Put your money where your mouth is



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The Budget: The Politics of Taxing and Spending

Chapter Overview


As the popular saying “put your money where your mouth is” suggests, the federal budget process provides a powerful way to think about the priorities of the national government. In this chapter we examine the politics of the budget. We start by describing the sources of funding for the federal government and assess the consequences of tax expenditures and borrowing. Then we analyze federal expenditures and the growth of the budget, outline the budgetary process, and explain the role that politics plays. We conclude by assessing the impact of democratic politics on budgetary growth and of the budget on scope of government. By the end of the chapter, students should have a good understanding of the basic dynamics and controversies surrounding the federal budget.
Lecture Suggestions

D
13.1
escribe the sources of funding for the federal government and assess the consequences of tax expenditures and borrowing.

LECTURE 1: The central political issue for many years has been how to pay for policies that most people support.

  • A budget is a policy document allocating burdens (taxes) and benefits (expenditures).

  • Over the past 30 years, the national government has run up large annual budget deficits. A budget deficit occurs when expenditures exceed revenues in a fiscal year.

  • The president and Congress have been caught in a budgetary squeeze: Americans want them to balance the budget, maintain or increase the level of government spending on most policies, and still keep taxes low.

  • Thus, two questions become central to public policy: Who bears the burdens of paying for government? Who receives the benefits?


LECTURE 2: Probably no government policy affects as many Americans as tax policy. In addition to raising revenues to finance its services, the government can use taxes to make citizens’ incomes more or less equal, to encourage or discourage growth in the economy, and to promote specific interests.

  • Progressive tax rates and governmental redistribution programs make society more equal. Examples of such programs include everything from unemployment insurance and food stamps to Social Security and Medicare.

  • Regressive taxes and some governmental programs can also make society less equal. Lower tax rates on capital gains than on wage income, for example, tends to exacerbate income inequality.

  • The government can also intervene in the economy to promote or discourage economic growth. When the economy is threatened with recession, for example, the government can increase its spending to stimulate the economy. The Federal Reserve can also lower interest rates to encourage investment. To prevent the economy from overheating and from high inflation setting in, the Fed can increase interest rates.



LECTURE 3: The three major sources of federal revenues are the personal and corporate income tax, social insurance taxes, and borrowing. Explore each of these with your students.

  • In 1913, the 16th Amendment was added to the Constitution, explicitly permitting Congress to levy an income tax. Although corporate taxes once yielded more revenues than individual income taxes, today corporate taxes yield only about 12 cents of every federal revenue dollar, compared with 44 cents coming from individual income taxes.

  • Today the federal debt—all of the money borrowed over the years and still outstanding—exceeds $15 trillion. Nine percent of all federal expenditures goes to paying just the interest on this debt. When the federal government wants to borrow money, the Treasury Department sells bonds, guaranteeing to pay interest to the bondholder. Citizens, corporations, mutual funds, and other financial institutions purchase the bonds. Many economists and policymakers are concerned about the “crowding out” effect the national debt is having on available investment capital. Some have called for a balanced budget amendment.

  • Tax expenditures represent the difference between what the government actually collects in taxes and what it would have collected without special exemptions. Tax expenditures are essentially monies that government could collect but does not because they are exempted from taxation.


LECTURE 4: Explain how recent administrations have changed and maintained tax policy over time.

  • Early in his administration, President Reagan proposed a massive tax-cut bill, which was passed by Congress in July 1981. Families with high incomes received significant income tax reductions with the 1981 bill, but those at the lower end of the income ladder did not notice much change in their tax burden because social insurance and excise taxes (which fall disproportionately on the poor) rose during the same period. Many blamed the massive deficits of the 1980s and 1990s at least partially on the 1981 tax cuts, as government continued to spend more but reduced its revenues.

  • The Tax Reform Act of 1986 was one of the most sweeping alterations in federal tax policy in history. It eliminated or reduced the value of many tax deductions, removed several million low-income individuals from the tax rolls, and greatly reduced the number of tax brackets.

  • In 1993, President Clinton proposed, and Congress approved, a plan to raise the income tax rate for families in the highest income bracket. Spending cuts were also enacted. By the end of the Clinton administration, the yearly deficit had been reversed into surpluses. This helped make cutting taxes once again a popular rallying cry for some politicians, including George W. Bush. In 2001, Congress enacted a tax cut that gradually lowered tax rates over the next ten years. When deficits immediately reappeared, critics charged that the president was fiscally irresponsible.


LECTURE 5: While there is often much debate over taxes during election cycles, and Americans generally resent having to pay taxes, few really understand the sources of government revenue. Examine the tax burden with your students. The primary tax sources are:

  • Individual Income Taxes. The individual income tax is the federal government’s largest source of revenue.

