Public Policy 6

In this part of the class we will look more closely at specific areas of public policy, beginning with the budget. There is a famous saying that "all budgets are moral documents," meaning they reflect the values of society, or the government which is supposed to represent the people. The federal budget refers to the expenses of the government every year on various programs and activities. The "power over the purse", or the power to control spending, and the power to tax, is given to the Congress in the U.S. Constitution, and does not specify a role for the President. However, the budget process is overseen by the President and the Congress, with special agencies like the Office of Management and Budget, the Government Accountability Office, and the Congressional Budget Office that provide oversight and research assistance for the budget. According to the National Priorities Project, the process of making the federal budget can be broken down into five steps:

1. The President submits a budget request to Congress
2. The House and Senate pass budget resolutions
3. House and Senate Appropriations subcommittees "markup" appropriations bills
4. The House and Senate vote on appropriations bills and reconcile differences
5. The President signs each appropriations bill and the budget becomes law.

https://www.nationalpriorities.org/budget-basics/federal-budget-101/federal-budget-process/

Each year, the President sends a budget request to Congress in February to take effect in the coming fiscal year beginning on October 1st. Trump's last budget generated a significant amount of controversy, as the Democrats in Congress agreed to many of the most controversial aspects of Trump's budget, even while leading an effort to impeach him, as detailed in this article here:
https://www.wsws.org/en/articles/2020/02/12/pers-f12.html

This aricle provides a breakdown of the current budget request under the Biden administration. Note that this budget has not been passed yet which shows you how long the process can be. Not surprisingly, the delay is caused by debates in Congress over raising taxes on businesses and wealthy individuals.

https://taxfoundation.org/biden-budget-proposals/

The proposed budget would raise federal spending by $4 trillion over ten years, or $400 billion a year. In this case, the budget includes additional legislation, the American Jobs Plan, and American Families Plan, in addition to the fiscal year 2022 budget.

Once the executive branch has submitted its budget request, the House of Representatives and Senate, which make up Congress, both have Budget Committees that make and vote on their own budget resolutions, or their plans for the budget.

Other committees in the House and Senate, known as Appropriations Committees, then determine the precise levels of spending for the federal government. There are also 12 sub-committees within the Appropriations Committee. Each of these committees produce their own spending bills which must be voted on by the House and Senate. The 12 sub-committees are listed below:

Once all 12 appropriations bills have been made, they are voted on in both the House and Senate. If a bill is passed by the House or Senate, it must be voted on by the other, before it is sent to the President to be signed into law. The bills passed by the House and Senate must be identical. Often however, the House and Senate will pass budgets that are different. They must then be referred to yet another committee, known as a Conference Committee, to reconcile the bills into one identical bill. If they are unable to do this then the budget cannot be passed.

What happens if the budget is not complete by Oct 1? This happens often in fact, and when it does, special resolutions are passed by Congress to continue funding agencies. If no resolution is passed, then this will result in a government shutdown as happened in 2013, and 2018 into 2019.

If the Congress can not agree on all 12 spending bills, then a single bill, or omnibus, bill can be passed that contains all 12 spending areas. Besides this, there are extra, or supplemental appropriations that are likely passed each year as well.

Before talking about what the money is spent on, we should talk about where the money comes from. The government raises revenue, for the most part, through taxation. However, taxes themselves fall under different categories. Here is a breakdown of the sources of government revenue:

Most revenue comes from income taxes paid by individuals. However there are also corporate income taxes paid by corporations, and payroll taxes, or wage taxes paid by workers, that are considered separate from income tax.

Income taxes have only become standard since 1913 with the passage of the XVI Amendment to the Constitution. Income taxes are progressive meaning that wealthier individuals pay more, this creates different tax brackets, or tax rates for different income levels. The breakdown of the brackets are shown here:

During the 1930s, and after, tax rates for the highest income earners were much higher than they are now, between 70 and 95 percent through most of the 1940s through 70s:

Corporations also pay taxes, however corporate taxes have decreased significantly as a source of revenue to less than 10 percent:

The economists Thomas Piketty and Emmanuel Saez have shown that tax rates are strongly related to levels of income inequality. Lower taxes on the wealthy (since 1980s) corresponds with increasing inequality since then as well. The graph below shows the the income of the top 10% of income earners and bottom 90%. Prior to 1980, the incomes of both groups grew at largely the same rate, but since the top 10% has grown significantly while the 90% has stagnated and even declined since 2008.

They also show that taxes do have a redistributive effect, in other words, reduces inequality by taxing the rich and providing services and income support to the poor. This is the purpose of an income tax and the reason why it is in the Constitution (XVI Amendment). Income taxes are not just a means of raising revenue, but specifically a tool for reducing inequality. As shown in the graph below the blue line represents the income of the top 1% before taxes, the orange line shows income after tax. However, despite this inequality has still surged to its highest level since the early 20th century.

 

The economist Michael Hudson argues that only looking at taxes underestimates the level of inequality since much of the wealth at the top is hidden from tax collectors, while the incomes of the bottom 90% mostly go to payments on debt (mortgages/rent, credit cards, student loans, medical, etc.) If you have time watch his speech on the history of debt, it is very revealing.

Furthermore, Senator Bernie Sanders has drawn attention to the fact that many large corporations, not only pay no corporate taxes, but pay a negative tax rate, meaning they actually receive money from the government by manipulating the tax code and various "loopholes," including Amazon.

Frankly, the impact of decades of tax cuts is revealing itself in the coronavirus pandemic, as state and federal authorities throughout the country are unable to meet the challenges brought about by this pandemic. For example, the lack of testing facilities and infrastructure to contain the spread of the outbreak during the peak of the pandemic in New York last March: 
https://www.youtube.com/watch?v=g7ehYduP4KU&t=0s
However, just as devastating as decades of tax cuts for the wealthy have been in terms of stripping down the infrastructure of the country, is the disproportionate role that military spending plays as it takes up almost 2/3 of annual spending.

Corporate and income taxes are used to fund the annual budget and make up what is called "discretionary spending" of the government. Payroll taxes are used exclusively to fund programs like Social Security and Medicare, and which are not part of the annual budget process and are considered "mandatory spending." We will talk more about these programs the next couple of classes.

Discretionary spending covers many different areas, most importantly the military which makes up by far the largest part of discretionary spending:

For the federal budget most expenditures are for mandatory programs like Social Security, Medicare, and Medicaid, making up roughly 2/3 of federal expenditures. The economist Paul Krugman once commented that the federal government is "like an insurance company with an army":

Since government spending is more than revenue, the government runs a deficit every year, requiring it to borrow money from private banks, to finance the budget deficit. This, in turn, adds to the overall government debt. However, public debt, or government debt, is much smaller than overall private debt, debts held by people with credit card debts, mortgages, student loans, as well as businesses that are in debt:

The government debt is held in the form of bonds issued by the Treasury Department and sold to private individuals, banks, and even foreign governments. Notably, the government of the People's Republic of China owns a large share of U.S. government debt (the second largest after Japan). There is also a debt ceiling, or a limit to the debt imposed by the Congress, although in most case this ceiling is raised every year, it become a significant issue during the Obama administration.

This covers the basics of the budget and taxing and spending. We will talk more about mandatory spending programs and other aspects of public policy in the next few classes.