Shared Flashcard Set


Public Budgeting and Finance
Revenue, Oklahoma Budgeting, Budget Reform, Federal Budget
Political Studies

Additional Political Studies Flashcards




Major Forms of Tax Revenue
a. Income tax - OK has a graduated scaled (make more = higher %); great use in making revenues and keeping it in ability to pay
b. User fees - Same for everyone, do horribly in ability to pay scenario, military has a good use of user fees though (Base it on ability to pay depending on your rank)
c. Wage taxes -
d. Sales taxes - Does not go particular for ability to pay, straddles the fence in the regards to benefits principle, pays at the same rate
e. Tariffs - Charged on others who bring things into the US to sell, not stable and elastic, don’t do well on the benefits principle for the foreign people since they do not reap any benefits in regards to the taxes being used in revenue to help run the govt
f. Property taxes - Can vary dramatically from jurisdiction to jurisdiction (Ex. Texas variance)
Defining taxable wealth
a. The amount of income subject to income taxes. Found by subtracting the appropriate deductions (IRA contributions, alimony payments, unreimbursed business expenses, some capital losses, etc.) from adjusted gross income
Tax revenue sources by level of government
a. Federal revenue comes from their own sources and primarily include:
i. Personal income tax
ii. Corporate income tax
iii. Other minor sources (i.e. excise taxes and import duties)
iv. No national sales or property taxes
b. State revenue comes from a variety of sources and includes:
i. General sales tax
ii. Personal income tax
iii. Federal aid (24%)
iv. Other minor (some user fees, i.e. parks)
v. Tend not to use property taxes
c. Local revenue also comes from a variety of sources and includes:
i. Property tax
ii. General sales tax
iii. User fees

State and federal aid (34%, over 50% for some like certain school districts)
How have these sources for levels of government changed and why?
a. How:
i. Federal and state- Individual income tax increased in importance
ii. Local- Sales tax and user fees main source of growth in local revenue
iii. However, local property tax and state sales tax have not grown very much, in fact, they have slightly declined
b. Why:
i. Tax elasticity - Favor income tax and hurting both property and sales tax
ii. Political unpopularity- hurts property tax especially, so user fees used to get around taxing limitations
Tax capacity vs. Tax effort
a. Tax capacity: A calculation of your share of property taxes based on market value and class rates
b. Tax effort: is the amount of revenues actually taken in divided by fiscal capacity.
Tax expenditures and nontax revenues:
a. Tax expenditures: "Revenue losses attributable to provisions of the federal tax laws which allow a special exclusion, exemption, or deduction from gross income or which provide a special credit, a preferential rate of tax, or a deferral of tax liability"
i. Shows an accumulation of estimates of revenue lost due to these preferences
ii. The "other side" of the tax system
iii. Provide a benefit to a recipient and reduce public resources available for other uses
iv. "allow politicians to appear to be reducing the size of government (Reducing taxes) while actually increasing it (increasing spending)"
b. Nontax revenue: consists of interest and dividends on investments made by the government such as fees and other receipts rendered by the government
i. Example: trash service, toll highways
Criteria for evaluating taxes and user fees:
a. Benefits principle : a taxation principle stating that those who benefit more from a product or service should pay more taxes on the product or service than those who benefit less
b. Ability to pay principle: envisages that taxation should be levied according to an individual's ability to pay; that is, individuals with higher incomes should be charged higher taxes.
c. Summary:
Individuals with higher incomes are charged more taxes not because they use more government goods and services but because they have the ability to pay more. The primary indicator of ability to pay is commonly agreed to be income. Ability-to-pay principle is therefore in contrast with the benefit approach principle, which determines the amount of taxes a person should pay by the benefits received in public services. Ability-to-pay principle is based not on the benefits received but on the notion of equal sacrifice. It is considered to be characteristic of a socialist sentiment, and is used in most industrialized economies; but equality of sacrifice, is open to interpretation as it can be easured in absolute, proportional or marginal terms.

The main downside of the ability-to-pay principle is that it diminishes the incentive to work, since a higher portion of the generated income will be collected by the government as taxes.
Tax-raising strategies
a. Earmarking: is a requirement that all or a portion of a certain source of revenue, such as a particular tax, be devoted to a specific public expenditure.
