The Federal Budget Making Process

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The federal budget prepared 18 months before end of fiscal year.

fiscal year-year by which accounts are kept; for the federal government, Oct. 1 to Sept. 30 of next year

The President and the Office of Management and Budget (OMB) work together

The President approves budget; sends to Congress Congress should pass it before end of fiscal year.

Often budget is not passed until after fiscal year has begun

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Taxation

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Principles of Taxation

benefits-received principle those who use a particular government

service support it with taxes; those who do not use a service do not pay taxes for it.

example-a gas tax is used to pay for highway repair. Frequent users of highways often buy more gas and pay more in gas tax

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Principles of Taxation

ability-to-pay principle those with higher incomes pay more taxes

than those with lower incomes, regardless of the number of government services they use

example-all property owners pay school tax even though they might not have school aged children

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Forms of Taxation proportional tax-tax that takes same

percentage of all incomes, as income rises, the amount of tax paid also rises

INCOME Tax Paid(10%)$1,000 $100$10,000 $1,000$100,000 $10,000

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Forms of Taxation

progressive tax-tax that takes a larger percentage of higher incomes than lower incomes; ability-to-pay principle

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Forms of Taxation regressive tax-tax that takes a larger

percentage of lower incomes that of higher incomes opposite of progressive tax example-poorer families spend a larger

proportion of their incomes on sales tax

Family #1 Family #2

yearly income $75,000 $40,000yearly sales tax pd $7,000 $7,000

% of income 9% 18%

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Deficit Spending and the National Debt

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The National DebtYear Interest Paid

on National Debt

(billions)

Percent of Federal

Expenditures

1940 $1 11.01950 $5.7 13.41960 $9.2 10.01970 $19.3 9.91980 $74.9 12.71990 $264.8 21.82000 $370 22.5

1. Write a one sentence summary of the table.2. Which decade had the greatest increase in interest paid on the national debt in both dollar terms and as a percentage of federal expenditures?

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budget deficit-situation that occurs when the amount of government spending exceeds its receipts during the fiscal year. This spending is similar to an individual using

credit by overspending his income. national debt-total amount of outstanding

debt for the federal government budget surplus-the amount of government

receipts is larger that its expenditures during the fiscal year

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