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Sources of Federal Revenue. Luke He, Janet Mao, Niki Phung , Akhil Anil. Basic Vocabulary. Budget : a policy document allocating burdens (taxes) and benefits (expenditures) Deficit : an excess of federal expenditures over federal revenues

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Sources of Federal Revenue

Luke He, Janet Mao, NikiPhung, Akhil Anil

Basic Vocabulary

  • Budget: a policy document allocating burdens (taxes) and benefits (expenditures)

  • Deficit: an excess of federal expenditures over federal revenues

  • Expenditures: federal spending of revenues-Major areas of such spending are social services and the military.

  • Revenues: the financial resources of the federal government-Major sources of revenue are the individual income tax and the Social Security Tax.

Income tax
Income Tax

  • Every American taxpayer is familiar with the April 15th income tax fury.

  • Income tax: Shares of individual wages and corporate revenues collected by the government.

Income tax cont
Income Tax (cont.)

  • History:

    -1895: ruled unconstitutional in Pollock v. Famer’s Loan and Trust Co. by the Supreme Court.

    -1913: Congress added the Sixteenth Amendment: explicitly permitted Congress to levy an income tax.

  • Internal Revenue Service (IRS): the office established to collect federal income taxes, investigate violations of the tax laws, and prosecute tax criminals.

Income tax cont1
Income Tax (cont.)

  • “Progressive” tax: theory that individuals with more taxable income pay more taxes at a higher rate.

    -endorsed by Obama: cut 95% of income taxes for middle class families, plans to raise income taxes for higher-paid families

  • “Flat” tax: theory that everyone is taxed at the same rate.

    -endorsed by Romney: plans on 20% individual, 25% corporation

  • Abandon income tax: theory that income tax should be abandoned and replaced by a national sales tax.

Social Insurance Taxes

  • Taxes paid by employers and employees to the Social Security Trust Fund (pays benefits to the elderly, disabled, widowed, and unemployed)


  • Federal Debt:All the money borrowed by the federal government over the years and still outstanding. Today the federal debt is $15,628,156,148,768.98 and constantly increasing.

  • TheTreasury Department sells bonds that can be bought by citizens, corporations mutual funds, and other financial institutes

Borrowing Cont.

  • Large deficits make the government dependent upon foreign investors.

  • Politicians believe that because families and businesses can balance their budget, the government should be also be able to do the same.

Even More Borrowing

  • 9%of federal expenditures are used towards paying interest towards this debt rather than using it for current policies.

  • Mostof the government borrowing is not for capital needs but for its day-to-day expenses.

  • With the increasing national debt, it is more difficult for businesses to capital expenditures, therefore there is less economic growth, which increases interest rates, which increases cost towards home financing and credit card purchases.

Taxes and Public Policy

  • The government can use taxes to make citizens’ incomes more nearly or less nearly equal, encourage or discourage growth in the economy and to promote specific interests.

  • Various different tax policies:

    • Tax loopholes

    • Tax expenditures

    • Tax Reductions

Tax Loopholes.

  • A tax loopholeis presumably a tax break or tax benefit.

  • The IRS Code contains many legal exemptions, deductions, and special cases.

  • Cost fairly little to the Treasury because they apply to only a few people.

  • Jimmy Carter called the American tax system “a national disgrace” because of its special treatment of favored taxpayers.

Tax Expenditures.

  • Tax expenditures: Revenue losses that result from special exemptions, exclusions, or deductions on federal tax law.

  • Tax expenditures amount to subsidies for different activities

  • For example, the government could send checks for billions of dollars to charities, but instead, it permits some taxpayers to deduct contributions to charities from their income.

  • Tax expenditures are among the most obscure aspects of the budget because they receive no regular review by Congress.

  • Tax expenditures benefit middle- and upper-class income taxpayers more.

Tax Reform.

  • Complaints about taxes in America have been as old as the Boston Tea Party.

  • President Reagan’s tax simplification plan in 1985 met howls of protests.

  • The Tax Reform Act of 1986 is one of the most sweeping alternations in federal tax policy history.