Earmarking bypasses the normal procedure by which tax revenue is pooled with all other revenue in a general fund and then allocated among various government spending programs.
b. Temporary taxes: ex. Bond
c. Taxing the politically weak: political tactic to help out your fellow man who is in need by threatening to raise taxes for those less fortunate
The politics of tax reform:
a. The president and Congress are hostage to the performance of the economy.
b. Due to not knowing what the future economic will be, when the budget is prepared there are failures in spending projecting and errors in how much revenue will be made
c. May construct "rosier" scenarios then what is warranted
d. Hard to tell when a recession will arrive, how long it will be, and how much impact it will have
Revenue forecasting (what it is and different types)
a. What it is :
i. "any statement about the future"
ii. Application of quantitative techniques to historical data
iii. Past trends are used to hypothesis/project about the future
iv. Basic assumptions about the future
v. Varies in form due to objectives, time horizon, recurrence
b. Three basic types:
i. Short-range (process) - Annual
ii. Medium-range (crisis) - From one fiscal year to the next fiscal year
iii. Long-range (prediction) (also known as fiscal impact analysis) - Multiple years
c. Three main types of forecasts:
i. Qualitative: Estimating method that relies on expert human judgment combined with a rating scale, instead of on hard (measurable and verifiable) data. Based on judgment and opinion
ii. Uni-variate quantitative: – takes recent trends and assumes they will continue. Pro – cheap and eassy, Con – assumes too much, things can change.
iii. Multi-variate quantitative: -- Looks at how it explains the past and used the data to forecast the future. Pro – can be most precise, Con – takes more time to carry out
Univariate vs. multi-variate forecasting
a. Uni-variate quantitative: – takes recent trends and assumes they will continue. Pro – cheap and eassy, Con – assumes too much, things can change.
b. Multi-variate quantitative: -- Looks at how it explains the past and used the data to forecast the future. Pro – can be most precise, Con – takes more time to carry out
Standards for tax policy
a. "Goal is to transfer control of resources from one group in the society in another and to do so in ways that do not jeopardize, and may even facilitate, the attainment of other economic goals"
b. Transfers include
i. Shifts of purchasing power among groups in the private sector
ii. Shifts of control over purchasing power from the private sector to the public sector
c. Aim is to create a shift of resources that is least harmful economically and socially
i. It is damage control
d. When public goods are financed, the tax must not be voluntary
i. It is of a compulsory nature
ii. Does not allow for voluntarism, such as user charges (ex. Tolls, recreation admission)
e. Equity
i. Fairly or equal burden to all by
1) "according to taxpayers' benefits from or usage of the public service (benefits received)"
2) "according to taxpayers' capabilities to bear the burden (ability to pay)"
a) Horizontal equity: considers equal treatment of taxpayers who have equal capability to pay taxes
b) Vertical equity: looks at proper relationship between the relative tax burdens paid by individuals with different capabilities to pay taxes
f. Adequacy of Revenue Production
g. Collectability
h. Economic Effects
Taxes and externalities:
a. When a negative externality occurs due to consumption by one or more people/businesses
i. Government regulates or responds to these by giving regulations, subsidies, tradable pollution rights or taxes
ii. Use of two types of taxing instruments with "Green taxes":
1) Emission taxes: apply a tax per unit of measured pollution output
2) Indirect taxes on goods or services: Tax for items or services that create environmental damages (ex. Fossil fuel) which helps to create a quest for alternatives
Arguments for and against taxing income
a. For:
i. Equity-measuring ability:
1) shows taxpayer's capacity to bear the cost of government
2) Allows for showing of relative affluence
ii. Equity adjustability:
1) Shows individual taxpayer conditions, such as family size or special economic circumstances
2) Allows for adjustment in taxes to give an equitable distribution of burden to those families who have different circumstances (can not do that with cigarette tax for ex.)
