AP Budget, Taxing, and Spending

1. THE FEDERAL BUDGET,
TAXING, AND SPENDING
AP UNIT 4 CONTINUED

2. Basic Terms
• budget - a policy document providing
for taxing and expenditures (burdens
and benefits)
• fiscal year - the time period a federal
budget covers (Sept.-Sept.); “fiscal” =
“financial”

3. • revenue - money made by the gov’t
(usually made through taxes)
• expenditure - money spent by the gov’t
• deficit - state in which there are more
expenditures than revenue (gov’t
spending more $ than it’s making)

4. Types of Taxes
• income tax - taxes paid by individuals
and businesses based on their yearly
income
• Est. by 16th Amendment
• is progressive (the more $ you make,
the more $ in taxes you pay)

5. 2018 Tax Brackets (Individual)

6. • social insurance (payroll) taxes - money taken
out of individuals’ paychecks to fund programs
such as Social Security and Medicare
• SOCIAL SECURITY RATE: 6.2% (0.062)
• MEDICARE RATE: 1.45% (0.0145)
• excise taxes - taxes paid on the manufacture
of goods (alcohol, gasoline, tobacco, etc.)

7. • sales tax - taxes levied on the sale
of an item (set by each state)
• gift tax - taxes levied on gifts,
prizes, and prize money
• estate tax - taxes levied on
transferred property after death

8. Progressive tax - the higher the income, the
higher the taxes that are paid (ex: income tax)
The wealthy carry more of the tax burden
Proportional (flat) tax - individuals pay the
same tax rate, rich or poor (ex: sales tax in
theory)
Regressive tax - taxes that place more of a
burden on lower income individuals than high
income individuals (ex: sales tax in practice)

9. Borrowing Money
• deficit financing - spending all sources
of revenue, then borrowing more to
cover expenses
• interest - extra fee added for extra
time to pay back a loan
• national debt - all the money borrowed
and still owed by the federal gov’t
• CURRENT NATIONAL DEBT: $22.1 TRILLION

10. Losing Gov’t Money
• tax expenditures - revenue lost by the
gov’t because they give citizens
exemptions and deductions through tax
law
• Tax reductions are also popular with
citizens, but lower gov’t revenues

11. Where Does Gov’t Spend All Its
Money?
• The bigger the gov’t, the bigger the
gov’t budget
• The most gov’t money used to be spent
on national security and military
expenditures
• Today, more is spent on income
securities (medicare/Medicaid, social
security) than anything else

12. • Social Security Act - created the
program that provides monthly funds
for older/retired individuals
• People currently in workforce pay
the social security of those who are
currently retiring
• Medicare - funds that provide
medical services for older individuals

13. Entitlements
• Entitlements - benefits that must be
given to individuals who meet
requirements set by law
• Congress sets the qualifications and
limitations of these programs, but
cannot control how many people
qualify for them
• Ex: Social Security, Medicare, welfare,
unemployment, disability, veterans’
benefits, etc.

14. Types of Gov’t Spending
• Mandatory spending – spending for programs already
established by law, with certain rules and qualifications
for eligibility
• Basically, the $$$ the gov’t MUST spend on programs because
it’s required by law
• Ex: entitlement programs, interest on national debt
• Discretionary spending – spending controlled by
Congress on a yearly basis through appropriations
• Basically, Congress can choose how much or how little to
fund these programs/policy areas every year
• Ex: defense, education, transportation, health, housing, etc.

16. The Budgetary Process
Starts with the President and the Office of
Management and Budget (OMB) - due 1st
week of Feb. each year
1.) OMB communicates with gov’t
agencies/depts. to get budget estimates
2.) OMB works with president to advise creation
of budget from estimates
3.) OMB communicates guidelines to
agencies/depts., who create their budgets
4.) OMB drafts official budget document when all
budget guidelines align

17. Budget is then sent to Congress (ONLY
Congress has the power to
appropriate/assign funds for gov’t
spending)
5.) Congressional Budget Office (CBO)
sends budget to both House and
Senate Budget Committees (other
committees send info as well)

18. 6.) Budget committees set budget
resolution (total level of budget
spending for the fiscal year)
-official guidelines for budget process in
Congress
-gov’t CANNOT spend more than this
amount of money

19. Legislating the Budget
Congress has two methods:
budget reconciliation - edits to current
program spending to match the new
budget spending levels
OR
Pass authorization bills - bills that create
or change a specific gov’t program
(including its setup and expenditures)
Must also pass an appropriations bills -
bills that officially fund authorization bills

20. • Usually the President and Congress’ budget
goals end up being very different, though
the President tries to persuade Congress to
keep to his budget
• Congress ends up passing continuing
resolutions - resolutions that allow gov’t
to spend the same level of money from the
previous fiscal year
• Usually budget increases by increments (a
little higher than the previous year’s
budget)

21. Other Influences in the Budget
Process
• Interest groups try to influence Congress to
allocate money for favored
programs/projects
• Gov’t agencies/depts. always push for
bigger budgets
• House Ways and Means Committee and
Senate Finance Committee deal with tax
code legislation to fund the budget
• Members of Congress pushing for pork
barrel spending for constituencies

22. • Government Accountability Office
(GAO) - monitors budget
implementation and how agencies use
their budgets

23. Economic Policymaking
1.) Monetary policy - gov’t manipulation of
the supply of money to influence the direction
of the economy
Executed by the Federal Reserve System
(“the Fed”)
regulates bank lending, interest rates, and
money supply
7 member Board of Governors each with 14
year terms, appointed by President,
approved by Senate

24. • 2.) Fiscal policy - using the federal
budget (taxing, spending, and
borrowing) to influence the economy
• 2 views: more gov’t involvement or
more consumer involvement?