  • Corporate Income Taxes. The corporate income tax is set at 35% of net corporate income profits; however, corporations find many ways of reducing their taxable income, often to zero.

  • Social Security Taxes. The second largest source of federal revenue is the Social Security tax.

  • Estate and Gift Taxes. Federal estate taxes levy a tax rate that rises to 55 percent; estates worth less than $3.5 million are exempt.

  • Excise Taxes and Custom Duties. Federal excise taxes on the consumption of liquor, tobacco, gasoline, telephones, air travel, and other so-called luxury items, together with customs taxes on imports, provide about 4 percent of total federal revenues.

  • Tax expenditures are tax revenues lost to the federal government because of exemptions, exclusions, deductions, and special treatments in tax laws.

  • Multiple means of tax avoidance (legal means), an “underground economy” that facilitates tax evasion (illegal means of dodging taxes) costs the federal government many billions of dollars.


LECTURE 6: Distinguish between progressive and regressive taxes and provide examples of each.

  • Progressive taxation requires high-income groups to pay a larger percentage of their incomes in taxes than low-income groups. Income taxes are generally progressive.

  • Regressive taxation takes a larger share of the income of low-income groups. Sales taxes are generally a regressive form of taxation.

  • Proportional (flat) taxation requires all income groups to pay the same percentage of their income in taxes.


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nalyze federal expenditures and the growth of the budget.

LECTURE 1: Among the most important changes of the twentieth century is the rise of large governments. American governments—national, state, and local—spend an amount equal to one-third of the Gross Domestic Product (GDP). Expenditures of the national government alone equal over 20 percent of the GDP. Nevertheless, the United States actually has one of the smallest public sectors among Western nations relative to the size of the Gross Domestic Product (GDP)

  • Two conditions associated with government growth in America are the rise of the national security state and the rise of the social service state.

  • After World War II, the “cold war” with the Soviet Union resulted in a permanent military establishment and expensive military technology. President Eisenhower coined the phrase military–industrial complex to characterize the close relationship between the military hierarchy and the defense industry that supplies its hardware needs. The Pentagon wants weapons systems and arms makers want contracts, so they tend to be mutually supportive. In the 1990s, defense expenditures decreased in response to the lessening of tensions in Europe. The budget of the Department of Defense now constitutes only about one-sixth of all federal expenditures.

  • The Social Security Act (passed in 1935) was originally intended to provide a minimal level of sustenance to older Americans. In the mid-1960s, America’s social services network greatly expanded by adding to the Social Security system and creating many new programs designed to aid the poor and the elderly. In 1965, Medicare, which provides both hospital and physician coverage to the elderly, was added to the system. Today, about 45 million Americans receive payments from the Social Security system. Social Security is not the only social policy of the federal government that is costly. The rise of the social service state has contributed to America’s growing budget in health, education, job training, and scores of other areas.


LECTURE 2: Explain how the politics of incrementalism affect the politics of the federal budget.

  • The picture of the federal budget is one of constant, slow growth. Expenditures mandated by an existing law or obligation (such as Social Security) are particularly likely to follow a pattern of incrementalism, which means that the best predictor of this year’s budget is last year’s budget plus a little bit more—that is, an increment.

  • More and more of federal spending has become “uncontrollable.” An uncontrollable expenditure is one that is mandated under current law or by a previous obligation. About two-thirds of the federal budget is uncontrollable—based on expenditures that are determined not by how much Congress appropriates to an agency, but by how many eligible beneficiaries there are for a particular program.

  • Many expenditures are uncontrollable because Congress has in effect obligated itself to pay X level of benefits to Y number of recipients. Such policies are called entitlements.


LECTURE 3: The expenditures of all governments in the United States—federal, state, and local governments combined—today amount to over 35 percent of GDP. The federal government itself spends more than $3.8 trillion each year—about 25 percent of GDP.

  • Mandatory Spending. Much of the growth of federal government spending over the years is attributed to mandatory spending items in the federal budget. Mandatory spending commitments in existing laws—notably Social Security, Medicare, Medicaid, and other entitlements, plus interest on the national debt—accounts for over 60 percent of the federal budget.

  • “Discretionary” Spending. Washington policymakers consider spending that is not previously mandated by law to be discretionary. Discretionary spending, including defense, accounts for only about 40 percent of the budget.

  • Exploding Deficits. Deficits are imbalances in the annual federal budget in which spending exceeds revenues.

  • The Debt Burden. The accumulated annual federal deficits—that is, expenditures exceed revenues each year—add up to the nation’s national debt.

