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Raising Money: Taxes, Budgeting, and Managing the Economy

This chapter explores the various methods used by the government to raise money, including taxes and borrowing. It also discusses the roles of the executive and legislative branches in budget preparation and the influence of fiscal and monetary policies on the economy.

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Raising Money: Taxes, Budgeting, and Managing the Economy

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  1. Splash Screen

  2. Chapter Focus Section 1 Raising Money Section 2 Preparing the Federal Budget Section 3 Managing the Economy Chapter Assessment Contents

  3. Why It’s Important

  4. Chapter Objectives • Raising Money Identify the kinds of taxes and the methods of borrowing the government uses to raise money. • Preparing the Federal Budget Describe the roles of the executive and legislative branches in the preparation of the federal budget. • Managing the Economy Explain the influence of fiscal and monetary policies on the economy. Chapter Objectives

  5. End of Chapter Focus

  6. Raising Money • Key Terms • taxes, taxable income, dependent, withholding, securities, national debt • Find Out • • How does the income tax compare with other sources of federal revenue in terms of the amount collected? • • How does the federal government use tax laws to affect economic decisions? Section 1 Introduction-1

  7. Raising Money • Understanding Concepts • Civic ParticipationHow are income taxes collected from citizens of the United States? • Section Objective • Identify the kinds of taxes and the methods of borrowing the government uses to raise money. Section 1 Introduction-2

  8. Representative Dick Armey (R-Texas) keeps his constituents informed on issues through his Web page. Among other things, the page features a daily update of the amount of the national debt. On October 15, 2000, the debt equaled $5,653,997,843,075.88. To pay off the debt, each American would have to contribute $21,152.21.The interest on the national debt is one of the largest expenses of the federal government. Section 1-1

  9. I. Taxes as a Source of Revenue (pages 555–558) • A. Individual income taxes are the government’s largest source of revenue. • 1) The income tax is progressive, that is, it is based on ability to pay. • 2) April 15 each year is the deadline for filing income tax returns. • 3) The Internal Revenue Service (IRS) collects taxes during the year through its regional centers. • B. Corporations, too, pay income taxes on income they earn beyond expenses and deductions. Section 1-2

  10. I. Taxes as a Source of Revenue (pages 555–558) • C. The federal government collects social insurance taxes paid equally by employees and employers to pay for Social Security and Medicare. • D. Excise taxes are federal taxes on the manufacture, transportation, sale, and consumption of goods like gasoline, tires, oil, liquor, and cigarettes, and the performance of services. • E. Customs duties are levied on goods imported into the United States. • F. The federal government collects an estate tax on the property and money above a set amount when someone dies. Section 1-3

  11. I. Taxes as a Source of Revenue (pages 555–558) Section 1-4

  12. I. Taxes as a Source of Revenue (pages 555–558) Do you agree or disagree with the policy that exempts colleges, labor unions, churches, and other nonprofit groups from paying income taxes? Explain. Students should weigh the value of nonprofit organizations against loss of revenue. Section 1-5

  13. II. Taxes and the Economy (pages 558–559) • A. U.S. tax laws are complex and filled with special provisions. • B. Tax exemptions, or loopholes, favor certain groups and encourage activities such as oil exploration. • C. The Tax Reform Act of 1986 reduced many tax exemptions, tax credits, and tax shelters, and the number of tax brackets. • D. The federal government today provides tax credits to people in lower income brackets. Section 1-6

  14. II. Taxes and the Economy (pages 558–559) What are some benefits and losses associated with the tax credits policy for people with lower incomes? Answers will vary. Tax credits are a way of shifting the tax burden to those most able to pay. Section 1-7

  15. III. Borrowing for Revenue (page 559) • A. In addition to collecting taxes, the federal government borrows to raise money by selling federal securities, such as bonds, notes, and certificates, on which it pays interest. • B. The accumulated moneys the government borrows is the national debt. Section 1-8

  16. III. Borrowing for Revenue (page 559) Why does the federal government sell securities to individuals, corporations, and other institutions, and how does this affect the national debt? The government sells securities to raise revenues. This is a form of borrowing that adds to the national debt. Section 1-9

  17. Checking for Understanding • 1. Main Idea Use a graphic organizer like the one below to show the steps in collecting federal income tax. • Employers withhold estimated taxes from workers’ pay and send the money to the IRS; self-employed people pay an estimated tax 4 times per year; by April 15 the following year, each taxpayer must file a return and send any amount still owed. Section 1 Assessment-1

