law, treaties, Constitution • Appointed by the President with “Advice and consent” of the Senate • Supremes have original jurisdiction in cases involving ambassadors, states as parties, and in all other cases, appellate jurisdiction

46. The Appointment of Judges • Judges are appointed by the President with “advise and consent of the Senate” (Article II, S.2, C.2) • Rule of “Senatorial Courtesy”—President, before making an appointment, will confer with the two Senators from the home state, to ensure that those Senators approve of the appointment (magic “blue slip”) --NOT used w/ SC justices • Senate must approve judge, will hold hearings • Difficult to judge ideology; Presidents can and do make “mistakes” (Bush Sr. and David Souter). To avoid this, judges must pass “litmus test”—test of ideological purity • Democrats try to make sure American Bar Association plays a role, and want judges who are pro-abortion/AA • Nominee can be anyone; but usually is a legal scholar or current judge • Confirmation hearings ensue

47. The U.S. Court System • There are 2 court systems in the United States: State and Federal, State courts hear most of the cases in this country • In addition, there are civil courts and criminal courts, at both the State and Federal levels • Courts interpret legislation (Article III of Const.) • 2 Views of Constitutional language—strict constructionist (Jefferson) and loose constructionist (Hamilton)…loose constructionists are often labeled “Activist” by Republicans • Federalist 78: Judiciary “least dangerous” because it “has no influence over the sword or the purse.”

48. Government and the Economy • Commerce Clause interpretation—gradually Court has declared almost everything “interstate commerce” which makes it regulatable by Congress • Court always protected property rights • 14th Amendment also protected private/corporate property from arbitrary actions of government • Selective Incorporation of Bill of Rights • Court workload rose sharply; 800/900 unconstitutional federal laws after 1868 • Upheld injunctions to prevent labor strikes, limited antitrust law, restricted ICC (Interstate Commerce Commission) from setting railroad rates, prohibited Federal Gov’t from banning child labor; changed its mind later and allowed some state controls—antiliquor laws, wage/hour regulations

49. Government & Political Liberty • Roosevelt’s Court Packing Scheme: All started when NRA part of NIRA got tossed. (“We do our part!”) • Was Social Security Next? Roosevelt offers mandatory retirement plan for SC at age 70, or he should be allowed to appoint new justices. Claims mandate from 1936 election. Public horrified, and plan unnecessary, as Owen Roberts changed his mind on some issues • Key Point: From 1936-1974, the Supreme Court did not overturn a single federal law that was designed to regulate business, but it did shoot down 36 laws that violated personal liberties—like laws that restricted freedom of speech, revoked citizenship, or withheld mail

50. Reviving State Sovereignty • There are limits on what Congress may do, and the Sc has recognized this in recent years. • Struck down: • Federal law banning the possession of weapons near schools • Laws that gave Indian tribes right to sue states in Federal courts • Brady Bill provision requiring local law enforcement officers to do background checks