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Chapter 16

Chapter 16. Financing Government Section 1- Taxes and other Revenue. The Power to Tax. No one likes taxes- but they are a necessity. The Constitution gives Congress the power to tax.

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Chapter 16

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  1. Chapter 16 Financing Government Section 1- Taxes and other Revenue

  2. The Power to Tax • No one likes taxes- but they are a necessity. The Constitution gives Congress the power to tax. • Usually done to raise money, but may also tax to discourage some activity they believe is harmful to the general public (ex-tobacco) • The government also regulates a number of other licensing, including sale/purchase of firearms, public lands, and hunting migratory birds. • Veazie Bank v. Fenno---First Supreme Court case to uphold the use of taxes for non-revenue purposes. Banks issued “bank notes” against the national currency “greenbacks”. Congress imposed a 10% tax on the use of the private notes.

  3. Power to Tax Continued… • Congress does not have unlimited power to tax (4 expressed limits and 1 implied) • Expressed • Taxes can only be levied for public purposes and not for the benefit of a private interest • Prohibits taxes on exports- Tariffs may only be placed on goods brought into the country • Can however, prohibit the export of items for the reasons of national security (ex- computer software that enables people to encrypt files in a code no government can crack) 3) Direct taxes must be equally apportioned or distributed evenly among the states---The nations wealth is not distributed equally so the burden would fall on some states (Congress- No direct since 1861)

  4. Continued… • Income Tax is a direct tax- but does not change in regard to population---Amendment 16 (1913)- Gave power to levy income tax without regard to population 4) ”all duties, imposts and Excises shall be uniform throughout the U.S.)---all indirect taxes the same everywhere • Implied limitation- The Federal Government cannot tax any State or local government in the exercise of government functions (ex- public education, police, health care) -The government does tax actions nongovernmental in character (ex- S. Carolina monopolized liquor sales---Feds taxed because not a necessary governmental activity)

  5. Current Federal Taxes • Income Tax- A flexible tax, because its rates can be adjusted to produce any amount of money Congress deems necessary • Also a progressive tax- the higher the income, the higher the tax • Makes up about 46% of tax revenue (2008)- 1.15 trillion • Individual income tax- provides the largest amount (just under a trillion (2009). Individuals are taxed on the amount they make minus a few deductions (ex- medical care, mortgage interest, charitable donations, schooling) • Each individual must file a tax return with the IRS by April 15 • Most are deducted by employer every pay period

  6. Taxes continued… • Corporation Income Tax- Must pay taxes on the net income/ earnings---complicated because of all the various deductions • Social Insurance Taxes- Government collects huge sums to finance three major programs (The old age, survivors, and Disability insurance/social security, Medicare, and unemployment compensation. -These are regressive taxes or taxes at a fixed rate * Excise Tax- taxes on the sale , manufacturing, or consumption of goods and/or services (tobacco, fire arms, airline tickets, etc.)—often called hidden taxes because you don’t see it (hidden in price)---some also called luxury or sin taxes

  7. Taxes Continued… • Estate tax is imposed on the assets of someone who dies and gift tax is imposed from one living person to another • 2009- estate taxes only on estates over 3.5 million---Husband to wife (or opposite) is rarely taxed • May give up to 12,000 in tax free gifts a year • Custom Duties- Taxes on goods brought into the U.S.---rates set by Congress (some not taxed- allowed up to 800 of tourists purchases abroad). • Non-tax Revenue- the largest is interest (payments on loans)

  8. Section 2 Borrowing Money and the Public Debt

  9. Borrowing • The government often borrows money for 2 main reasons: meet the cost of a crisis (ex-war) and fund large scale projects (ex- Panama Canal)----Starting in the 1930’s a third reasons was added, to finance budget debt deficits (Government spends more than it collects) • The Great Depression set off deficit spending---1935, 18 million depended on government programs and 1 in 5 banks had failed (lost all money)---Hoover believed in a balanced budget, F. Roosevelt in aid (Roosevelt won easily) • Roosevelt believed in Keynesian Economics---spending will produce employment and higher tax revenue (demand-side economics). Reagan/Bush believed in lower taxes (money in people’s taxes to spend)---supply-side economics

