Financing Government
Chapter 16 Notes

 Taxes

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Power that was granted to Congress
“To lay and collect Taxes, Duties, Imposts and
Excises, to pay the Debts and provide for the common Defense and general Welfare of the
United States…”
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Article 1, Section 8, Clause 1

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Constitutional Limitations
 Taxes must be used for public purposes only
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Prohibition of export taxes
Can not tax goods sent out of the country
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Direct taxes must be equally apportioned, evenly distributed, among the states
Any direct tax that Congress levies must be apportioned among the States according to their populations
 Income Tax
Indirect taxes levied by the Federal Government must be set at the same rate in all parts of the country

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The Implied Limitation
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Federal Government cannot tax the States or their local governments, when those governments are performing social acts
Public Education, Furnishing Health Care,
Building Streets and Highways

 Income Tax
 Authorized by the 16th Amendment
 A flexible tax that is levied on the earnings of both individuals and corporations
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Progressive tax used today
 The higher one’s income, the higher percentage of tax one pays

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The Individual Income Tax
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The Tax is levied on each person’s taxable income one’s total income in the previous year less certain exemptions and deductions
 Deductions are things that help reduce the amount of taxes one pays
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By April 15 of every year people must file a tax return a declaration of that income and of the exemptions and deductions he or she claims
Controlled by the Internal Revenue Service (IRS)
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Most pay income taxes through withholding pay-as-you-go plan

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The Corporation Income Tax
Corporations pay a tax on its net income
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Social Insurance Taxes
Social Security Act of 1935
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Medicare
Unemployment Compensation Program
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All three are paid through payroll taxes
Tax that employees pay that are withheld from their paychecks
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They are considered regressive taxes taxes levied at a flat rate, without regard to the level of a taxpayer’s income or their ability to pay them

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Excise Taxes
Tax laid on the manufacture, sale, or consumption of goods and/or the performance of services
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Estate and Gift Taxes
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Estate Tax
A levy imposed on the assets of one who dies
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Gift Tax levy imposed on the making of a gift by a living person
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Custom Duties
A tax laid on goods brought into the United State from abroad

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Taxes can also be used to discourage or limit purchases or actions
Hunting license
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Firearm sales
Etc.

 Nontax Revenues and Borrowing

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Most Nontax Revenues comes from earnings of the Federal Reserve System, mostly in interest charges
A charge for borrowed money, generally a percentage of the amount borrowed
Also made through the minting of coins and selling of special stamps

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Congress has the power “to borrow Money on the credit of the United States” (Article 1,
Section 8, Clause 2)
Since the 1960’s, America has consistently borrowed money to pay for the annual deficit
The yearly shortfall between income and outgo
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Since 1969, there was not a surplus , except for
1998-2001
Mostly due to a robust Economy
Generally the borrowing is done by the Treasury
Department, but Congress must authorize it

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The government’s total outstanding indebtedness
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Due to the high amount borrowed, many are concerned about the weight the debt will have on future generations
In 2003, 1 in 5 every dollar went to interest on the debt
Current Debt

 Spending and the Budget

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Spending Priorities
SSA spends more money than any other
Federal Agency
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Entitlements
Benefits that federal law says must be paid to all those who meet the eligibility requirements, such as being at a certain age or income level

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Controllable and Uncontrollable Spending
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Controllable spending is any spending that
Congress and the President can make choices
Also known as Discretionary Spending
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Uncontrollable spending is any spending that is mandatory
An example would be the interest payments
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Also, Social Security Benefits, Food Stamps, and other entitlement programs
 Nearly 80% of spending is considered uncontrollable

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Congress controls the purse strings, however the President initiates the spending process by submitting a budget at the beginning of each congressional session
It is a major political statement; a declaration of the public policies of the United States in financial terms
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The President and the Budget
All agencies submit their proposals to the OMB (Office of Management and Budget), who determines whether they will be a part of the budget document

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Congress and the Budget
CBO (Congressional Budget Office) in both houses reviews the budget proposed by the
OMB
Congress tries to pass the appropriations (Bills) by October 1 (Beginning of next Fiscal year)
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Continuing Resolution measure allows the affected agencies to continue to function on the basis of the previous year’s appropriations