3) Easier to adjust versus other types of taxes, such as social insurance tax
iii. Yield:
1) Keeps pace with general economic activity and allows for significant revenue that is socially acceptable rates
iv. Base breadth:
1) There is less distortion when it comes to income tax versus smaller/narrower tax bases
2) Equity and efficiency advantages if low rate of distortion
b. Against:
i. Transparency and compliance:
1) Income tax complicated enough that it violates transparency standard
2) Very few understand it and some take advantage, such as with loopholes (Tax preferences)
ii. Administration and Compliance:
1) Expensive to collect income tax
2) IRS is evasive, abuses power, costs more for taxpayers to be in compliance with tax laws (10 times more) then it takes to run the IRS
iii. Economic Effects:
1) Discourages saving and investing due to tax applied to interest earned on savings
2) Distortion between present and future consumption
3) Delayed consumption (savings) are reduced
iv. Economic Distortion:
1) Gives relief and punishment to different parts of the economy
2) Moving of economic resources due to tax advantages versus market forces that reflect consumer demand, resource prices and production technology (Ex. Major companies moving overseas due to tax breaks)
v. Equity:
1) Argument that distribution of cost of government is unfair currently
2) Should be evenly distributed among all
3) Unfair use of loopholes of horizontal equity
vi. Overuse:
1) Distortion increases and it is used more
2) Businesses and people will try to move around their affairs so that they can avoid taxation
3) If the rates were lower versus higher, there would not be as much of a need for people to do this (not enough benefit for the cost)
c. Overall, perhaps a better balance among all tax sources could help relieve the revenue system from the dominance of income tax
Selective excise taxation
Different tax treatment for particular products or services and whomever purchases these items will have a greater burden cost; usually discriminatory to try and charge social cost of actions
a. Types:
i. Luxury Excises: A purchase that reflects extraordinary taxpaying ability (Ex. Fur, jewelry, entertainment, services)
1) Objections: tax distorts producer and consumer choices, distributes tax burden on the basis of personal preferences for the taxed items, tax applies to the manufacturer or wholesaler level since it is hard to separate the sales of taxed luxury items from other sales and therefore, fall prey to objections of any nonretail levy
ii. Sumptuary Excises: try to discourage excess consumption of unhealthy or unsafe products (Ex. Tobacco and alcohol)
1) Objections: the demand for the products taxed is often highly price-inelastic, so the tax has little short-term effect on the amount of the product purchased, may have heavy tax burden on low income families and may involve higher effective taxes on lower-income families, and problem arises from the very specific nature of the excise itself
iii. Benefit-Base Excise: primarily transportation-related taxes, operate as quasi price for a public good (Ex. Motor fuel use goes toward the use of the highway)
iv. Regulatory and Environmental Excises: Similar to the sumptuary excise tax, however without the ethical undertones and without explicit revenue objectives of the sumptuary taxes. Tax things such as tax pollutants or penalize automakers who do not make more fuel efficient automobiles. This type of taxes tries to make both sellers and buyers aware of the social cost of their actions.
v. Other Excise: Selective excises on imported items (custom duties) which helps protect local producers during development, finance research or trade promotion activities, lodging excises used to promote tourism, federal vaccine injury compensation fund financed by an excise on certain childhood disease vaccines, fishing equipment that supports sport fish restoration programs (all very specific types of excise that are dedicated for a particular purpose)
Value-added taxes
a. Usually levied by national governments
b. It is a general consumption taxation where tax applies to the increment in value at each stage of the production and distribution process, rather than at the final stage (retail)
c. A tax on the estimated market value added to a product or material at each stage of its manufacture or distribution, ultimately passed on to the consumer. Example being when tax is charged when manufacturer or business sells to a wholesaler and again is sold to a retailer. There is a tax at each interval.
