THE BUDGET MAKING PROCESS

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THE BUDGET MAKING PROCESS

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

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The Federal Budget

• THE PROCESS
• The President advises, Congress delegates.
• 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.

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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 higherits a surplus (it
  did happen in 99!)
• If expenses are higher. . .its a deficit which
  is then added to the national debt and you get a
  shortfall in the trillions and it takes far too
  much of the current budget just to pay interest
  on the debt!

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Obama's 1st Term
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GOVERNMENTS SOURCES OF REVENUE

• THREE MAJOR SOURCES
• Personal corporate income tax
• Social insurance taxes
• Borrowing (Bonds)

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INCOME TAXES

• Began in Civil Warbut 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

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Married Taxpayers Filing Jointly
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Individual Taxpayers
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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

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SOCIAL INSURANCE TAXES

• Paid by both Employers and Employees
• For example social security each pays in 4.2
  now
• 36 of todays 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
  they are an uncontrollable expenditure

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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

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Regans 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 Ive 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, youd be a millionaire. A trillion dollars
  would be a stack of thousand-dollar bills 67
  miles high.

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LOST INCOME FED TAX LOOPHOLES

• Loophole is a tax break or tax benefit to the
  individual it is lost income to federal govt
• TAX EXPENDITURES loopholes, deductions,
  exemptions
• The difference between what the govt 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 dont buy homes, etc.

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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 STATE has caused
  much of the growth

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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

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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

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INCREMENTALISM UNCONTROLLABLE EXPENDITURES

• INCREMENTALISM prevails in budget making
• Increase last years budget by an increment to
  satisfy this years 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?

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The Budgetary Process

• POWER OF THE PURSE belongs to Congress!
• House Ways Means Committee deals with taxing
  aspects House Budget Committee Senate Budget
  Committe
• 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)
• Ps Budgetary Arm
• Supervises preparation of the federal budget and
  advises the P on budgetary matters

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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 Ps 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

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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 cant go
  higher, but can give lower amounts.
• Huge numbers in budget for ex., in 2011 Obamas
  budget called for 3.83 trillion in spending
• 2013 budget - 3.7 trillion but revenues only
  2.56 trillion so..deficit

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• 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
  govt going.
• Do the same thing as last year with same amount
  of

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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