Government Finances

Budget Process

President must submit a budget proposal to Congress by the 1st Monday in February

Congress then passes a budget resolution through both Houses of Congress

Budget Process

Spending is divided into 2 types:

Mandatory SpendingMandatory Spending: Spending that does not need annual approval.

EX: Social Security Payments

Discretionary SpendingDiscretionary Spending: Spending that must be approved each year EX: Highway construction

Federal Revenues IncomeIncome taxestaxes account for half of all federal

government revenues Most of this comes from tax withholdingstax withholdings-- money

taken from each person’s paycheck to cover their taxes

At the end of the year, you file a tax returntax return. If the government took too much in your checks, you get a refundrefund. Otherwise you pay the balance.

CorporationsCorporations also pay taxes on their profits. This is about 10% of all federal government revenue.

Federal Revenues The second largest source of gov’t income

is payroll taxespayroll taxes--money taken from your paycheck to pay for social security and Medicare

The government also collects excise taxesexcise taxes--taxes on specific goods such as gas, tobacco, alcohol, & legal betting (also called sin taxes)

Another tax is the estate taxestate tax--tax on money left in a will

Another tax is a gift taxgift tax--tax on large gifts

Forms of Taxes

Proportional tax- a tax that has the same percentage no

matter how much you make collects less money than other

methods for the government

Forms of Taxes

Progressive tax- the more you make, the higher the

percentage you pay collects the most money for the

government

Forms of Taxes

Regressive tax- opposite of progressive in that the

percentage you pay goes down the more you make

ex: social security and sales taxes

Federal Expenditures

Expenditures-where the government spends its money

21% on Social Security 17% on national defense 14% on Medicare 8% on interest on debt

Sources of State Government Revenue

Main source is intergovernmental revenue-money received from the national government, about $.22 per all dollars received.

Sales tax-tax on the purchase of most items. Stores pay a lump amount each month. Ranges in amount from 2% to 8%. Some states don’t have any sales taxes at all.

Sources of State Government Revenue

Contributions-states take the money collected from it’s employees for their retire and invest it.

Income taxes-many states have their own income tax systems. Some states simply take a percentage from your federal return. Others charge a flat rate to all it’s citizens. Some charge a progressive rate while 7 states have no income tax at all.

State Expenditures

State welfare programs called entitlement programs. These programs provide health, nutrition, or income payments to people who meet basic requirements

Higher education-states help to subsidize the cost of a college education for the poor.

Highway construction

Sources ofLocal Government Revenue

Property taxes- must pay a certain percentage on real property such as buildings and land. May also charge property taxes on stocks, bonds, cars, jewelry, furniture, and fine works of art.

Revenue from utility companies Also collect sales taxes Fines from traffic violations and other user

fees

Local Government Expenditures

Education-in charge of setting up local school districts

Police and fire protection Water supply Sewage and sanitation

Budget Issues

Difficulties in planning Hard to predict tax revenues Hard to predict all government

expenses Never know when a unique event will

occur (hurricane, blizzard, terrorist attack)

Budget Issues

Try to have a surplussurplus-when revenues are more than expenditures

States also try to put money away for unforeseen events

Budget Issues

When expenditures are more than revenues you have a deficitdeficit

Another problem is that the national government is forcing states to pay for more programs leading to large state debts

Government Debt

When the government runs into debt it must borrow money to pay it’s bills

May use bonds-an agreement to pay back a loan with interest

Surpluses may help to pay for these debts, or governments may cut programs

Raising taxes is another unpopular option

Government Debt

Governments try to have a balanced budget, where spending equals expenditures

The business cycle can make this difficult as government spending in recessions can make a balanced budget difficult

Government Debt

Impact of National debt:1. More tax dollars go to paying interest on

loans, leaving less for government programs

2. Higher taxes to pay off debt mean less money for your expenses

3. The more money the government borrows the less available for its citizens to borrow, slowing down the economy

Automatic Stabilizers These are programs that are in place to

stimulate the economy when needed The main advantage is that are always in

place with no government action needed Ex: unemployment insurance to help

people till they can find a job Ex: Medicaid and other welfare programs to

help people maintain a basic standard of living

Ex: progressive taxes