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Financing Government
Chapter 16
American Government
Ms. Powers
Financing Government
Section I: Taxes & Other Revenue
Why Does the Government Need
Money?
• Basic maintenance of the Government’s
infrastructure
• Funding government operations & paying
government employees
• To run government services (defense, judiciary,
policing, etc.)
• Social Services & Social Security
• Public Services (Education, roads, health, buildings,
planes, etc.…)
Taxes are CRUCIAL for a governments survival. If it
werent for governments, taxes would not exist
Fiscal Policy
Fiscal Policy: Is the Government’s
power to tax & spend to influence
the economy
• Includes the various means the
government uses to raise &
spend money
Tax Cut:
More money for consumers = More
spending power = More jobs
Tax Increase:
Less money for consumers = Less
spending = Slow economy =
Inflation reduction
The Power to Tax
Benjamin Franklin: “In this world nothing can be
said to be certain, except death & taxes”
The Constitution: Gives Congress the Power to Tax
“To lay & collect taxes, duties, imposts & excises to
pay the Debts & provide for the common defense &
general Welfare of the United States…”
The Spending Clause of the Constitution
Why Does the Government Tax?
1. To Raise Money:
Congress: Exercises the taxing
power to raise the money needed
to operate the Federal Government
2. Purposes OTHER than Raising
Money:
To regulate or DISCOURAGE
harmful activities
Examples:
• Regulation of narcotics
• Taxation of alcohol, tobacco,
firearms, hunting
FDA
Limitations on Taxation
The Constitution provides 4 expressed limits on
taxation… Congress must abide by the Constitutional
limitations on taxation...
1. Taxes can only be used for public purposes
2. Government can NOT tax exports
3. Taxes must be evenly distributed
4. Indirect taxes must be applied at the SAME rate
# 1: Public Purposes Only
Any taxes that
Government (Congress)
creates MUST be used
for PUBLIC purposes
only
• The Government can
NOT use taxes for their
own private benefits
• Taxes exist for the
general welfare of the
United States
# 2: No Tax on Exports
The Government (Congress) may NOT put any tax on exports
(goods leaving the United States)
• Taxes may only be applied to Imports
• Created as part of the Commerce Compromise (1787)
Congress can however prohibit the export of certain
materials…
• This is the power to regulate foreign commerce
Example: Congress has banned the export of computer
software that allows people encrypt files in codes (National
Security)
# 3: Even Distribution
Taxes must be equally apportioned (evenly
distributed) among the States
• Originally created as part of the 3/5th compromise
– Northern v. Southern state populations (Slaves)
– Northern states argued that if the Southern states wanted
to count slaves as part of population then they should
have to provide the taxation funds for them
# 4: Same Rate for Indirect Taxes
“All duties, imposts, & excises shall be uniform
throughout the United States”
• All of the indirect taxes levied by the Federal
Government must be set at the SAME RATE in
ALL parts of the country
• The rates cannot change by state or location
“Implied” Limitation
Federal taxes can not be imposed
on State governments when they
are carrying out such things as
public education, public health,
providing police protection, or
building streets & highways
McCulloch v. Maryland (1819): “The
power to tax is the power to destroy”
• The Federal Government may NOT
tax all of State government activities
(If they could they would tax them
bankrupt)
• The Federal Government may tax the
States of activities that are NONgovernmental (Liquor tax)
Income Tax
Taxes are… “What we pay for civilized
society” (Justice Oliver Holmes)
16th Amendment: Authorized the
Income Tax
• Today it is the LARGEST source of
federal revenue
• Income taxes are flexible &
progressive
• Rates may be adjusted
Progressive Tax: The higher one’s
income, the higher the tax rate
• Exist for both individuals &
corporations
Individual Income Tax
Individual Income Tax: A tax levied on each person’s total
income during the previous year (minus exemptions &
deductions)
• Tax is levied on each person’s taxable income
Deductions: Tax deductions are allowed for a number of
things such as….
• Cost of some medical care, state & local taxes, interest on
home mortgages, charitable contributions, travel
expenditures for work, etc...