  • Interest Burden for Future Generations—Even if the federal government manages to balance future budgets, interest payments will remain obligations of the children and grandchildren of the current generation of policymakers and taxpayers.


LECTURE 4: In many states, something similar to the 1996 federal welfare reform has been in place for some time. The goal is to bring people back into the work force. But the real question is whether these people can earn a living once they get there.

  • All over the nation, states are helping welfare recipients find work. And those efforts have been successful.

  • But if the goal is to make welfare recipients self-sufficient, the results are not encouraging.

  • The reality is that when welfare recipients do find jobs, the pay is below a subsistence level and they have no long-term prospects.

  • The main problem is that to get beyond the minimum wage job, welfare recipients need more education, transportation, child care, and often counseling. But those things cost money, money the legislatures are generally not ready to spend.

  • Even states that do offer free education and child care to welfare recipients cannot keep up with the booming demand. And budget constraints have cut back many of these programs.

  • The simple fact is that unskilled workers, whether on welfare or not, are having an increasingly hard time finding work that pays a living wage.

  • One other question should be posed: Will welfare rolls go up once the U.S. economy begins to falter? Discuss this in class.


LECTURE 5: Consider providing graphical representations of the federal budget to your class. Examples can be found at the Congressional Budget Office (http://www.cbo.gov/publication/42636), the White House (http://www.whitehouse.gov/winning-the-future/interactive-budget), and the Office of Management and Budget (http://www.whitehouse.gov/omb/budget).
O
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utline the budgetary process and explain the role that politics plays.

LECTURE 1: Public budgets are the supreme example of Harold Lasswell’s definition of politics as “who gets what, when, and how.” Budget battles are fought over contending interests, ideologies, programs, and agencies. The battle over the deficit and the fiscal cliff provide an engaging way to illustrate these themes

  • In January 2013, Republicans and Democrats struggled over how to address the country’s growing budget deficit. Congressional Republicans wanted to address the national debt primarily by cutting government spending. Democrats, led by President Barack Obama, focused on increasing revenues by raising taxes on the wealthiest Americans.

  • These conflicting policy proposals reflected competing ideologies. Republicans generally favor smaller government, preferring to let the private sector tackle most issues. Democrats, by contrast, tend to favor greater equality and prefer to use the government as a vehicle to redress socioeconomic inequality.

  • By definition, budgets thus reflect Lasswell’s famous definition of politics, as they define “who gets what, when, and how.”


LECTURE 2: The distribution of the government’s budget is the outcome of a very complex budgetary process involving thousands of policy choices and prompting a great deal of politics. Explain this process to your students.

  • Every political actor has a stake in the budget. The main actors in the budgetary process include interest groups, agencies, the Office of Management and Budget, congressional tax committees and budget committees, congressional subject-matter committees and appropriations committees, the General Accounting Office, and, of course, the president.

  • According to the Constitution, all federal appropriations must be authorized by Congress—a control sometimes called the “power of the purse.” Two key players in this process are the House Ways and Means Committee and the Senate Finance Committee. In 1921, Congress passed the Budget and Accounting Act, requiring presidents to propose an executive budget to Congress and creating the Bureau of the Budget to help them. In the 1970s, President Nixon reorganized the Bureau of the Budget and renamed it the Office of Management and Budget (OMB). The OMB now supervises preparation of the federal budget and advises the president on budgetary matters.

  • The Congressional Budget and Impoundment Act of 1974 was designed to reform the congressional budgetary process. The act established a fixed budget calendar in which a timetable mandated by law was set for each step in the budgetary process. The Congressional Budget Office (CBO) advises Congress on the probable consequences of its budget decisions, forecasts revenues, and is a counterweight to the president’s OMB. In April of each year, both houses of Congress are expected to agree upon a budget resolution which binds Congress to a total expenditure level that should form the bottom line of all federal spending for all programs.

  • The congressional budget resolution often requests that certain changes be made in law, primarily to achieve savings incorporated into the spending totals and thus meet the budget resolution.

    • First is budget reconciliation, a process by which program authorizations are revised to achieve required savings; it frequently also includes tax or other revenue adjustments.

    • The second way that laws are changed to meet the budget resolution (or to create or change programs for other reasons) involves more narrowly drawn legislation that affects the program itself. Congress could, for example, impose stricture eligibility requirements for a program as a way of reducing total spending on that program.

    • An authorization bill is an act of Congress that either establishes a discretionary government program or an entitlement, or continues or changes such programs.

    • An additional measure, termed an appropriations bill, must be passed to fund programs established by authorization bills.

