Chapter 15: Federal Budgets Flashcards
The part of the government budget that includes both spending and transfer payments
Government Outlays
A plan for both raising and spending funds for governmental activities
Government Budgets
Two Sides of Government Budget:
(1) Sources of Funds - Inflows
(2) Use of Funds - Outflows
Sources of funds - Inflows
Referred to as income or revenue
Use of funds - Outflows
Referred to as spending or outlays
Payments taken from one group of citizens and given to other groups or individuals
Transfer Payments
Total outlays are now nearly $4 trillion dollars, or more than $12,000 per U.S. Citizen
US Government Outlays, 1970-2017
Outlays may be divided into three groups:
(1) Mandatory outlays
(2) Discretionary outlays
(3) Interest payments
Comprise government spending determined by ongoing government programs
Mandatory Outlays
Comprise spending that is adjustable during the annual budget process
Discretionary Outlays
While national defense spending grabs a lot of headlines, Social Security outlays are two thirds higher than that of national defense
Historical Federal Outlay Shares, 1970-2017
○ 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
Social Security
Guarantee that American workers retire with at least some retirement income
Purpose of Social Security
● (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
Biggest Problems Facing Social Security
A mandated federal program that funds health care for people aged 65 and older
Medicare
Ensure that all retired workers have some funding for their health care
Goal of Medicare
Social Security and Medicare are taking an ever-growing share of the federal budget. This is due to demographic reasons:
○ (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
Three major factors that have been contributed to the increase in spending have been:
○ (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)
The rate of government outlays has been significantly increasing especially during the Great Recession
U.S. Government Outlays, 1990-2017
● The two largest sources of government revenue are individual income taxes and social insurance
Government Revenue
Together, individual income and social insurance taxes make up 83% of federal tax revenue
U.S. Federal Tax Revenue Sources, 2017
Money for Social Security and Medicare comes directly from people’s paychecks
Social Insurance Tax
Income Tax
● 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
Historical Income Tax Rates
● 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
2019 U.S. Federal Tax Rates - Progressive Structure
● Marginal rates apply only to income dollars within specified ranges
Who pays the government?
● 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%
The Tax Cuts and Jobs Act of 2017
● 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
Taxing Corporations
● 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?
○ Occurs when government outlays exceed revenue in a given time, usually a year
○ Outlays > Revenues
○ More funds flowing out than in
Budget Deficit
○ Occurs when government revenue exceeds outlays in a given time period, usually a year
○ Revenues > Outlays
○ More funds flowing in than out
Budget Surplus
U.S. Federal Outlays and Revenue as a Percentage of GDP
● During recessions, tax revenues declines, and outlays increase as the government tries to stimulate the economy, leading to budget deficits
Outlays and Revenue 3 General Observations:
○ (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
A shortfall in revenue for a particular year’s budget
Deficit
The total of all accumulated and unpaid budget deficits
Debt
U.S. National Debt, 1990-2017
While the federal debt is $18 trillion, much of the debt is owned by government agencies meaning that the government owes money to itself
Foreign Ownership of U.S. Federal Debt
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
Foreign and Domestic Ownership of U.S. Debt
While the percentage of the national debt owned internationally has grown in recent decades, it is still less than one-third of the total
Government Outlays =
Government Spending + Transfer Payments
Largest portion of outlays:
Social security
Medicare
Increased due to demographic changes