Tax Day
Tax Day = APRIL 15th!!!!!!!!
• On or before 4/15 of any given year,
everyone who earned taxable income
in the previous year MUST file a Tax
return: A declaration of that income &
of the exemptions & deductions that
person claims (Filed with the IRS)
Internal Revenue Service (IRS):
Responsible for collecting taxes & the
administration of the Internal Revenue
Code
• Employers are also required to
withhold a certain amount from each
employees paycheck to give to the IRS
• The funds that are above that
employees tax requirements are
returned with a tax REFUND
Social Insurance Taxes
The Federal Government collects HUGE amounts of money
to finance three major social welfare programs
1. The Old Age, Survivors, & Disability Insurance (OASDI = Social
Security Program)
– Established by the Social Security Act of 1935
2. Medicare: Healthcare for the elderly
3. The Unemployment compensation program: Benefits paid to
jobless workers
These taxes are imposed on nearly ALL employers & selfemployed persons
They are Payroll Taxes: Meaning that the amounts owed by
employees are withheld from their paycheck (payroll)
Regressive Taxes
Taxes for social services & insurances are not
progressive (dependent on income) rather, they are…..
Regressive Taxes: Taxes levied at a FIXED rate,
regardless of a person’s income or ability to pay them
IRS: Undersanding Taxes for Students
Excise Taxes
Excise Tax: A tax that is laid on
the manufacture, sale, or
consumption for goods &
services
Examples:
• Gas, oil, tires, tobacco, alcohol,
firearms, telephones, plane
tickets, etc.
Some are called “luxury taxes”
because they are imposed on
goods that are not considered to
be necessities
Gift & Estate Taxes
Estate Tax: Tax imposed on the assets (estate) of someone
who dies
• Most estates are exempt from this however because it must
be an expensive one to quality (Over $5 million)
Gift Tax: Tax imposed on a gift from one living person to
another
• Only applied to gifts of over $13,000
Custom Duties
Customs Duties: Taxes laid on goods brought back
into the United States from abroad.
• AKA tariffs, import duties, or imposts
• Congress decides what imports will be dutied &
at what rates
Duty Free America
Non-Tax Revenues: Interest
Large amounts of money reach
the federal treasury from many
NON-Tax sources. One large
non-tax source is….
Interest: A charge for borrowed
money (a percentage of the
money borrowed)
• Interest can be laid on loans,
tolls, copyrights, patents,
etc...
The FED
Financing Government
Section II: Borrowing & the Public
Debt
Borrowing Money
The Constitution gives Congress the power to borrow money “on
the credit of the United States”
• There is NO LIMIT to how much money Congress may borrow
Why Does the Government Borrow Money?
1. To meet the costs of crisis situations (wars)
2. To pay for large-scale projects that could not be financed out
of income (Panama Canal)
3. To Finance budget deficits!!!!!
Deficit: Spending more money than you make
Surplus: Making more money than you spend
The Great Depression & Deficit
Spending
The collapse of the stock market in October of 1929
triggered the Great Depression of the 1930’s
• 1933 = 13.5 million unemployed
• 1935: Over 18 million people rely on government
relief programs
• More than 5,000 banks closed
In order to try to meet this catastrophe, deficit
financing becamee a constant practice of fiscal policy
Election of 1932: F.D.R won over Hoover because of his
drastic government led economic improvement plans
Keynesian Economics (Demand)
Keynesian (Demand Side) Economics: (John Maynard
Keyes) The theory that the higher employment that
results from the Government borrowing more money
will produce higher tax revenues
Keynesian Economics In A Nutshell
• Government SHOULD influence the economy by large
increases in public spending in times of high
unemployment
FDR’s New Deal Programs: A series of government
spending & job programs designed to stimulate the
economy & put Americans back to work
FDR's New Deal: Library of Congress
Reaganomics (Supply)
Reganomics (Supply-Side) Economics: Theory that
lower taxes, NOT greater spending, provides the
best route to a stronger economy
• Based on the assumption that tax cuts increase
the supply of money in private hands & thus
stimulate the economy
Reaganomics Explained
2007: Economic Recession in the United States
• Bush followed by Obama enacted a series of
economic stimulus plans designed to pump over
$1.5 trillion into the nations economy
How Does the Government Borrow
Money?
