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?


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


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


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


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


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)


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


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


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)


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


How does the US government manage the economy?


Characteristics of a Healthy Economy

• Low unemployment• Stable prices of consumer goods• High worker productivity• Increasing economy overall


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


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


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


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


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


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


Resources

• Remy, Ph.D., R. C. (2010), United States Government: Democracy in Action, Glencoe McGraw-Hill.

• http://apps.irs.gov/app/withholdingcalculator/

http://apps.irs.gov/app/withholdingcalculator/

Documents

Federal Government and the Economy Political Science I