a. VAT helps if lack of vendor cooperation problems
i. VAT requires purchasers to require a documented receipt for vendors for taxes paid
ii. Good way to have a trail of invoices for audit process
b. RST allows for all the eggs to be in one basket and if the retailer cheats then revenue is busted
c. VAT can not be administered at statutory rates higher then 10%
i. Any effort to replace income taxes nationally would make VAT the only feasible choice
d. Countries can remove VAT's from international trade and international competitiveness considerations
i. Request refund at time of export and have importer charged when items come into the country
ii. Other taxes are not able to do that
e. RST on the other hand can not be removed from export prices which creates an international competitive prob
i. Sub national RST better way to go
f. VAT closer to general consumption tax versus RST
i. VAT covers more general services and more complete exclusion of business
ii. Legislation seems more willing to deal with businesses paying on purchases but refunding on their sales, which allows for it to act more like a general consumption tax
g. RST exempts a considerable portion of household consumption expenditure and taxes a considerable amount of business purchases of input
Advantages and limitations of user charges
a. User charge: Must have conditions of benefits separability and chargeability and these factors are absent from pure public goods
i. The farther away a good or service departs from publicness and the closer it gets to a private good, then the more feasible user charges are
ii. Good when individuals benefit from a service
iii. Allows for exclusion for those who do not pay for the benefit
iv. Allows for resource allocation gains and for there not to be substantial waste if the item or service were unpriced
b. Advantages:
i. Registers and records a public demand for a service
1) Offers conclusive demand for the service
ii. Can improve finance equity for selected services\
1) Prevent the prob of putting an extra expense on the general taxpaying public due to general tax revenue provisions
iii. Helps create efficiency since agency staff must respond to client demand
iv. Helps correct cost-and-price signals in the private market
1) Makes businesses or agencies respond and recognize the true social cost of their actions
v. Overall, user charges show the public that services are not costless
c. Limitations:
i. Activities that have substantial benefit beyond the principal recipient are not candidates for user-charger financing
1) Ex. Basic fire protection for an urban area
2) Should not just be about cash flow when it comes to user charges but rather the social benefit, resource allocation, and overall contribution to the community
ii. May subsidize low-income/disadvantaged recipients
1) Beneficiaries should not pay if it has welfare elements
iii. May be expensive to collect even if its feasible to charge
1) Using a bunch of revenue to collect revenue is never wise
iv. Political issues arise when there is a shift from tax-supported service to financial charge service
1) People are already pay taxes and therefore should get these services and not have to pay in addition to receive it
2) Bureaucratic resistance since "rationing" services is happening and public officials will naturally have attitudes against that
v. Unpopular since those who do not pay will be refused service
1) "crisis" in media and from politicians on how enforcement of these charges are hard on lower income people and the elderly
Set-up of state board of equalization
Board Membership and Purpose
The State Board of Equalization was created by constitutional amendment in 1975.  The purpose of the Board is to adjust and equalize the valuation of real and personal property of the several counties in the state and to assess all railroad and public service corporation property.
The Board is composed of 7 members.  The constitutional amendment placed both the State Auditor and the State Examiner and Inspector on the Board but provided that if the Offices of the State Auditor and the State Examiner and Inspector were combined, then the Superintendent of Public Instruction would be added.  The members of the Board are as follows:
Governor Brad Henry, Chair
Lieutenant Governor Jari Askins, Vice-Chair
State Auditor and Inspector Steve Burrage, Secretary
State Treasurer Scott Meacham
Attorney General Drew Edmondson
Board of Agriculture President Terry Peach
Superintendent of Public Instruction Sandy Garrett
Legal parameters to appropriations as a % of revenue estimates
• Revenues & expenditures must balance
• Actual funds must balance by end of year
• If revenues not meeting estimates, Director of Finance must reduce appropriations by the necessary amount
• Legislature can’t appropriate more than 95% of the revenue estimate
Basic legislative process
• FY begins July 1st, ends June 30th.
• August prior to beginning of FY: Budget requirements and forms to agencies.
• October: agencies submit their requests to Office of State Finance (Governor).
• CC to Legislative Service Bureau.
• November/December: Revenue estimate set by Board of Equalization
• Can be augmented by tax increases (requires 2/3 vote of both Houses)
• Legislative session begins (late Jan/early February)
• Governor must submit budget on first day of session
• Revenues & expenditures must balance
• Actual funds must balance by end of year
• If revenues not meeting estimates, Director of Finance must reduce appropriations by the necessary amount
• Legislature can’t appropriate more than 95% of the revenue estimate
• Appropriations committees run the show (authorizing committees have no role)
• Half of the money bills originate in the House, other half in the Senate
• Last Friday in May: session ends
• Budget must be passed by then
• Legislature usually passes earlier to allow time to respond to Gov’s line-item vetoes
• Governor must sign budget or veto it
• Governor has standard line-item veto
• 2/3 override required to negate
• As many as 50 line-items vetoed each year
• After funds are appropriated, each agency must develop a Budget Work Program
• Supplemental Appropriations: for the current fiscal year may be made during the legislative session.
