The Congress, the President, and the Budget: The Politics of Taxing and Spending

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The Congress, the President, and the Budget The
Politics of Taxing and Spending
Government in America People, Politics, and
Policy Thirteenth Edition, and Texas
Edition Edwards/Wattenberg/Lineberry

• Chapter 14

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Introduction

• Two central questions Who bears the burden of
  paying for government? Who receives the
  benefits?
• Remember Big budget big government
• Budget
• A policy document allocating burdens (taxes or
  revenues) and benefits (expenditures)
• Deficit
• An excess of federal expenditures over federal
  revenues
• Expenditures
• What the government spends money on
• Revenues
• Sources of money for the government

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Sources of Federal Revenue

• Income Tax
• Shares of individual wages and corporate revenues
  collected by the government
• The 16th Amendment permitted Congress to levy an
  income tax. This tax is collected by the IRS
  (Internal Revenue Service). They receive over
  130 million individual tax returns each year.
• Individual taxes are the largest single revenue
  source for the government. In 2005, corporate
  taxes made up 13 cents of every federal revenue
  dollar, and individual income taxes made up 43
  cents.
• Income tax is progressive Those with more income
  pay higher rates of tax on their income. Some
  argue in favor of a flat tax

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Sources of Federal Revenue

• Social Insurance Taxes-
• Additional taxes for specific funds Social
  Security and Medicare. Taken from employees pay
  checks and matched by employers. They are
  earmarked for the Social Security Trust Fund

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Sources of Federal Revenue

• Borrowing
• The Treasury Department sells bondsthis is how
  the government borrows money. Individuals,
  corporations, mutual finds, financial
  institutions, and even foreign countries can buy
  these bonds.
• The federal debt is the sum of all the borrowed
  money that is still outstanding. It currently
  amounts to more than 9 trillion. 9 of federal
  expenditures go to pay the interest on this debt.
  This is not optional. Foreign investors hold 1/5
  of the national debt.
• The government competes with other borrowers.
  They are a lower risk for banks than you and I
  are.

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Sources of Federal Revenue
Federal Debt all money borrowed over the years
and still outstanding
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Sources of Federal Revenue

• Taxes and Public Policy
• Tax Loopholes tax breaks or benefits for a few
  people
• Tax Expenditures revenue losses that result from
  special exemptions, exclusions, or deductions on
  federal tax law. Its the difference between
  what the government collects in taxes and what
  they could have collected without these
  exemptions
• Examples charitable donations, mortgage
  interest deduction
• They generally benefit middle and upper class
• Tax Reduction the general call to lower taxes
• Tax Reform rewriting the tax laws to change the
  rates and who pays them
• Tax Reform Act of 1986extensive tax reform that
  reduced the value of many tax deductions, removed
  many low income people from the tax rolls,
  reduced the number of tax brackets

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Sources of Federal Revenue
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Federal Expenditures
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Federal Expenditures

• The policies and programs the government spends
  money on change over time
• Expenditures keep rising
• Big Governments, Big Budgets
• A big government requires lots of money.
• As the size of government increases, so does its
  budget.
• The government grows because of the publics
  demand for more services.

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Federal Expenditures

• The Rise and Decline of the National Security
  State
• In the 1950s and 1960s the Department of Defense
  received more than half the federal budget.
• Eisenhower military industrial complex
• Defense now constitutes about one-fifth of all
  federal expenditures.
• Mid-1960s to early 1980s social welfare
  spending doubled
• Reagan expansion of military budget, happened
  again under GW Bush after 9/11, war in Iraq
• Much of the defense budget goes to pensions and
  payroll for the more than 7 million active,
  reserve, disabled and retired members of the
  military

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Federal Expenditures
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Federal Expenditures

• The Rise of the Social Service State
• The biggest part of federal spending is now for
  income security programs giving aid to the
  elderly, the poor and needy.
• Social Security is largest program, designed to
  insure that the elderly a minimum level of
  sustenance.
• Social Security has been expanded since 1935 to
  include disability benefits and Medicare (added
  in 1965 under Johnson)
• Medicare provides hospitalization and
  prescription drug benefits to the elderly.
• These benefit programs face financial problems
  with more recipients living longer.
• 1999 President Clinton proposed allocating the
  budget surplus to Social Security. It didnt
  happen. Bush didnt fix it either. By 2018
  costs will exceed income from tax collection.