  18. Checking for Understanding • A. one who depends primarily on another person for basic needs • B. financial instruments that are sold as a means of borrowing money with a promise to repay the buyer with interest after a specific time period • C. the total income of an individual minus certain deductions and personal exemptions • D. the money an employer withholds from workers’ wages as payment of anticipated income tax • E. the total amount of money the government owes at any given time • F. money that people and businesses pay to support the activities of the government Match the term with the correct definition. • ___ taxes • ___ taxable income • ___ dependent • ___ withholding • ___ securities • ___ national debt • F • C • A • D • B • E Section 1 Assessment-2

  19. Checking for Understanding • 3. Identify progressive tax, IRS, social insurance taxes, regressive tax, tax loophole. • A progressive tax is a tax based on a taxpayer’s ability to pay.The IRS, or Internal Revenue Service, is the bureau of the United States Treasury Department responsible for collecting taxes.Social insurance taxes are taxes collected to pay for major social programs such as Social Security, Medicare, and unemployment compensation.A regressive tax is a tax in which people with lower incomes pay a larger portion of their income.A tax loophole is an exemption from taxes. Section 1 Assessment-3

  20. Checking for Understanding • 4. What is the federal government’s biggest single source of tax revenue? • The federal government’s biggest single source of tax revenue is the individual income tax. Section 1 Assessment-4

  21. Critical Thinking • 5. Identifying Alternatives Why does the government raise most of its revenues through taxing rather than borrowing? • Although taxes are unpopular, borrowing costs the government a huge amount of interest, adds to the national debt, and threatens the nation’s economic security. Section 1 Assessment-5

  22. Civic Participation Obtain a paycheck stub—yours or a family member’s. Note the categories and amounts of money deducted for city and state taxes, FICA, and Social Security. Create a graph that shows the percentage of the earned wages deducted in each category. Section 1 Concepts in Action

  23. End of Section 1

  24. Preparing the Federal Budget • Key Terms • fiscal year, uncontrollables, entitlement, incrementalism • Find Out • • How do the executive and legislative branches work together to produce an annual budget for the federal government? • • Why is it so difficult for the federal government to reduce spending or raise taxes in order to balance the budget? Section 2 Introduction-1

  25. Preparing the Federal Budget • Understanding Concepts • Public PolicyWhat factors prevent the budget from changing very much from year to year? • Section Objective • Describe the roles of the executive and legislative branches in the preparation of the federal budget. Section 2 Introduction-2

  26. In August 1997, Congress and the president agreed to enact a balanced federal budget for the first time in 30 years. In reaching this historic agreement, President Clinton and the Republican-controlled Congress cut individual income taxes by $94 billion and pledged to reduce the federal deficit by $182 billion over the next 5 years. Section 2-1

  27. I. Drawing Up the President’s Budget (pages 560–562) • A. Since 1921 the president has been responsible for preparing the budget. • B. The Office of Management and Budget (OMB) collects spending requests from each federal agency and analyzes the nation’s economic situation. The president, the OMB director, the secretary of the treasury, and the president’s Council of Economic Advisors (CEA) discuss how the proposed budget may affect the administration’s general policies and goals. Section 2-2

  28. I. Drawing Up the President’s Budget (pages 560–562) • C. The White House returns guidelines to the federal agencies to help them prepare their final budgets. • D. Before the final budget is presented to Congress, the OMB submits a complete budget to the president for final review and approval. • E. About 70 percent of spending in the federal budget is uncontrollables, or expenditures required by law or resulting from previous commitments, such as Social Security, government pensions, Medicare, veterans’ benefits and interest on the national debt. Section 2-3

  29. I. Drawing Up the President’s Budget (pages 560–562) Section 2-4

  30. I. Drawing Up the President’s Budget (pages 560–562) How do the OMB, the CEA, and the Department of the Treasury work with the president in preparing the federal budget each year? OMB: Gives first set of figures to the president. CEA and Treasury: Make decisions on the effect of budget decisions on policy goals. Section 2-5

  31. II. Congressional Budget Action (pages 562–564) • A. The Constitution requires that Congress approve all federal spending; only Congress has the power to raise revenue and pass appropriations. • B. Congress can revise the president’s budget, and key lawmakers must often negotiate with the president about budget proposals. Section 2-6

  32. II. Congressional Budget Action (pages 562–564) • C. The Congressional Budget Act of 1974 set up House and Senate Budget Committees and the Congressional Budget Office (CBO) to centralize and evaluate the federal budget for Congress. • D. The Gramm-Rudman-Hollings Act of 1985 aimed to force the president and Congress to work together to reduce the huge federal budget deficits. Section 2-7

  33. II. Congressional Budget Action (pages 562–564) • E. Congress 1) reviews the president’s budget proposals, 2) reconciles differences between the House and Senate taxing and spending plans, and 3) carries out the procedures in the Gramm-Rudman-Hollings Act. • F. The Budgetary Enforcement Act (BEA) of 1990 divided the budget into domestic policy, defense, and international affairs, and said any spending that exceeded the budgeted limit in any area would come out in the next year’s funding for that area. Section 2-8