• Any of the 5% not appropriated for previous FY can be used
Line-item vetoes
• Governor must sign budget or veto it
• Governor has standard line-item veto
• 2/3 override required to negate
• As many as 50 line-items vetoed each year

After funds are appropriated, each agency must develop a Budget Work Program
Basic set-up of rainy day fund
• Excess revenue (over 100% of projections) is deposited into the Constitutional Reserve Fund (Rainy Day Fund)
• Rainy Day Fund can be used if:
• General Revenues estimates decline from one year to the next
• Emergency declaration by the Governor and a 2/3 vote in both Senate and House of Representatives
3/4 vote by Senate and House of Representatives
6. Key difference between OKC and Tulsa budgeting systems
• In OKC, City manager hired by council
• Submits proposed budget (about $400 million)
○ Budget must be balanced as proposed
○ Budget must be balanced as implemented
• City budget office (Manager is over) sets revenues for budget proposal
○ Council can change estimates, but doesn’t
○ Council makes changes to City mgr’s/ mayor’s proposed budget
• There is typically only 1 appropriations bill
○ Mayor has no veto power in OKC
• Is merely another council member in a formal sense
○ Mayor is exec in Tulsa, can veto
○ During FY:
• Budget can be amended, but no formal supplemental appropriation
• City mgr (OKC) and Mayor (Tulsa) can impound funds for efficiency reasons or because of low revenues
• Rainy Day Fund
○ 1.5% of the General Fund
○ Plus unappropriated monies left in
Performance budgeting
Putting performance information alongside budget numbers will improve public decisions
b. there is an emphasis on agency-activity performance objectives and accomplishments, not the purchase of resources
c. Puts funds and objectives on the same sheet
d. Organized in terms of:
i. Activities versus line items only
ii. Measure activities, cost of activities and efficiency of activities (evaluate all three)
iii. Monitor by comparing actual cost and accomplishment against the planned levels for each agency
iv. "means to an end"
e. Example of Salt Lake City Performance Budget (pg.203) that contained four key elements:
i. The demand section
ii. The workload section
iii. The productivity section
iv. The effectiveness section
f. Overall, look at whether the activity is being done at low cost and it does not consider whether the activity is worth of doing
New performance budgeting
a. The societal goal, the outcome or result, is what matters for government performance, not the direct output or activity of the agency
i. Example from private industry: auto companies manufacture cars to make a profit, not to buy materials to use in making cars, or simply selling and satisfying stockholders due to size of profit, but instead it is to look forward the result or outcome of agency operations and accordingly tests agencies results, not on how results are attained (not on input use or operational management)
ii. Example for agencies: vaccinations for children should be done to decrease infant mortality at public health agencies
iii. Involves:
1) Objectives/strategic plan
a) Agency states what it is trying to accomplish for the citizenry
2) Performance measures
a) Gauging measures of progress toward meeting those objectives
i) Five critical areas:
One. External focus - relate to client/customer, not internal procedures of agency
Two. Truly measurable - data from 3rd party is best; should gauge if there is success, failure, deteriorating, stay the same
Three. Outcome based - measure service delivery to the citizenry rather than impact within the entity
Four. Significance - look at full scope of agency work so that a complete idea of success is portrayed
Five. Manageable - number of measures should be no greater than necessary to cover the scope of agency operations
3) Flexible execution: not have narrow constraints in how they use their resources to deliver services
4) Reporting: reports reflect service outcomes with their financial report; should show audit and evaluation emphasis on outcomes versus how the money was spent
b. Challenges for New Performance Budgeting:
i. Need to agree on what to accomplish
ii. Performance budgets do not cross agencies
iii. Cost must be tracked
iv. Responsibility without control
v. Trust and no micromanagement
vi. Refocused audit
vii. Information overload
viii. Outcome measurement
Zero-based budgeting
a. Jimmy Carter brought in this sort of budgeting back in 1976 when he was President
b. Intended to be an orderly device for reallocating public resources to areas of greatest social need
c. Each agency had to defend its budget in its entirety every year and there was no assumption that they would receive what they had the previous year
d. Deliberations were to involve the full appropriations under review
e. Should allow for government to be more flexible, eliminate low-yield programs, improve effectiveness by making administrators look at their cost of entire operations and simplify shifts of government resources in response to changed demands without the need for government to reorganize
f. Kept the same line item and department organization format; however, managers needed to prepare a decision package
i. Packages included operation data such as workload that help to appropriate for making choices
