The US government finances its operations through taxes, non-tax revenues like fees, and borrowing. Congress has broad taxing powers but some constitutional limits, like that direct taxes must be proportional to population. Current major federal taxes include income tax on individuals and corporations, social insurance taxes, excise taxes, estate and gift taxes, and customs duties. The government also borrows regularly through public debt obligations. Federal spending is dominated by entitlement programs like Social Security. The annual budget process involves the President's budget proposal and congressional appropriations committees determining actual funding levels.

1. Financing Government
Ch. 16 Sec. 1

2. The Power Tax
• Congress exercises the taxing power to
finance the costs of operating the Federal
Government as well as for non-revenue
purposes.
• Constitutional Limitations
– Taxes may be levied only for public purposes
– Taxes on Export are prohibited

3. • Constitutional Limitations cont.
– Direct taxes must be equally apportioned among
the States according to their populations (except
income tax)
• Ex. Tax on Land or Buildings paid by the property owner
– Indirect taxes must be levied at the same rate
throughout the country.
• Ex. Federal tax on liquor, is passed on to the distiller
but paid by the person buying the liquor.
• The Implied Limitation
– The Federal Government may not tax State or local
governments in the exercise of their formal governmental
functions, Ex. Schools, Furnishing health care
– Nongovernmental functions may be taxed

4. Current Federal Taxes
• The Income Tax- The income tax is flexible and
progressive and is levied on both individuals
and corporations.
• The Individual Income Tax
– A tax is levied on each person’s taxable income.
– Tax rates vary depending on the amount of
income a person receives.

5. • The Corporation Income Tax
– Corporations also pay income tax on their profits.
– Nonprofit organizations are not subject to this tax.
• Social Insurance Tax
– Social insurance taxes paid by employees and
employers finance social security, Medicare, and
unemployment compensation.
– These taxes are regressive, or laid at a flat rate
without regard to a taxpayer’s income

6. • Excise Taxes
– Excise taxes are taxes on the manufacture, sale, or
consumption of goods or services.
– These taxes are passed on to consumers by the
producers.
• Estate and Gift Taxes
– The estate tax is a tax on the estate of one who
dies.
– The gift tax prevents people from avoiding the
estate tax by giving their property away before
they die

7. • Custom Duties
– These are taxes on goods brought into the country
from abroad.
– Once the major source of federal income, custom
duties now make up only two percent of
government revenues

8. Taxing for Nonrevenue Purposes
• Taxes are also used to regulate or discourage
activities that Congress considers harmful to
the public
– Ex. Certain guns and gas-guzzling
• There are constitutional limits to Congress’s
power to tax for such purposes.

9. Non-tax Revenues and
Borrowing
Ch. 16 Sec. 2 & 3

10. Nontax Revenues
• The Federal Government earns more than $20
billion a year from nontax revenues.
• Nontax revenues come from many sources,
including earnings
– Federal Reserve System
– interest on loans
– fees charged by federal agencies
– monies from the sale of public lands

11. Borrowing
• Traditionally, the power to borrow was used
only to meet crises and to finance large-scale
projects that could not be paid for out of
current income.
• In recent decades, the government has
borrowed regularly in order to make up the
difference between what it spends and what
income it takes in—the deficit.

12. • The Federal Government can borrow at lower
interest rates than private borrowers because
it is considered a safe investment and because
interest on federal securities cannot be taxed
by State or local government

13. The Public Debt
• The public debt is all of the money borrowed
by the government and not yet repaid plus the
interest on that money.
• The public debt has increased rapidly in recent
years, causing great controversy because of
the burden it places on tomorrow’s taxpayers.

14. Spending and the Budget
Federal Spending
Ch. 16 Sec. 3
• The Federal Government spends the largest
amounts of money on social security
• Interest on the public debt is the second
largest object of current federal spending

15. • Controllable and Uncontrollable Spending
– About 20 percent of spending by the Federal
Government is controllable, that is, the President
and Congress decide how much will be spent each
year on theses expenditures
– About 80 percent of spending- such items as
interest on the national debt, social security
benefits, food stamps, and other entitlements- is
not controllable, that is, the government cannot
control the amount of these payments.

16. The Federal Budget
• The Budget Process
– The Budget is the joint responsibility of the
President and Congress
– The President proposes a budget and Congress
decides whether and in what amounts to
appropriate the funds the President asks for in
that budget

17. • The President and the Budget
– Each federal agency is required to submit detailed
estimates of its spending needs for the coming
year
– The office of Management and Budget reviews
the requests, holds hearings in which agencies are
required to justify their estimates, and fits all the
requests into the federal budget that is sent to
Congress.
• Congress and the Budget
– The President’s budget is referred to the Budget
Committee in each house

18. –The Congressional Budget Office helps
these committees study and make decisions
about the Presidents Budget.
–The President’s budget is also sent to the
House and Senate Appropriations
committees, which are responsible for
fashioning the bills that actually appropriate
the money.

19. • Congress tries to pass all of its appropriations
measures before the beginning of the fiscal
year (October 1), but seldom succeeds in
doing so and must then pass emergency
spending legislation to allow the government
to continue operating until the budget is
passed.