  34. II. Congressional Budget Action (pages 562–564) In what ways are the conflicts over the budget between the president and Congress beneficial and troublesome for taxpayers? Beneficial: Negotiated budget is more carefully planned. Troublesome: Impasse can delay programs or shut down government. Section 2-9

  35. III. Incremental Budget Making (page 564) • A. The federal budget-making process is based on incrementalism. • B. Incrementalism means that federal agencies usually can assume they will get at least the same amount of money they received in the previous year. Section 2-10

  36. III. Incremental Budget Making (page 564) For which federal agencies would you like to see the budget increased or decreased? Explain. Answers will vary. Students may list budget priorities. They should support their choices with logical reasons. Section 2-11

  37. Checking for Understanding • 1. Main Idea Use a graphic organizer like the one below to show how the budget process is affected if Congress and the president are from different political parties. • Cause—president and Congress are from different parties; Effect—budget is slowed due to the need for compromise Section 2 Assessment-1

  38. Checking for Understanding • 2. Define fiscal year, uncontrollables, entitlement, incrementalism. • A fiscal year is a 12-month accounting period. • Uncontrollables are government expenditures required by law or resulting from previous budgetary commitments. • An entitlement is a required government expenditure that continues from one year to the next. • Incrementalism is the term used to explain that the total budget changes little from year to year. Section 2 Assessment-2

  39. Checking for Understanding • 3. Identify Office of Management and Budget, Congressional Budget Office. • The Office of Management and Budget, or OMB, is responsible for the actual day-to-day preparation of the federal budget. • The Congressional Budget Office, or CBO, is responsible for carefully evaluating the overall federal budget for Congress and acting as a counterbalance to the OMB in the executive branch. Section 2 Assessment-3

  40. Checking for Understanding • 4. Identify four entitlements that are a part of the federal budget. • Any four: Social Security, pensions for retired government employees, Medicare, Medicaid, veterans’ benefits Section 2 Assessment-4

  41. Critical Thinking • 5. Expressing Problems Clearly Why does the federal government find it difficult to raise taxes or reduce spending to balance the budget? • People do not want to pay more taxes, and the budget contains about 70 percent uncontrollables or entitlements. Section 2 Assessment-5

  42. Public Policy Imagine that you are a part of a presidential committee set up to decide the spending priorities for next year’s government budget. Your job is to list the four top areas that you think should have the greatest share of the budget. Prepare a supporting argument for the four areas you have chosen. Section 2 Concepts in Action

  43. End of Section 2

  44. Managing the Economy • Key Terms • fiscal policy, monetary policy, gross national product (GNP), discount rate, reserve requirement, open-market operations • Find Out • • What is the difference between fiscal policy and monetary policy? • • What are the four major categories of federal government spending? Section 3 Introduction-1

  45. Managing the Economy • Understanding Concepts • Public Policy Why must the Fed operate free of pressures from Congress or the president? • Section Objective • Explain the influence of fiscal and monetary policies on the economy. Section 3 Introduction-2

  46. The Federal Reserve Board (the Fed) plays a key role in the nation’s economy. The Fed determines the interest rates member banks pay to borrow money. When the chairman of the Fed’s Board of Governors testifies before a congressional committee, the stock market sometimes overreacts. On October 27, 1997, not long after Chairman Alan Greenspan suggested that stock prices might be getting too high, the stock market plunged more than 554 points. Even though the market soon recovered this loss, the experience revealed how closely investors pay attention to the words and actions of the Fed. Section 3-1

  47. I. Where the Money Goes (pages 566–567) • A. Most of the federal government’s annual $2 trillion in spending goes to direct benefits for individuals, national defense, discretionary spending, and interest on the national debt. • B. Spending for Social Security, social-welfare, and health-care programs is one of the biggest items in the federal budget. • C. Spending for defense has increased since 2000 after decreasing during the 1990s. • D. Federal grants to state and local governments help to pay for public housing, road repairs, school lunch programs, flood insurance, and other services. Section 3-2

  48. I. Where the Money Goes (pages 566–567) Section 3-3

  49. I. Where the Money Goes (pages 566–567) Why do you think spending for national defense declined following the end of the Cold War? National security needs were changing as the major threat to national security was gone. Section 3-4

  50. II. Fiscal and Monetary Policy (pages 567–568) • A. Beginning with the Great Depression of the 1930s, the federal government’s role in managing the nation’s economy has expanded. • B. The federal government influences the direction of the nation’s economy by its fiscal policy. • C. The government also uses monetary policy to influence the direction of the economy. Section 3-5

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