ii. Administrators ranked packages and let it flow up to the bureaucracy until the departments used them to build their final budgets
g. Ultimate decision of what packages made it into the budget proposal came from the chief executive

This system did not last outside of the Carter administration; however, some local governments still use it and the close relative of target-based budgeting budded from this budgeting method
Program budgeting
a. organizes proposed expenditure according to consumer output or contribution to public objectives
b. Arthur Smithies program design
i. Facilitate comparisons: design programs so that they "permit comparison of alternative methods of pursuing an imperfectly defined policy objective"
ii. Include complementary resources: Have complementary components that can not function separately
iii. Recognize the unallocable: sometimes separate supporting service programs are needed if one part of the government serves several other parts of that government
iv. Multiple structures: may need overlapping structures to achieve their objectives
v. Recognize long-term activities: long time span may need research, development or long term investment and therefore, should be separate subprograms
c. Problems with program budgeting:
i. Many public services contribute to more then one public objective and sometimes the best one is not always apparent; therefore, there will always be a winner and loser in regards to a set of policy choices taken by government agencies
ii. Cost estimates for programs may be less meaningful for public decisions then imagined; there are a lot of resources that are shared among several agency programs at any given time, hard to distinguish just a single program funding
iii. Programs can not completely displace departments since accountability and responsibility must be tacked on to a particular organizational unit; programs can not be held accountable; departments can
Balance budget amendment
is any one of various proposed amendments to the United States Constitution which would require a balance in the projected revenues and expenditures of the United States government. Most such proposals contain a supermajority exception allowed for times of war or national emergency.
While no balanced budget amendment has passed at the national level, every US state except Vermont has a form of Balanced Budget Amendment
Entitlement caps
Force cuts to entitlement programs
Push and Pull factors in budgeting
Centralizing vs. Decentralizing
Major laws that changed budgeting (what precipated them and their effects)
· Historical Development
· Budget and Accounting Act of 1921
l Created executive budget*
l Established OMB and GAO
· Congressional Budget and Impoundment Control Act of 1974
l Designed to coordinate Congressional action on the budget
l Created budget committees and budget resolution
l Established CBO
· Balanced Budget and Emergency Deficit Control Act of 1985 (1987)
l Designed to eliminate deficit by 1991 (1993)
l Didn’t work!
· 1990s Deficit Reduction
l OBRA 1990, OBRA 1993, BBA of 1997
l Budget Enforcement Act
l Created discretionary spending caps
l Created pay-as-you-go (PAYGO)
Rise of entitlements and backdoor spending
· Rise of entitlements—authorizing payments for many years (off-budget)
· Now a huge slice of Federal pie.
· Makes it harder to do anything new because do much of the budget is already decided in advance.
· When cuts are needed, they are draconian.
“Backdoor spending,” a term invented by appropriators to convey the notion that spending through authorizing legislation is illicit. (Schick 219)
Presidential-congressional rivalry on budgeting (power swing)
· Congress, the President and the Budget
· President’s budget as kickoff to Congressional process
· Congress has “power of the purse”
· Extent of deference to President depends on political factors
· Congress faces different incentives than President
· Use of budget for electoral purposes
· Leads to “member priorities” (pork)
· Pendulum of power between the branches.
· Schick oversimplifies the eras of congressional and presidential dominance.
· Misses an important development in 1950, which I have researched
· More Subtle Power Swing
o President was advantaged in the 1921 act and then presidents, beginning with FDR starting using the veto all the time.
o Congress’ reaction was to veto-proof things in large omnibus budget bills.
o Force the president to sign because he likes most of it (veto becomes watered down)
o Omnibus bills help Congress over President, contrary to the conventional wisdom.
o What institutional tool might allow the president to reverse the trend toward bundling of bills?
§ Line-item veto
§ Clinton had for 16 months in mid 1990s.
§ Declared unconstitutional by Sup Ct.
Omnibus bills and presidential veto power (also line-item veto)
An OMNIBUS BILL packages together several measures into one or combines diverse subjects into a single bill. (
Allows for legislature to have more power over the president and his/her vetoing power
Steps of Federal budget process (see handout for overview)
Major shifts in Federal funding
· Major shifts in Federal Funding, 20th century
· Move to income tax from tariff-driven revenue structure in early 1900s.
