The battle of the budget is at the center of American politics. Two questions are central to public policy: Who bears the burdens of paying for government? Who receives the benefits? The public budget is a policy document allocating burdens (taxes) and benefits (expenditures). A budget deficit occurs when expenditures exceed revenues in a fiscal year. Americans want the government to balance the budget, maintain or increase the level of government spending on most policies, and keep taxes low. * Sources of Federal Revenue
* Income Tax
* Individuals are required to pay the government a portion of the money they earn; this portion is an income tax. The Sixteenth Amendment (1913) permitted Congress to levy an income tax. The Internal Revenue Service was established to collect it. Corporations and individuals pay income taxes. * The income tax is generally progressive, meaning that those with more income pay higher rates of tax on their income. * Social Insurance Taxes
* Social Security taxes come from both employers and employees. Money is deducted from employees’ paychecks and matched by their employers. The money is earmarked for the Social Security Trust Fund. * Borrowing
* When the federal government wants to borrow money, the Treasury Department sells bonds, guaranteeing to pay interest to the bondholder. The federal debt is all the money borrowed over the years that is still outstanding. Eleven percent of all federal expenditures go to paying interest on this debt. * Government borrowing crowds out private borrowers from the loan marketplace. Every dollar that the government borrows today will cost taxpayers many more dollars in interest over the next thirty years. Government is borrowing not so much for its capital needs as for its day-to-day expenses. * The perceived perils of gigantic deficits have led to calls for a balanced budget amendment. Opponents argue that it is difficult to estimate expenditures and revenues more than a year ahead. * Unlike state and local governments and private businesses, the federal government does not have a capital budget, a budget for expenditures on items that will serve for the long term, such as equipment, roads, and buildings. When the federal government purchases these things, they are counted as current expenditures and run up the deficit. * Taxes and Public Policy
* A tax loophole is presumably a tax break or tax benefit that gives exemptions, deductions, and special cases. Tax loopholes cost the treasury relatively little. Tax expenditures are defined as “revenue losses attributable to provisions of the federal tax laws that allow a special exemption, exclusion, or deduction.” * A tax expenditure consists of the difference between what the government actually collects in taxes and what it would have collected without special exemptions. Tax expenditures receive no regular review by Congress. On the whole, tax expenditures directly benefit middle- and upper-income taxpayers and corporations. Tax expenditures may be seen as loopholes or public policy choices supporting a social activity worth subsidizing. * Tax reductions are rare. In 1981 Congress passed Reagan’s tax-cutting proposal. Families with high incomes saved many thousands of dollars on taxes, but those at the lower end of the income ladder saw little change in their tax burden. * The Tax Reform Act of 1986 was one of the most sweeping alterations in federal tax policy history. It eliminated or reduced the value of many tax deductions, removed several million low-income individuals from the tax rolls, and reduced the number of tax brackets. * Federal Expenditures
* Big Governments, Big Budgets
* Big budgets are necessary to pay for big governments. America has one of the smallest public sectors...