  • The new system was supposed to force Congress to consider the budget (both projected expenditures and projected revenues) as a whole. However, Congress has often failed to meet its own budgetary timetable, and presidents have made matters worse by submitting budget proposals containing large deficits. Moreover, in many instances Congress has not been able to reach agreement and pass appropriations bills at all and has instead resorted to continuing resolutions—laws that allow agencies to spend at the previous year’s level.

  • In response to growing frustration at its inability to substantially reduce annual budget deficits, Congress enacted the Balanced Budget and Emergency Deficit Control Act (1985), better known as the Gramm-Rudman-Hollings Act. As amended in 1987, the act mandated maximum allowable deficit levels for each year until 1993—at which point the budget was supposed to be in balance. If Congress failed to meet the deficit goals, automatic across-the-board spending cuts (called sequestrations) were to be ordered by the president, although a number of programs were exempt from the process.

  • In 1990, Congress decided to shift the focus from controlling the size of the deficit (which was the trigger for sequestration) to controlling increases in spending (under which the sheer size of the deficit would not matter). While Congress shifted to keeping a lid on expenditures, it allowed events beyond its control—such as war or a recession—to increase the size of the deficit without penalty. The bottom line was a bigger deficit; yearly deficits continued to climb until the Clinton administration.

  • The results of the 1994 congressional elections once again altered the budgetary game. In 1995, the new Republican majorities in each house, determined to balance the budget within seven years, argued for substantial cuts in the rate of growth of popular entitlement programs. The president agreed with the goal of balancing the budget but on his terms and took his case to the voters in 1996. The outcome, as we have seen, was divided government. In 1997, the president and Congress agreed to a budget that was to be in balance by 2002. However, decreased tax revenues resulting from the economic downturn in 2000–2001 and the income tax cut of 2001 sent the budget into deficit again.


LECTURE 3: Political leaders often campaign on the platform of balancing the federal budget. But once they are in office, they often finding balancing the budget to be far more difficult than they originally anticipated. Explore the challenges of balancing the federal budget.

  • Approximately 60 percent of the federal budget is comprised of mandatory spending required under existing law. This includes spending on programs like Social Security, Medicare, Medicaid, and interest on the national debt.

    • Some of these programs, like Social Security, are indexed to the Consumer Price Index. This means that they automatically increase to match the rate of inflation.

    • The cost of health spending has increased faster than the rate of inflation as a result of sharp increases in health care costs in the United States. Efforts to reign in these increases have generally been unsuccessful.

    • The popularity of mandatory spending programs like Social Security and Medicare make them politically difficult to cut. Indeed, Medicare has often been termed the “third rail of American politics.” Well mobilized constituencies actively oppose proposals to reduce benefits.

  • Discretionary spending represents only about 40 percent of all federal spending. But spending on national defense comprises about half of that, or 20 percent of the total federal budget. Consequently, all other spending programs, on programs ranging from national parks and federal prisons to highways and education, falls within the final 20 percent of the federal budget.

  • Elected leaders often have little incentive to really reduce the federal budget. Well mobilized constituencies exist for most federal spending programs. No specific constituency exists to reduce the federal deficit.

  • Consequently, elected officials often find it politically expedient to make token cuts to federal spending. As a candidate for the Presidency, for example, Republican nominee Mitt Romney proposed cutting spending on PBS as a step towards reducing the federal budget deficit. Yet spending on PBS represents only 0.00014% of the federal budget.

  • Real efforts to balance the federal budget would require dramatically rethinking spending on the four largest parts of the federal budget: defense spending, Social Security, Medicare/Medicaid, and the national debt.


LECTURE 4: Explain why two-thirds of the federal budget is “uncontrollable.”

  • About two-thirds of the federal budget is uncontrollable—based on expenditures that are determined not by how much Congress appropriates to an agency but by how many eligible beneficiaries there are for a particular program. An uncontrollable expenditure is one that is mandated under current law or by a previous obligation.

  • Uncontrollable expenditures result from policies that make some group automatically eligible for some benefit. Congress has in effect obligated itself to pay a certain level of benefits to a particular number of recipients. For example, Social Security or veterans’ benefits from previous obligations of the government or interest on the national debt. The government does not decide each year, for example, whether it will pay the interest on the debt or send checks to Social Security recipients.

  • Most uncontrollable expenditures are called entitlements. The biggest of these is the Social Security system, including Medicare, which costs more than $1.2 trillion dollars; other uncontrollable expenditures include veterans aid, agricultural subsidies, military pensions, civil service workers’ retirement benefits, and interest on the national debt.

