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Government Finance. Chapter 25 Notes. Chapter 25 Notes. The federal budget, created by the president and Congress, is the government’s plan for raising and spending money
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Government Finance Chapter 25 Notes
Chapter 25 Notes • The federal budget, created by the president and Congress, is the government’s plan for raising and spending money • Each year the president and Congress work together to create a budget that lasts one fiscal year from October 1st to September 30th the next year • The budget process begins when the president sends a proposed budget message to Congress the first Monday in February • Congress then passes a budget resolution that states revenues and spending for the year and sets targets for how much will be spent in various categories
Chapter 25 Notes • There are two types of spending: • Mandatory – spending that does not require annual approval • Example: social security benefit checks • Discretionary – spending that must be approved each year • Example: highway construction • Congress then passes an appropriations bill, which approves spending for a specific activity • Appropriation bills always begin in the House and then move to the Senate. Once both chambers approve the bill, it goes to the president to sign into law or to be vetoed
Chapter 25 Notes • The federal budget has two main parts: revenues and expenditures • About half of the government’s revenue comes from individual income taxes • Workers must file a tax return each year reporting their income and tax owed • About a third of the government’s revenue comes from payroll taxes, which fund Social Security (retired or disabled) and Medicare (elderly) • About 10% of government revenue comes from taxes on corporate profits • The government receives revenue from other sources such as excise taxes (gas, tobacco, phones), estate taxes (inheritance), personal gifts, government fees
Chapter 25 Notes • There are several types of taxation based on how the tax effects those who are taxed • Progressive tax – the tax rate increases as income increases • Example: income tax • Regressive tax – the tax rate decrease as income increases • Example: gas tax – tax rate is the same, but takes higher proportion of annual income for lower vs. higher income • Proportional tax – the tax rate is the same regardless of income amount • Example: tax rate = 10%, income $50,000 (tax = $5,000), income $500,000 (tax = $50,000)
Chapter 25 Notes • Federal expenditures are programs where the federal government spend its money • The largest expenditure is Social Security. This expense will continue to increase as the baby-boomer generation retires over the next couple decades. • This is a serious problem as there will be more people receiving Social Security benefits than paying into the program • Medicare is another program for the elderly that will also continue to increase in expense as baby-boomers retire • National defense is the second largest federal expenditure. Spending for national defense has increased since 9/11 to fight the war of terrorism and the war in Iraq • Another portion of federal expenditures goes towards paying interest on the loans the government has borrowed • The federal government also spends money on retirement and healthcare benefits for federal employees, Medicaid, research, education, infrastructure, natural resources, etc…
Chapter 25 Notes • The federal budget has changed over time as the government has taken on new roles and functions expenditures have increased • Traditionally, the president has played a minor role in drafting a budget, but this changed in the early 20th century. The president is now required to propose a budget to Congress for the entire federal government each fiscal year
Chapter 25 Notes • State and local governments have their own revenue sources and expenditures • The most important source of revenue for state governments are intergovernmental revenues, which are monies received from other levels of government. For states, most of this revenue comes from the federal government • State sales taxes are the next important source of revenue. Sales taxes are levied on all types of consumer products and vary from state to state. The tax is a percentage of the purchase price and some products may be taxed while others may not • Current sales tax rates range from 0-8.25%, but local taxes can increase the state tax from 0-11.5% • NC current sales tax rate is 4.75% + applicable local sales tax
Chapter 25 Notes • The third source of state revenues is contributions from the state and state employees that go towards state employee retirement plans • The fourth major source of state revenue comes from state income taxes. These taxes vary state to state. Some states have no income tax, while others have a proportional tax or progressive tax • State income tax ranges from 0-11% • NC currently has an income tax rate of 6-7.75%
Chapter 25 Notes • Local governments receive some of their revenue from the same sources as state governments • Intergovernmental revenue is the most important source, and comes primarily from state governments • The second largest source of revenue comes from property taxes, which are levied against landand houses. Property taxes can be levied on real or personal property • Real property includes land and buildings • Personal property includes objects that are portable: cars, furniture, stocks, bonds, etc… • Most local governments only tax real property • Other sources of revenue include sales taxes, utility taxes, income taxes, fines/fees
Chapter 25 Notes • State and local governments use their revenues to pay for various expenditures • One of the expenditures for state governments is entitlement programs which include human services for basic health and living conditions for indigent persons who meet specified requirements • Another expenditure for states is subsidies for higher education. Most states pay a portion of tuition for higher education at state institutions • States must pay to maintain federal highways and infrastructure, state employee benefits/retirement, health facilities, correctional institutions, and [public education (varies state to state – sometimes local, or both state and local)]
Chapter 25 Notes • Local governments pay for services provided for the community that include police/fire protection, utilities, and [public education (varies state to state – sometimes local, or both state and local)] • Public schools are generally funded at the local level • Police/fire protection funding varies in different locales. Larger revenues allow these services to be more permanent versus voluntary • Services for utilities vary with some local governments providing water, sewer, and sanitation services, while others do not
Chapter 25 Notes • A governmental budget is important to managing the economy, and can result is a surplus, deficit, or balanced budget • Budgeting can be difficult as a budget is often based on a forecast, which may not be precise/exact • If revenues are higher than expenditures then there is a surplus • If revenues are lower than expenditures then there is a deficit • If revenue equals expenditures then there is a balanced budget
Chapter 25 Notes • When a government runs a deficit, it must borrow money to pay its bills • The government borrows money by selling bonds • A bond is a contract to repay the borrowed money with interest at a specific date in the future • A U.S. savings bond is a loan to the federal government • All the money the government borrows over the years and has not been paid back is the national debt • If the government runs deficits then the total debt goes up, whereas surpluses can be used to reduce the debt • The current national debt is $14.8 trillion and rising • The national debt has increased over $12 trillion since 1980
Chapter 25 Notes • The federal government is not required by law to have a balanced budget, but most state and local government are • State and local governments have been forced to cut spending, unlike the federal government • Revenues often decline during a bad economy, yet these are the times when states often need to increase spending to entitlement programs • When the government spends more than it receives in revenues it has to borrow the difference, which leads to more debt • Most of the national debt is owned by the American people • The national debt affects the economy in different ways
Chapter 25 Notes • The national debt’s most direct impact on the budget is how much tax revenue is needed to cover past borrowing • The larger the national debt the larger the interest payment is each year, and interest must be paid each year • The easiest and best way to pay off the debt is to increase taxes, but if taxes increase then people have less money to spend on their own needs, and some end up relying more on government entitlement programs • When the government borrows money it leaves less money for American individuals and businesses to borrow • Law of supply and demand – increase of government demand for credit will increase the price of credit (interest rates) • If interest rates increase it will cost more money to finance loans/purchases
Chapter 25 Notes • Fiscal policy can help the government control the economy • The government can use taxes and spending to help the economy grow, and this practice is called fiscal policy • According to Keynesian economic theories and models, a government can stimulate the economy during a recession by increasing spending and cutting taxes. When the economy gets better, government can decrease spending and increase taxes • Keynesian theory is difficult to put into practice • People always want lower taxes • People always want government services
Chapter 25 Notes • Regardless of theory and practice, government action or inaction does not always have the desired effect on the economy • Factors influence the growth or contraction of the economy whether or not there is government action, though the condition of the economy is often, wrongly, attributed to government action or inaction • The economy has a number of automatic stabilizers, programs that stimulate the economy as soon as they are needed, without government action • Unemployment insurance/benefits provide small amounts of income to individuals who lost their job, which is typical in a recession • Federal income tax is progressive, so those people who have lost their jobs pay less in taxes
