Transcript Federal Government and the Economy Political Science I

Federal Government
and the Economy
Political Science I
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How does the US government
raise money?
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Taxes and Federal Securities
• Taxes are the primary source of revenue
• Taxes are used to influence the economy
• Federal securities (e.g. bonds, notes, treasury
bills) are sold to borrow revenue
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Individual Income Tax
• Is the federal government’s biggest single source of
revenue
• Is levied on a person’s taxable income
• Is a progressive tax based on a person’s ability to pay
(higher the income, higher the tax rate)
• Must be reported/filed by April 15th of every year
• Withholding pays the anticipated taxes ahead of the April
15th deadline
• Self-employed people who do not receive regular salaries
must
• File income estimates four times a year
• Make payments based on estimates
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Corporate Income Taxes
• Are the federal tax on all the earned corporate
income beyond a corporation’s expenses and
deductions
• Is approximately 14% of federal revenues (Remy,
2010)
• Does not apply to nonprofit organizations, which
are exempt
• Colleges
• Labor unions
• Churches
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Social Insurance Taxes
• Are taxes collected to pay for major social
programs such as
• Social Security
• Medicare
• Unemployment compensation
• Are deducted from each worker’s paycheck by his
or her employer who then pays an equal amount
and sends the total to the federal government
• Go into Treasury Department special trust
accounts, not the government’s general fund
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Other Taxes
• Excise Taxes
• Are taxes intended to increase state revenue while
reducing consumption of a product or service (e.g. gas
and cigarette taxes)
• Are also called luxury taxes
• Customs Duties
• Are taxes levied on imported goods
• Are also called customs duties, tariffs, or import duties
• Are used to raise revenue or to protect domestic
business and agriculture from foreign competition (i.e.
protective tariff)
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Other Taxes (continued)
• Estate Taxes
• Are taxes on property and money left by a person
after he or she has died
• Gift Taxes
• Are taxes on money someone gives while living
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Taxes Influence the Economy
• Governments use taxes to influence the
economy by encouraging and discouraging
activities, such as
• A tax deduction for home mortgage interest
encourages people to buy homes, which helps the
construction industry
• A heavy tax on cigarettes discourages smoking,
which improves peoples health
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Taxes Influence the Economy (continued)
• Tax exemptions
• Are a legal means to free certain types of property,
sales, or income from taxpaying obligations
• Tax credits
• Are usually given to people with lower incomes
• Allow taxpayers to reduce their income tax
liability (e.g. child care credit)
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Federal Securities
• Federal securities (e.g. bonds, notes, treasury
bills) are sold to borrow revenue
• The government must borrow money when its
spending results in a deficit
• Government borrowing over time creates/increases
the national debt
• The size of the national debt affects the economy
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How does the US government
manage the economy?
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Characteristics of a Healthy Economy
•
•
•
•
Low unemployment
Stable prices of consumer goods
High worker productivity
Increasing economy overall
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General Information
• The primary purpose of the national budget is to
fund government programs at the federal, state,
and local levels
• The Budget and Accounting Act of 1921 gives the
President the authority to prepare an annual
budget and submit it to Congress for approval
• The federal government plays a major role in
managing the US economy
• Control of the US economy is divided between
the government and the private sector, which
often causes conflict
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General Information (continued)
• Unlike some state and local governments, the
federal government is not required to operate
with a balanced budget
• It is very rare for the federal government to spend
exactly the amount it receives in revenue
• The most recent federal budget surplus occurred in
2001
• Since 2001, the federal government’s expenditures
have exceeded its revenue, creating a budget
deficit and increasing the national debt
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Types of Policies
• The federal government influences the
economy with two types of policies
• Fiscal Policy, which utilizes government spending
and taxation
• Monetary Policy, which manages the supply of
money and credit
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Four Major Components of
Federal Government Spending
• Direct benefit payments to people participating in
social programs (e.g. Social Security, health and
welfare programs)
• A large portion goes to uncontrollable expenditures
• The biggest entitlement program is Social Security (Remy,
2010)
• National defense expenses
• Discretionary spending
• On interests such as the environment, transportation,
criminal justice, etc.
• As grants to states and localities
• Interest on the national debt
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The Federal Reserve System (The Fed)
• Is the central banking system of the US
• Is the entity that loans money to banks
• Is supervised by a seven-member Board of
Governors that
•
•
•
•
Are selected by the President
Are approved by the Senate
Serve a four-year term
Determine the general money and credit policies of the
US
• Make decisions independent of the President and the
Senate
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The Federal Reserve System (The Fed)
(continued)
• Uses four main tools to control the US
monetary policy
• Raise or lower the discount rate
• Raise or lower the reserve requirement
• Buy government bonds
• Sell government securities
• Creates policies that may support or challenge
existing government programs
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Resources
• Remy, Ph.D., R. C. (2010), United States
Government: Democracy in Action, Glencoe
McGraw-Hill.
• http://apps.irs.gov/app/withholdingcalculator/
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