Firstly, Congress must authorize all federal borrowing
• The borrowing itself is actually done by the
Department of the Treasury
• DOT issues securities to investors (treasury notes or
bills
– T-bills are issued for short term borrowing
– Bonds are issued for long term borrowing
– These are both essentially IOU’s (by a certain date)
The Public Debt
The public debt is the result of the Federal Government’s
borrowing over time
Public Debt: The total outstanding indebtedness of the Federal
Government
• Includes all of the money the government has borrowed and
not yet repaid, plus interest
Today the Public debt is well over $19 TRILLION dollars!!!!
Remember there is NO limit on how much the government may
borrow, therefore there is no limit on the public debt
John Green: Understanding the Public Debt
Financing Government
Section III: Spending & the Budget
$$$$$$$$$$$$$$$$$$
The Federal Government spent about $3.8 Trillion
Dollars in 2015
What does $1 Trillion Look Like?
What could you BUY with $1 Trillion Dollars?
Take this for example: If you spent $1 Million dollars per
day since the beginning of the AD age (the year 0) You
would STILL have money left (about $700 Billion)
Federal Spending
From 1779 until the 1930’s the
Federal Governments spending
was miniscule and had LITTLE to
NO effect on the nation’s
economy
What Changed?
• Great Depression of the 1930’s
• WWII
Today the Federal government
takes roughly $ 4 trillion dollars
and pumps it into other
segments of the economy, thus
DRASTICALLY affecting the
economy
Federal Spending in 2015
Spending Priorities
The Department of Health & Human Services: Spends more
than any other Federal agency = $848 Billion on things like
Medicare, Medicaid, & other entitlement programs
Department of Defense = $651 Billion per year and
continues to increase
Department of Agriculture = $150 Billion per year
Department of Education = $ 15 Billion per year
Questions to Consider:
How does the government prioritize its yearly spending?
How SHOULD the government prioritize its yearly
spending?
Priorities & Entitlements
Entitlements: Are benefits that federal law says MUST be
paid to all those who meet the eligibility requirements
• The law says that people who receive those benefits are
entitled (have a right) to them
• Social Security (OASDI) is the largest entitlement program
today (funded by taxes paid by ALL American workers out
of their paychecks as a regressive tax)
United States Social Security Administration
Effects of the Baby Boomers
There are roughly 76.4 MILLION
Baby Boomers alive today
How could this affect our
economy???
• THINK About Federal
Spending!!!!
• What programs does our
government spend the MOST
on???
How Baby Boomers Affect the
US Economy
Talkin bout my Generation
Millenials & Baby Boomers
Controllable Spending
Controllable (Discretionary)
Spending: Congress & the
President can decide each year
just how much will be spent on
government operations
Examples:
• National Parks
• Highways
• Education
• Defense
Uncontrollable Spending
Uncontrollable Spending: Can NOT be changed
unless Congress changes laws that set the funding
for those programs (60% of Federal Spending)
• Uncontrollable spending items exist because Congress
created them & built them into the programs
themselves, thus only Congress can change it
Examples:
• Special Security benefits
• Food stamps
• Medicare
• Most entitlements
WHY would it be difficult for Congress to make these changes?
The Federal Budget
The Constitution gives Congress the
“power of the purse” AKA the Power to
control the financing of the Federal
Government & ALL of its operations
• ONLY CONGRESS has the power to
provide the enormous amounts of
money that the Government uses each
year
Congress decides….