· Income taxes are more stable than collections on imports.
· Allows development of post-Industrialist government apparatus, but still a limited government (not positivist).
· The New Deal represents the next major shift.
· Depression Era created context for change.
· Dramatically expanded role of Federal government into new areas.
· First real set of entitlements apart from veterans’ payments. Positivist govt.
· World War II involved dramatic levels of deficit spending to spur along America’s involvement in the war.
· And, when the WWII vets assimilated back into society in the late 1940s and 50s, they were privy to yet more new Fed. programs.
· Fed govt then into education policy (veterans programs and then Sputnik).
· Later dramatic involvement in transportation policy (system of highways, Pres. Involvement in union talks).
· The 1960s saw the Fed govt expand social security and welfare programs from the New Deal era and add several new poverty programs.
· Entitlements begin to flourish.
· Fed. Govt. enters K-12 and Higher education explicitly.
· 1970s-1990s
o Entitlements expand through growth in population and backdoor spending techniques
o These moves opened many programs up to new groups of Americans (including the middle class).
o By late 1990s, entitlements are 60% of budget.
o See Schick, Figure 2-3 (p. 18).*
· 1990s Peace Dividend
o Major change in funding in the 1990s (the post Cold-War era) was a major reduction in the amount of defense spending.
o Part of the previous defense funds went to domestic programs (the so-called peace dividend).
o Much was used for deficit reduction. See Schick, Figure 4-2 (p. 66).*
· Post 9/11 Funding
o Since 9/11 we have grown the military back toward what it was during the Cold War.
o It is too early to determine what impact this will have on the budget.
· One thing is clear, something will have to give (deficits, cut domestic, or don’t re-grow the military).
Role of the president in budgeting (formal and informal, opportunities and challenges)
· Formal roles:
o Interaction with OMB about Presidential budget
o State of Union
o First mover advantage
o Signs reconciliation act (can veto)
o Signs 13 regular appropriations (can veto)
o Presidential Role continued
· Informal Roles:
o Input on resolution
o Interaction via staff with committees all through congressional process (Congress always fearful of veto).
o Building cross-party coalitions with moderates in other party.
o Summits at White House when there is budget gridlock.
· Opportunities
o Whole vs. parts perspective
o Honeymoon period
o Fellow partisans in Congress
o Veto threats
· Challenges
o Partisan polarization
o Declining capital over Presidency
o Opponents come out of woodwork
OMB’s conflicting mandates
Has two conflicting mandates:
(1) Provide professional assistance to president in preparing budget (expertise)
(2) Articulate and promote president’s views and priorities (politics)
(3) These 2 mandates can come into conflict
Congressional changes and budgeting
Congressional changes
· Everything used to be funded through appropriations (discretionary).
· Entitlement funding is done through authorizations (permanent appropriations).
· Hence, authorizing committees (traditionally charged with making policy, not budgets) have gained power vis-à-vis appropriations committee with the rise of entitlements.
· Backdoor spending
· Appropriations committees have fought back by bundling policy changes (traditionally the purview of the authorizing committees) in with appropriations bills.
· Backdoor policymaking
· Another change is the rise of polarized parties on Capitol Hill, which has resulted in a very partisan budgeting process.
· Becomes hard to get a majority with traditional methods.
· Hence, power leaders are given new legislative tools to get things done.
· This allows Congress to get things done, but disadvantages the committee system and individual members vis-à-vis the part leaders.
· Lastly, with the rise in the use of the filibuster as a tool to block legislation and budgets, supermajorities are often required in the Senate to do anything.
· This means the coalition leaders (and President) have to make deals with the minority party in the Senate.
· Majority party really calls the shots in the House in contrast. Not as much of a need to reach across party lines to build a coalition.
Discretionary spending caps
Era’s of presidential-congressional politics on budgeting
Social Security challenges; Social Security Act
· Social Security Act of 1935
· Title I: granted to states to support state welfare programs for the aged.
l This was temporary relief program to be phased out once Title II was implemented.
· Title II: Federal old age benefits (what we think of Social Security today)
l Benefits were to be paid to the primary worker when he/she retired at 65.