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Federal Expenditures

• Social Security and Medicare account for more
  than 1/3 of the federal budget
• Liberals and Conservatives disagree on social
  services/ welfare spending

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Federal Expenditures

• Incrementalism
• The idea that last years budget is the best
  predictor of this years budget, plus some.
• Agencies can safely assume they will get at least
  what they got last year.
• Focus debate on the increase over last year
• Budgets tend to go up a little each year.
• Incrementalism does not describe ALL budgetary
  politics
• Groups and their various interests make it very
  hard to pare the budget

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Federal Expenditures

• Uncontrollable Expenditures
• About 2/3 of the federal budget is made up of
  uncontrollable expenditures
• Spending determined by the number of recipients,
  not a fixed dollar figure
• Mainly entitlement programs where the government
  pays known benefits to an unknown number of
  recipients
• Social Security (including Medicare) cost almost
  1 trillion in 2007
• The interest on the debt is also uncontrollable
• The only way to control the expenditures is to
  change the rules. Congress can cut Social
  Security benefits or tighten eligibility
  requirements, so why dont they?

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The Budgetary Process

• Budgetary Politics
• Stakes and Strategies
• All political actors have a stake in the budget.
• Try and tie their budget needs to national or
  political needs
• The Players
• Lots of players, with the president and Congress
  playing important roles
• Almost all committees are involved in the budget.

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The Players, continued

• Interest groups
• Agencies
• OMB major role
• President makes final decision on what gets
  proposed to Congress
• Tax Committees in Congress House (Ways and
  Means) Senate (Finance)
• Budget Committees
• Subject Matter Committees new lawsnew
  expenditures
• Appropriations Committees both houses
• Congress approve taxes and appropriations
• GAO Audit and monitor agencies to see what
  happens to the budget money

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The Budgetary Process

• The Presidents Budget
• Presidents originally played a limited role in
  the budget.
• Now budget requests are directed through the OMB
  and president before going to Congress.
• The budget process is time consumingstarting
  nearly a year in advance.
• The OMB, the president, and the agencies
  negotiate budget requests.

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The Budgetary Process
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The Budgetary Process

• Congress and the Budget
• Congress must authorize ALL federal
  appropriations (The power of the purse)
• Reforming the Process
• The Congressional Budget and Impoundment Control
  Act of 1974 an act designed to reform the
  congressional budgetary process
• It established the following
• Fixed budget calendar
• A budget committee in each House
• The CBO, which advises Congress on the probable
  consequences of its decisions, forecasts
  revenues, and is counterweight to OMB

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The Budgetary Process

• Congress and the Budget
• Reforming the Process (continued)
• Budget to be considered as a whole
• A budget resolution binds Congress to a bottom
  line for the budget before Congress considers
  appropriations.
• The current budget is then reconciledprogram
  authorizations are revised to achieve required
  savings
• The new budget is authorized and appropriated.
• Authorization bill establishes a discretionary
  government program set goals and maximum
  expenditures
• Appropriations bill funds programs within limits
  established by authorization bills

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The Budgetary Process
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The Budgetary Process

• Congress and the Budget
• The Success of the 1974 Reforms
• Between 1974 and 1998, every budget was a deficit
  budget.
• Congress misses most of its own deadlines.
• Congress passes continuing resolutions to keep
  the government going until it passes a budget.
  These are passed when Congress cant agree and
  pass appropriations bills. They are passed to
  allow agencies to spend at the previous years
  level.
• Omnibus budget bills often contain policies that
  cannot pass on their own. They lump a bunch of
  appropriations bills together. It forces the
  President to either accept the unwanted
  provisions or veto the entire funding.

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The Budgetary Process
Annual Federal Deficits (Figure 14.6)
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The Budgetary Process

• Congress and the Budget
• More Reforms
• Congress passed bills to try and control the
  deficits.
• By 1990, Congress focused on increases in
  spending.
• Both parties claimed victory for the budget
  surpluses that began in 1997.
• Economic downturn, income tax cuts, and increased
  military expenditures brought a return to
  deficits by 2001.

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More reforms

• Reagan passed budgets with HUGE deficits
• Congress passed Gramm-Rudman-Hollings Act it
  mandated maximum allowable deficits and said by
  1993 the budget would be balanced. It was all
  abandoned by 1990.
• There has been a shift from controlling the size
  of the deficit to controlling spending increases
• Discretionary spending 3 categories domestic,
  defense and international. Increases in one
  means decreases in another

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Understanding Budgeting

• Democracy and Budgeting
• Many politicians spend money to buy votes.
• With many groups and people asking for government
  assistance, the budgets get bigger.
• Some politicians compete by trying not to spend
  money.
• People like government programs, but they really
  do not want to pay for them, thus there are
  deficits and federal debt.

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Understanding Budgeting

• The Budget and the Scope of Government
• In sum, the budget represents the scope of
  government.
• The bigger the government, the bigger the budget
• Limits on funding (taxes) can limit what the
  government can do.

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Summary

• Federal budget consumes one-fifth of GDP
• Government growth has meant higher taxes to pay
  for additional services, often through deficit
  spending.
• The budgetary process is complex.
• The budget is used, some argue, to buy votes,
  leading to an ever larger government.