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Chapter 14: The Congress, the President, and the Budget: the Politics of Taxing and Spending |
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INTRODUCTION
The central political issue for many years has been how to pay for policies that most people support. The president and Congress have been caught in a budgetary squeeze: Americans want them to balance the budget, maintain or increase the level of government spending on most policies, and still keep taxes low. Thus, two questions become central to public policy: Who bears the burdens of paying for government? Who receives the benefits?
There is more to public budgets than bookkeeping, however, because such a budget is a policy document allocating burdens (taxes) and benefits (expenditures). During the 1980s and 1990s, the national government ran up large annual budget deficits. A budget deficit occurs when expenditures exceed revenues in a fiscal year.
SOURCES OF FEDERAL REVENUE
Probably no government policy affects as many Americans as tax policy. In addition to raising revenues to finance its services, the government can use taxes to make citizens' incomes more or less equal, to encourage or discourage growth in the economy, and to promote specific interests. This chapter focuses on how tax policies can promote the interests of particular groups or encourage specific activities.
This section looks at the substance of the budget to see how the American government raises money and where that money is spent. The three major sources of federal revenues are the personal and corporate income tax, social insurance taxes, and borrowing and deficit spending. Only a small portion comes from excise taxes (such as tax on gasoline) and other sources. Although corporate taxes once yielded more revenues than individual income taxes, today corporate taxes yield only about ten cents of every federal revenue dollar, compared with 49 cents coming from individual income taxes.
Today the federal debt-all of the money borrowed over the years and still outstanding-exceeds $8 trillion. Nine percent of all federal expenditures go to paying off the debt. When the federal government wants to borrow money, the Treasury Department sells bonds, guaranteeing to pay interest to the bondholder. Citizens, corporations, mutual funds, and other financial institutions purchase the bonds. Many economists and policymakers are concerned about the national debt. Many have called for a balanced budget amendment.
A tax loophole is presumably some tax break or tax benefit. The IRS Code is riddled with exemptions, deductions, and special cases. For example, H. Ross Perot (1992 presidential candidate) hired a former Internal Revenue Service commissioner in 1975 to aid him in having the tax code changed to benefit him to the tune of approximately $15 million. The bill was killed on the House floor when the press reported that only Perot would benefit from the provision.
Loopholes are really a type of tax expenditure, which represent the difference between what the government actually collects in taxes and what it would have collected without special exemptions. Tax expenditures are essentially monies that government could collect but does not because they are exempted from taxation.
Early in his administration, President Reagan proposed a massive tax-cut bill, which was passed by Congress in July 1981. Families with high incomes received significant tax reductions with the 1981 bill, but those at the lower end of the income ladder did not notice much change in their tax burden because social insurance and excise taxes (which fall disproportionately on the poor) rose during the same period. Many blamed the massive deficits of the 1980s and 1990s at least partially on the 1981 tax cuts, as government continued to spend more but reduced its revenues.
The Tax Reform Act of 1986 was one of the most sweeping alterations in federal tax policy in history. It eliminated or reduced the value of many tax deductions, removed several million low-income individuals from the tax rolls, and changed the system of 15 separate brackets to just two generally lower rates (28 percent and 15 percent). In 1990, a third bracket of 31 percent was added for those with higher incomes. In 1993, President Clinton proposed, and Congress approved, a plan to raise the income tax rate on those in the top two percent of income. Corporate income taxes and energy taxes also rose.
FEDERAL EXPENDITURES
Among the most important changes of the twentieth century is the rise of large governments. American governments-national, state, and local-spend an amount equal to35 percent of the Gross Domestic Product (GDP). Expenditures of the national government alone equal over 20 percent of the GDP. Nevertheless, the United States actually has one of the smallest public sectors among Western nations relative to the size of the Gross Domestic Product (GDP).
Two conditions associated with government growth in America are the rise of the national security state and the rise of the social service state. After World War II, the "cold war" with the Soviet Union resulted in a permanent military establishment and expensive military technology. President Eisenhower coined the phrase "military-industrial complex" to characterize the close relationship between the military hierarchy and the defense industry that supplies its hardware needs. The Pentagon wants weapons systems and arms makers want contracts, so they tend to be mutually supportive. In the 1990s, defense expenditures have decreased in response to the lessening of tensions in Europe. The budget of the Department of Defense now constitutes only about one-sixth of all federal expenditures.
The Social Security Act (passed in 1935) was originally intended to provide a minimal level of sustenance to older Americans. Lyndon Johnson's "Great Society" initiatives in the mid-1960s greatly expanded America's social services network, adding Medicare and Medicaid to the Social Security system and creating many new programs designed to aid the poor. Today, more than 40 million Americans receive payments from the Social Security system.
Social Security is not the only social policy of the federal government that is costly. The rise of the social service state has contributed to America's growing budget in health, education, job training, and scores of other areas. Liberals often favor these programs to assist individuals and groups in society. Conservatives see them as a drain on the federal treasury.
The picture of the federal budget is one of constant, slow growth. Expenditures mandated by an existing law or obligation (such as Social Security) are particularly likely to follow a pattern of incrementalism, which means that the best predictor of this year's budget is last year's budget plus a little bit more-that is, an increment. More and more of federal spending has become "uncontrollable." An uncontrollable expenditure is one that is mandated under current law or by a previous obligation. About two-thirds of the federal budget is uncontrollable -based on expenditures that are determined not by how much Congress appropriates to an agency but by how many eligible beneficiaries there are for a particular program.
In February 1998, President Clinton presented the first balanced budget in nearly 30 years. However, decreased tax revenues resulting from the economic downturn in 2000-2001 and the income tax cut of 2001 sent the budget into deficit again.
UNDERSTANDING BUDGETING
Almost all democracies have seen a substantial growth in government in the twentieth century. Economists Allen Meltzer and Scott Richard argue that government grows in a democracy because of the equality of suffrage. Poorer voters will always use their votes to support public policies that redistribute benefits from the rich to the poor. Indeed, the most rapidly growing expenditures are items like Social Security, Medicaid, Medicare, and social welfare programs (all of which benefit the poor more than the rich).
One often thinks of elites-particularly corporate elites-as being opposed to big government. However, Lockheed and Chrysler corporations have appealed to the government for large bailouts when times got rough. Corporations support a big government that offers them contracts, subsidies, and other benefits. Poor and rich voters alike have voted for parties and politicians who promised them benefits. Government often grows by responding to groups and their demands.
Conversely, some politicians compete for votes by promising not to spend money (such as Ronald Reagan). In contrast with other nations, Americans have chosen to tax less and spend less on public services than almost all other democracies with developed economies. Paradoxically, Americans want to spend but they do not want to pay taxes. Being a democracy, that is exactly what the government does-and the inevitable result is red ink.
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