  • It eliminated or reduced the value of many tax deductions, removed several million low-income individuals from tax rolls, and greatly reduced the number of tax brackets (categories of income that are taxed at different rates)

Federal expenditures

Federal Expenditures

Rachel Kim, Nathalie Murphy, Susan Yoon

The increase of federal spending
The Increase of Federal Spending

  • Budgets are so large because big budgets are necessary for large governments such as ours.

  • The government has been getting bigger because of citizens’ needs for more public services.

Military spending
Military Spending

  • Ever since the Cold War, the US has established a permanent military and increased the cost of government.

  • Military industrial complex: coined by President Eisenhower, the term characterized the relationship between the military and the defense industry that supplied the military’s equipment needs.

  • Underestimations of cost are very common.

  • Now, the budget of the Department of Defense constitutes about 1/5 of the federal budget.

Income security
Income Security

  • Most of the federal budget was allotted to defense, but now it goes to income security.

  • income security – aid to the elderly, poor, and needy

I need help! I’ve fallen, and I can’t get up!

Social security act
Social Security Act

  • During Franklin D. Roosevelt’s presidency, Congress passed the Social Security Act

  • It was intended to provide minimal sustenance to the elderly

    • Save them from poverty

  • The first Social Security check was for $22.54

    • Now about 45 million people receive Social Security checks for $922

Disability insurance and medicare
Disability Insurance and Medicare

  • In 1950, disability insurance was added to the Social Security program.

  • Medicare, the program that provides hospital and physician coverage to the elderly, was added to the Social Security program in 1965.

Intergenerational contract
Intergenerational Contract

  • Social Security is not an insurance program; it is an intergenerational contract.

    • Social Security takes money from the working members of society and gives it to the retired people.

Social security has increased
Social Security has Increased

  • In 1940, a 3% payroll tax supported Social Security.

  • In 1990, the tax was over 15%.

Social security has increased continued
Social Security has Increased (continued)

  • In 1945, 50 workers supported one beneficiary.

  • In 1990, 3 workers supported one beneficiary.

  • In 2025, only 2 workers will be supporting one beneficiary.

Attempts to fix social security
Attempts to Fix Social Security

  • Congress raised taxes.

    • The goal was to take in more money than they spent, so they would create a surplus.

  • Presidents Clinton and Bush both wanted to invest the surplus in the Stock Market, but the American people did not approve.

Social security will continue to grow
Social Security will Continue to Grow

  • In 2018, Social Security is expected to spend more than it takes in.

  • Social Security is the largest government program.

    • Social Security and Medicare take up 1/3 of the federal budget.

  • Other government programs have grown also.


  • Incrementalism: belief that best predictor of this year’s budget is last year’s budget, plus a little bit more(increment).

    Lead to:

    -little attention on the base(amounts of money agencies had before)

    -agencies assume that they will have at least what they had before

    - a lot of attention on propose increments

    -budget tends to grow each year

  • Budget constantly grows

Incrementalism continued

  • Mandated expenditures: by law and obligated

    -steady increase

    (ex) Social Security

  • NASA’s budget=can be changed easily each year

  • Budget reform=never-ending

  • “most deserving”programs=supported

  • “wasteful”=cut

Incrementalism continued1

  • Interest group has a lot of influence


  • Budget is too big

    -so it’s hard to go over in detail annually

  • Check on incrementalism=has failed led to “uncontrollable spending”

Uncontrollable expenditures
Uncontrollable Expenditures

  • Not reauthorized every year

  • Congress has constitutional authority to appropriate $ to agencies

  • Reagan, Bush, Clinton=proposed gov. spending cuts

  • “allowance theory”




  • Uncontrollable expenditures: determined not by fixed amount of $ appropriated by Congress but by how many eligible beneficiaries there are for a program or by previous obligations of government.

    -takes up 2/3 of budget

    (ex) pensions, interest on debt

  • Entitlements: policies for which Congress has obligated itself to pay X level of benefits to Y number of recipients

    (ex) Social Security benefits, agricultural subsidies, veterans’ aid


  • Social Security& Medicare=biggest uncontrollable expenditures

    -spend $800 billion per year

  • Eligible individual automatically receives the benefits

  • Gov. can cut benefits or tighten eligibility restriction