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Section 1:
The Federal Government
Under our federal system,
the executive, legislative,
and judicial branches share
the responsibility of
governing the nation. The
president and Congress work
together to create the
budget—a blueprint for
raising and spending the
nation’s money.
Section 2:
State and Local
Governments
Political and economic
institutions evolve to help
individuals and groups
accomplish their goals.
State and local governments
have their own revenue
sources and decide how to
spend the money they take
in.
Section 3:
Managing the Economy
Political and economic
institutions evolve to help
individuals and groups
accomplish their goals.
Governments use various
tools to manage the
economy.
Guide to Reading
Big Idea
Under our federal system, the
executive, legislative, and judicial
branches share the responsibility of
governing the nation.
Preparing the Budget
The federal budget, created by the
president and Congress, is the
government’s blueprint for raising
and spending money.
Preparing the Budget (cont.)
• The president and Congress create the
federal budget, which determines how the
government raises and spends money.
• Government’s fiscal year (FY): October 1
to September 30
Preparing the Budget (cont.)
• Budget process:
– President proposes budget to Congress
by first Monday in February
– President sends proposed budget to
Congress, with annual budget message
Preparing the Budget (cont.)
– Congress passes budget resolution
• Mandatory spending does not need annual
approval
• Discretionary spending (about one-third of
the budget) is approved each year
Preparing the Budget (cont.)
– Both houses must approve
appropriations bills
– President signs into law or vetoes
Revenues and Expenditures
The federal budget has two main
parts—revenues and expenditures.
Revenues and Expenditures (cont.)
• Revenues:
– Half from individual income tax returns
– Corporate income tax
– Payroll taxes fund Social Security and
Medicare
The Federal Budget, FY 2007
Revenues and Expenditures (cont.)
– Other taxes:
• Excise tax on gasoline, tobacco, telephone
• Estate tax on wealth to heirs
• Tax on gifts
• Miscellaneous income such as national
park fees
The Federal Budget, FY 2007
Revenues and Expenditures (cont.)
• Forms of taxation:
– Proportional tax—same percentage from
everyone
– Progressive tax (such as the federal
income tax)—proportion increases with
income
– Regressive tax—proportion
decreases with income
The Federal Budget, FY 2007
Revenues and Expenditures (cont.)
• Expenditures:
– Social Security—largest category in 2007
– Income security
– Health costs
– Defense—second largest category—
17.4 cents of every dollar spent
in 2007
The Federal Budget, FY 2007
Revenues and Expenditures (cont.)
– Interest on debt
– Programs such as education, highways,
natural resources
The Federal Budget, FY 2007
Revenues and Expenditures (cont.)
• Changes to budget:
– Early government had few expenditures
– Budget and Accounting Act of 1921
– Increased role of President
The Federal Budget, FY 2007
Guide to Reading
Big Idea
Political and economic institutions
evolve to help individuals and groups
accomplish their goals.
Revenues
State and local governments have their
own revenue sources.
Revenues (cont.)
• State and local governments have their own
budgets, revenues, and expenditures.
State and Local Governments:
Revenues and Expenditures
Revenues (cont.)
• State government revenues in order of
importance:
– Intergovernmental revenues from
federal government
• For welfare, highways, hospitals, etc.
State and Local Governments:
Revenues and Expenditures
Revenues (cont.)
– State sales tax
• Five states have no sales tax
• Other states charge 2.9 to 7.25 percent
– Contributions from state employees to
retirement funds
State and Local Governments:
Revenues and Expenditures
Revenues (cont.)
– Income tax
• Seven states have none
• Some charge percentage of federal
income tax
• Some charge single rate
• Some use progressive tax
State and Local Governments:
Revenues and Expenditures
Revenues (cont.)
• Local government revenues:
– For many local governments, most
comes from state
– Property taxes, usually only on real
property
• Real property—land and buildings
• Personal property—portable
objects
State and Local Governments:
Revenues and Expenditures
Revenues (cont.)
– Local sales tax
– Fines and fees
– Revenue from water and utilities
State and Local Governments:
Revenues and Expenditures
Expenditures
State and local governments use the
revenues they receive to fund many
different expenditures.
Expenditures (cont.)
• State and local governments use revenues
to fund many human services.
State and Local Governments:
Revenues and Expenditures
Expenditures (cont.)
• State governments
– Entitlement programs for the poor
– Subsidize college tuition
– Maintain highways
– Retirement, hospitals, corrections,
education
State and Local Governments:
Revenues and Expenditures
Expenditures (cont.)
• Local governments
– Public schools
– Police and fire protection
– Water supply
– Sewage and sanitation
State and Local Governments:
Revenues and Expenditures
Guide to Reading
Big Idea
Political and economic institutions
evolve to help individuals and groups
accomplish their goals.
Guide to Reading
Content Vocabulary
• surplus
• deficit
• bond
• balanced
budget
• automatic
stabilizer
• debt
Academic Vocabulary
• precise
• ideological
Surpluses and Deficits
Government budgeting can result in
either a surplus, a deficit, or a balanced
budget.
Surpluses and Deficits (cont.)
• Surplus—the government budgets more
than it spends
The Deficits and the Debt
Surpluses and Deficits (cont.)
• Deficit—government spends more than
planned
– Issue bonds to raise extra funds
– Outstanding bonds are government’s
debt
– Federal debt about $4.9 trillion in
October 2006
The Deficits and the Debt
Surpluses and Deficits (cont.)
• Balanced budget—spending equals
revenues
– Not required of federal government
– Required of many state and local
governments
– Must cut spending if revenues drop
The Deficits and the Debt
Surpluses and Deficits (cont.)
• Effects of national debt:
– Taxpayers must pay interest rather than
funding services
– Higher consumer interest rates
The Deficits and the Debt
Fiscal Policy
The tool of fiscal policy can help
governments control the economy.
Fiscal Policy (cont.)
• Fiscal policy is the government using taxes
and spending to help the economy grow.
– Theory: to increase spending, cut taxes
in recession; to reduce spending,
increase taxes in boom.
– Practice: hard to raise taxes or cut
services
Fiscal Policy (cont.)
• Many oppose spending increases, while
others oppose tax cuts on ideological
grounds, or on principle
• Politics hamper quick action
Fiscal Policy (cont.)
• Automatic stabilizers always in place
– Unemployment and welfare
– Progressive income tax
budget
a plan for making and spending
money
mandatory spending
federal spending required by law that
continues without the need for annual
approvals by Congress
discretionary spending
spending for federal programs that
must receive annual approval
appropriations bill
legislation earmarking funds for
certain purposes
Social Security
federal program that provides
monthly payments to people who
are retired or unable to work
Medicare
government program that provides
some health care to the elderly
enormous
very large
intergovernmental revenue
funds one level of government
receives from another level of
government
sales tax
tax levied on a product at the time of
sale
property tax
tax on land and property
entitlement program
a program using eligibility
requirements to provide health,
nutrition, or income supplements to
individuals
subsidize
to aid or promote with money
revenue
the income that a government collects
for public use
utilize
to make use of
resource
the money, people, and materials
available to accomplish a
community’s goals; wealth
surplus
situation in which quantity supplied is
greater than quantity demanded;
situation in which government spends
less than it collects in revenues
deficit
situation in which government spends
more than it collects in revenues
bond
contract to repay borrowed money
with interest at a specific time in the
future
debt
money borrowed and not yet paid
back
balanced budget
annual budget in which expenditures
equal revenues
automatic stabilizer
program that automatically provides
benefits to offset a change in people’s
incomes
precise
to be exact
ideological
a body of opinions
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