1. How MUCH the government can spend
2. WHAT the government will spend
money on
• The President initiates the process with
submitting a budget proposal to Congress
• Congress reacts to the proposal
The President & The Federal Budget
The process of building the Federal
budget begins at least 18 months
prior to that fiscal year
Steps:
1. Federal agencies prepares
estimates of their own expenses &
submit to the President’s Office of
Management & Budget (OMB)
2. The OMB reviews the proposals in
budget hearings
3. Plans are given to the President
4. President creates budget
document and submits it to
Congress
The Budget Making Process
Government Shutdown
IF both Congress & the President fail to pass the
budget proposals, the Government would have to
suspend their operations
Government Shutdown of 2013
Financing Government
Section IV: Fiscal & Monetary
Policy
Bush v. Clinton
Election of 1992:
– Incumbent: George H.W. Bush
– Opponent: Bill Clinton
Status of the Country:
– Cold war ended
– ECONOMY in shambles
Bush Strategy: Focus on foreign policy
• Because the economy was so bad, Bush was blamed
Clinton Strategy: Focus on domestic economic policy
• Clinton won due to his domestic economic focus & reform
proposals
Things to Consider:
The status of the ECONOMY is VITAL to a President’s success
Economic Goals
Gross Domestic Product (GDP): The total value of all
final goods & services produced in the country each
year (around $15 Trillion)
• Over time, the people have come to expect that the
Government will actively & effectively control the
behavior of the GDP
• Well being of elected officials rely on GDP (Economy)
World Country GDP
Three Goals for the Economy:
1. Full Employment
2. Price Stability
3. Economic Growth
1. Full Employment
Full Employment: Means that
there are enough jobs
available to employ all those
who are able & willing to work
• The Bureau of Labor &
Statistics compiles
employment &
unemployment data
• Reports are major indication
of nation’s economy
9 Countries Where Everyone
Has A Job
2. Price Stability
Price Stability: Refers to the absence of
significant ups and downs in the prices of
goods & services.
• Inflation: An increase in prices
• Deflation: A decrease in prices
Consumer Price Index (CPI): Tracks the
trends in the prices of consumer goods
BOTH inflation & deflation harm the
economy
• Inflation takes purchasing power away
from consumers because products are
more expensive
• Deflation harms businesses, people, &
farmers because their products decline in
value
3. Growing Economy
Growing Economy: Is one in which the GDP constantly
increases
• Growth: helps produce a higher standard of living
• Recession: (Shrinkage of the economy) Absence of
growth causing the economy to shrink
Fastest Growing World Economies
Fiscal Policy
Fiscal Policy: Consists of the government’s power to
tax & spend to influence the economy
• A major tool with which the Federal Government
seeks to achieve its economic goals
• Policy makers MUST consider what effects their
taxing & spending will have on the overall economy
• Federal spending = 20% of the nations GDP
Great Depression:
• John Maynard Keyes: Increase in government
spending & a decrease in taxes would help the
economy (Keynesian Demand Side Economics)
Monetary Policy
Monetary Policy: Involves the money supply (the
amount of currency in circulation) and the
availability of credit in the economy
Government Regulation Crash Course
Monetary & Fiscal Policy Crash Course
The Federal Reserve Board (FED)
Federal Reserve Board (FED): Is
responsible for the execution of
the governments monetary
policy (7 members appointed by
President & serve 14 year
terms)
• Frame the monetary policy
The FED can alter the money
supply using three major tools:
1. Open Market Operations
2. Reserve Requirements
3. Discount Rate
Open Market Operations
Open Market Operations: A
process that involves the buying &
selling of government securities
(bonds) from and to the nation’s
banks
• When the FED BUYS securities
from the banks, they provide
them with more money
– BUY securities = Increase money
supply
• When the FED SELLS securities
to the banks, they remove
money from the banks
– SELL securities = Decrease money
supply
Reserve Requirements
Reserve Requirement: The amount of money that the
FED determines banks MUST keep “in reserve” in their
vaults or on deposit with one of the 12 Federal
Reserve Banks
• The FED can alter the money supply by changing the
necessary reserve requirements
– Lower Requirements = Increase money supply
– Higher Requirements = Decrease money supply
Discount Rate
Discount Rate: The rate of interest a bank must pay
when it borrows money from a Federal Reserve
Bank
• If the FED raises the discount rate, it is more
difficult for banks to obtain money
– Raised Discount Rate = Higher Interest Rates =
Decrease in money supply
• If the FED lowers the discount rate, it is easier for
banks to obtain money
– Lowered Discount Rate = Lower Interest Rates =
Increase in money supply