Chapter 15: Federal Budgets

Question 1

The part of the government budget that includes both spending and transfer payments

Answer 1

Government Outlays

Question 2

A plan for both raising and spending funds for governmental activities

Answer 2

Government Budgets

Question 3

Two Sides of Government Budget:

Answer 3

(1) Sources of Funds - Inflows

(2) Use of Funds - Outflows

Question 4

Sources of funds - Inflows

Answer 4

Referred to as income or revenue

Question 5

Use of funds - Outflows

Answer 5

Referred to as spending or outlays

Question 6

Payments taken from one group of citizens and given to other groups or individuals

Answer 6

Transfer Payments

Question 7

Total outlays are now nearly $4 trillion dollars, or more than $12,000 per U.S. Citizen

Answer 7

US Government Outlays, 1970-2017

Question 8

Outlays may be divided into three groups:

Answer 8

(1) Mandatory outlays
(2) Discretionary outlays
(3) Interest payments

Question 9

Comprise government spending determined by ongoing government programs

Answer 9

Mandatory Outlays

Question 10

Comprise spending that is adjustable during the annual budget process

Answer 10

Discretionary Outlays

Question 11

While national defense spending grabs a lot of headlines, Social Security outlays are two thirds higher than that of national defense

Answer 11

Historical Federal Outlay Shares, 1970-2017

Question 12

○ A U.S. government administered retirement funding program
○ Enacted in 1935 by FDR as part of the New Deal
○ Requires workers to contribute 6.2% of their earnings to the Social Security Trust Fund
○ Employers contribute 6.2% BUT REMEMBER THE ELASTICITY

Answer 12

Social Security

Question 13

Guarantee that American workers retire with at least some retirement income

Answer 13

Purpose of Social Security

Question 14

● (1) A falling worker to beneficiary ratio
● (2) Rising life expectancies
● (3) “Investment” strategy - Spent most of it plus record low bond yields and fear of the stock market
● (4) Congressional Stalemate - The 3rd rail of politics
● (5) Paying current recipients from current payee’s contributions

Answer 14

Biggest Problems Facing Social Security

Question 15

A mandated federal program that funds health care for people aged 65 and older

Answer 15

Medicare

Question 16

Ensure that all retired workers have some funding for their health care

Answer 16

Goal of Medicare

Question 17

Social Security and Medicare are taking an ever-growing share of the federal budget. This is due to demographic reasons:

Answer 17

○ (1) People are living longer today than ever before
○ (2) There are now far more workers retiring and drawing benefits than before.
○ (3) In addition to a normal flow of retirees, baby boomers are now retiring

Question 18

Three major factors that have been contributed to the increase in spending have been:

Answer 18

○ (1) Increased defense spending following Sept. 11th. 2021
■ 2001: Defense spending was 16.5% of the federal budget
■ 2010: Defense spending was 19.1% of the federal budget
○ (2) Increased spending on Social Security and Medicare
○ (3) Government responses to the Great Recession (2008)

Question 19

The rate of government outlays has been significantly increasing especially during the Great Recession

Answer 19

U.S. Government Outlays, 1990-2017

Question 20

● The two largest sources of government revenue are individual income taxes and social insurance

Answer 20

Government Revenue

Question 21

Together, individual income and social insurance taxes make up 83% of federal tax revenue

Answer 21

U.S. Federal Tax Revenue Sources, 2017

Question 22

Money for Social Security and Medicare comes directly from people’s paychecks

Answer 22

Social Insurance Tax

Question 23

Income Tax

Answer 23

● U.S. Federal income taxes are set according to a scale that increases with income levels
● Progressive Income Tax System: People with higher incomes pay a larger portion of their income in taxes than people with lower incomes do
● Marginal Tax Rate: The tax rate paid on an individual’s next dollar of income
● In a progressive income tax system, they increase with higher earnings
● Average Tax Rate: The total tax paid divided by the amount of taxable income

Question 24

Historical Income Tax Rates

Answer 24

● The U.S. income tax is only about 100 years old
○ The highest marginal tax rate in 1913 was 6%
○ Applied only to earning over $500,000
● Marginal Tax Rates Rose Quickly
○ The top marginal rate five years later was 77%
○ Highest top marginal rates occurred in 1945 at 94%
● The first big tax cut was made in 1963 by President Kennedy. Tax rates were severely hampering the economy and economic growth
● Second round by President Reagan in the 1980’s
● Over the course of a century, there was a great deal of fluctuation in marginal tax rates

Question 25

2019 U.S. Federal Tax Rates - Progressive Structure

Answer 25

● Marginal rates apply only to income dollars within specified ranges

Question 26

Who pays the government?

Answer 26

● The top 20% are contributing an ever-increasing portion of total tax revenue. In 2017, that group contributed to 70% of all tax revenue while the second highest 20% contributed less than 20%

Question 27

The Tax Cuts and Jobs Act of 2017

Answer 27

● In December of 2017, the U.S. Congress passed, and the president signed into law, the Tax Cuts and Jobs Act of 2017 (TCJA)
● It reduced personal income tax rates for most taxpayers and reduced the tax rate on corporate profits

Question 28

Taxing Corporations

Answer 28

● All corporation earnings ultimately devolve individual tax returns
● Ergo, a corporate tax means earnings are taxed twice
○ (1) Corporate Tax
○ (2) Individual Income Tax
● What are the effects on capital and economic growth?
● What are the effects on job creation?

Question 29

○ Occurs when government outlays exceed revenue in a given time, usually a year
○ Outlays > Revenues
○ More funds flowing out than in

Answer 29

Budget Deficit

Question 30

○ Occurs when government revenue exceeds outlays in a given time period, usually a year
○ Revenues > Outlays
○ More funds flowing in than out

Answer 30

Budget Surplus

Question 31

U.S. Federal Outlays and Revenue as a Percentage of GDP

Answer 31

● During recessions, tax revenues declines, and outlays increase as the government tries to stimulate the economy, leading to budget deficits

Question 32

Outlays and Revenue 3 General Observations:

Answer 32

○ (1) Deficits grow when:
■ Outlays increase
■ Revenues decrease
■ Outlays increase and revenues decrease
○ (2) Deficits tend to grow during recessionary periods
○ (3) Recent U.S. budget deficits are historically larges

Question 33

A shortfall in revenue for a particular year’s budget

Answer 33

Deficit

Question 34

The total of all accumulated and unpaid budget deficits

Answer 34

Debt

Question 35

U.S. National Debt, 1990-2017

Answer 35

While the federal debt is $18 trillion, much of the debt is owned by government agencies meaning that the government owes money to itself

Question 36

Foreign Ownership of U.S. Federal Debt

Answer 36

There has been public concern over international ownership of U.S. debt, but:
70% of national debt is held domestically
30% is held internationally
Foreign lending increases the supply of loanable funds
Decreases interest rates

Question 37

Foreign and Domestic Ownership of U.S. Debt

Answer 37

While the percentage of the national debt owned internationally has grown in recent decades, it is still less than one-third of the total

Question 38

Government Outlays =

Answer 38

Government Spending + Transfer Payments

Question 39

Largest portion of outlays:

Answer 39

Social security
Medicare
Increased due to demographic changes