· Title II of Soc Sec Act contined
· Benefits funded through a payroll tax (FICA—Federal Insurance Contributions Act)
l Paid by employer and worker
l Benefits received by an individual based on contributions made by that individual
l Payroll taxes collections began in 1937
l Monthly benefits began to be paid out in 1942
l 1st recipient of Soc Security payment was Ernest Ackerman, who retired one day after the program began. He received a payment of 17 cents.
· Social Security Act continued
· Contributions are paid into the Social Security Trust Fund. Payments go out of here to individuals upon retirement also.
· In addition to what individuals pay into the system, a small amount is funded into the Social Security Trust Fund from the general govt budget
l varies according to what the need is that year
· Surpluses typically invested in Federal securities (earning about 6%)
· Social Security Act continued
· Since 1937, more than $4.5 trillion has been paid into the trust fund, and more than $4.1 trillion has been paid out.
· Amendments:
l 1939: benefit amounts increased a little
l 1950: benefits increased 77%.
l 1961: early retirement at 62 okay with lower benefits
l 1975: COLA’s built in for the first time
· Social Security continued
· Program has grown dramatically.
· In 1940s, 220,000 people received social security payments totaling $35 million.
· Today, nearly 44 million people receive it, to the tune of $341 billion.
Social Security reform proposals
Plan #1 to Fix System
· Mandatory Individual Retirement Accounts (eventual privatization)
· 12.4% payroll tax used for funding. 10% goes into private pension funds. 2.4% to fund the transition administratively.
· Retirement age determined by each worker individually.
· Transition—choices for those 30 & up.
Plan #2 to Fix System
· Mandatory Personal Savings Accounts.
· Two-tiered system which raises payroll tax by 1.52% to 13.92% starting today and ending in 2069.
· Tier 1: base benefit of $410 per month indexed to inflation. Funded by 8.92%
· Tier 2: Other 5% put into private pension funds.
· Hybrid with Tier 1 safer tier in case Tier 2 doesn’t work out.
Plan #3 to Fix System
· Individual Accounts
· Also a two-tiered system. Raise payroll tax by 1.6% to 14%.
· Put the 1.6% into individual accounts (stocks and bonds) managed by Fed govt.
· Tier 2 retains the old system, but it is scaled back significantly.
Plan #4 to Fix System
· Incremental Reform
· Increase retirement age (to 68 or 70) with early retirement at 65 by 2035.
· Reduce base benefits (especially of high-wealth retirees, but also of others)
· Reduce COLA’s.
· Increase payroll taxes by 2% to 14.4%.
Plan #5 to Fix System
· Maintain Benefits
· Invest up to 40% of trust fund in the private sector by 2014.
· Increase payroll tax by 1.6% to 14% in 2045.
· Increase benefits formula to 38 years from 35.
Plan #6 to Fix System
· Leave Social Security Alone…
· Until the Trust fund runs out, then…
· Raise payroll tax 3.5% to 15.9% in 2029 and to 16.5% in 2050.
· Or cut spending in others areas enough to offset deficit in trust fund.
· Logic: social security has worked to well to change in major ways.
Arguments for and against deficits at the Federal level
Are Deficits Bad?
· Opportunity costs
· Govt borrowing can crowd out private borrowing
· Borrowing from foreigners sends $ abroad
· Possible inflationary effects
· Immoral
· Large deficits limit economic effects of Fed govt during recessions
Are Deficits Good?
· Stimulating the economy
· Investment
· The deficit pays for important programs
· Wars and Emergencies
How Would It Compare to the States?
· Some states have balance requirement only in the approved version
· Allow deficits in FY
· Only require balance in general fund
· Capital budgets lead to large debts
· Impact on Presidential-Congressional Power
· Tend to empower executives
· Submission of balanced budget
· Impoundment in execution of budget
What Will be Included?
· Useless if entitlements not included
· Will a capital budget be formulated?
· Deficits okay in true emergencies?
· Will it Prevent Gimmicks?
· Collect revenue early, pay salaries late
· Rosey revenue projections (GRH)
· Asset Sales
· Refunding Bonds
· Fund Transfers
· All of the above reduce citizen accountability
Who Will Enforce It?
· The courts?
· To date, state courts have made few rulings concerning unbalanced budgets
· Will the President be given more power?
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