  10. Borrowing Continued… • Bush and Obama offered stimulus packages--- shore up loan making, overcome decline in consumer spending, and combat rising unemployment (success was minimal) • Congress must authorize any borrowing (form individuals, banks, companies, etc.) promise to pay back later, plus interest • Public Debt--- all the money the government has borrowed and not paid back yet, plus interest. Government only had a surplus in 19 years in history (1789-1981 totaled 1 trillion in debt, since, over 11 trillion and counting) • 4 inches of 1,000 dollar bills make you a millionaire, 67 miles equals a trillion (Reagan) • 2008 interest on debt totaled 250 billion • Congress st

  11. Section 3 Spending and the Budget

  12. Federal Funding • 2009- The government spent more than 3.7 trillion • The government takes billions from one segment of the national economy and pumps it into others (greatly effecting economy) • Department of Health and Human Relations spends over 700 billion a year. Mainly on entitlements (Medicare/Medicaid/ social security/food stamps/etc.) • Defense spending has increased greatly and interest on the debt is now the fourth-largest category of federal spending • Federal spending charts page 468

  13. Federal Spending Continued… • Most specific items in the federal budget are controllable (discretionary)---Congress and President decide on how much to spend (highways, defense, civil service pay, education aid, etc.) • Some spending is uncontrollable because of law (Congress would have to change law). Public Debt (rates are set), social security and food stamps (once set standards, cannot control how many meet it) • Can control all technically, but vary difficult to change politically (today 60% of spending falls into uncontrollable)

  14. The Federal Budget • Congress is the only one who can decide how much and on what the Federal Government can spend money on • However, the President initiates the process by submitting a budget • The annual budget-making process is a joint effort of the President and both houses of Congress (President submits Budget and Congress reacts, usually enacts most of them in altered form). • Preparing budget is lengthy 1) Each federal agency prepares detailed estimate of what they need for that 12 month period

  15. Preparing Budget Cont.… 2) Each agency submits plan to the OMB (Office of Management and Budget) 3) After OMB reviews, a revised (usually lower) is put in the plan 4) President sends it to Congress Once the budget reaches the house it seen by the Budget Committee in each house, appropriations are set, and final budget approved (see page 470)

  16. Section 4 Fiscal and Monetary Policy

  17. Overall Economic Goals • Economy is very complex---The Gross Domestic Product or sum of all final goods and services produced in the country now exceeds 14 trillion per year • Federal Government has three main goals (w/ economy) • Full employment- create enough jobs for all people able and willing to work • Price stability- the absence of ups/downs in the price of goods and services (avoid inflation and deflation)---both are harmful to economy • Economic growth- helps produce a higher standard of living---when it shrinks or does not grow we are in a recession

  18. Fiscal Policy • Fiscal policy consists of the government’s power to tax and spend money to influence the economy -The government must decided how their spending and raising of money will effect the national economy -General rule: increase in spending lifts the economy and cuts dampen activity. Taxing increases slow economy and tax cuts boost economy -Until the 1930’s the government just accepted ups and down in economy (only 3% of GDP), now they tend to spend to try and stimulate economy---Keyenism (now 20% of nations GDP)

  19. Monetary Policy • The amount of money in circulation and availability of credit • The Federal Reserve Board oversees monetary policy • Designed to prevent panic and collapse in the banking system • The Fed alters money supply through 3 major mechanisms • Open Market Policy- Buying and selling of government securities (ex-bonds) to and from the nation’s banks---buying them from bank gives the bank money to lend or selling to bank and destroying money removes money from circulation • Reserve Requirements- Changing the amount each bank must keep on reserve with a Federal Reserve (increase/decrease amount left to lend) • Discount Rate- Rate of interest a bank must pay to borrow money

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