  • Although Congress legally can control such expenditures, it could do so only by changing a law or existing benefit levels. Cutting benefits or tightening eligibility restrictions would provoke a monumental outcry from millions of older voters


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ssess the impact of democratic politics on budgetary growth and of the budget on scope of government.

LECTURE 1: Almost all democracies have seen a substantial growth in government in the twentieth century. Economists Allen Meltzer and Scott Richard argue that government grows in a democracy because of the equality of suffrage. Poorer voters will always use their votes to support public policies that redistribute benefits from the rich to the poor. Indeed, the most rapidly growing expenditures are items like Social Security, Medicaid, Medicare, and social welfare programs (all of which benefit the poor more than the rich).

  • One often thinks of elites—particularly corporate elites—as being opposed to big government. However, Lockheed and Chrysler corporations have appealed to the government for large bailouts when times got rough. Corporations support a big government that offers them contracts, subsidies, and other benefits. Poor and rich voters alike have voted for parties and politicians who promised them benefits. Government often grows by responding to groups and their demands.

  • Conversely, some politicians compete for votes by promising not to spend money (such as Ronald Reagan). In contrast with other nations, Americans have chosen to tax less and spend less on public services than almost all other democracies with developed economies. Paradoxically, Americans want to spend but they do not want to pay taxes. Being a democracy, that is exactly what the government does—and the inevitable result is red ink. America’s large budget deficits have been as much a constraint on government as they have been evidence of a burgeoning public sector.


LECTURE 2: In the 2012 Presidential Election cycle, there was considerable discussion about the fact that 47 percent of Americans pay no federal income tax. Indeed, the Republican nominee, Mitt Romney, was criticized when he concluded that these individuals would support the Democratic candidate.

  • The Tax Policy Center’s analysis (http://www.taxpolicycenter.org/taxtopics/federal-taxes-households.cfm) of 2011 tax data confirms that 46.4% of Americans did not pay any federal income tax.

  • That, however, only paints part of the picture. The vast majority of those who did not pay income tax still paid payroll taxes, meaning that they were working but did not earn enough to pay federal income taxes.

  • According to the Tax Policy Center, only 18.1 percent of US filers paid neither income tax nor payroll tax. The majority of these were elderly retirees.

  • This could lead into an engaging discussion of fairness and the tax system.

    • Is it fair that some Americans pay no taxes? Should everyone be required to pay, even if they have no income? Under what circumstances, if any, should someone not be required to pay income taxes?

    • Some of the wealthiest Americans pay a lower effective tax rate than middle income Americans. Would a flat-tax proposal solve this dilemma? Or is a flat tax rate unfair to poorer Americans?


LECTURE 3: Political leaders often campaign on the promise to cut taxes and reduce government spending. However, balancing the federal budget and reducing the national budget deficit is also a popular campaign idea. Explain the structure and sources of federal revenue.

  • The top five percent of income earners in the United States pay half of all federal income taxes; the top one percent pays one-third of all federal income taxes. And almost all federal income taxes are paid by the top half of all earners.

  • Yet middle and lower income Americans pay other taxes, including the federal payroll tax, Social Security levies, and state and local sales taxes. Many of these taxes are regressive, claiming a larger proportion of the income of poorer Americans than of wealthier Americans.

  • Many of the tax write-offs claimed by middle income Americans, such as the mortgage interest deduction, the child tax credit, and the tuition and student loan write-offs, are politically popular.


LECTURE 4: Studies by political scientists have reaffirmed Harry S. Truman’s observations about voters and their pocketbooks.

  • James Carville once quipped, “It’s the economy, stupid.”

  • Policymakers worry constantly about the state of the economy. Voters often judge officeholders by how well the economy performs, despite widespread agreement among economists that there is often very little elected leaders can do to influence economic activity.

  • Traditionally in American politics, Democrats stress the importance of employment while Republicans are worried about inflation. This reflects their constituencies.


LECTURE 5: Elected leaders always want to appear to be reducing taxes, at least on the middle class. But the middle class pays the lion’s share of most taxes. Examine some of the recent arguments in favor of lowering the marginal tax rate with your students.

  • The top marginal personal income tax rate fell dramatically during the Reagan administration, then began to creep upward again under Presidents Bush and Clinton. George W. Bush lowered the top rate in 2001 and again in 2003, but these tax cuts were scheduled to expire in 2011, bringing the top marginal rate back to 39.6 percent.

  • “Read My Lips.” Breaking his solemn pledge on taxes contributed heavily to Bush’s defeat in the 1992 presidential election.

  • “Soak the Rich.” President Clinton pushed Congress to raise the top marginal tax rates to 39.6 percent for families earning $250,000.

  • Bush Tax Cuts. President Bush moved the Republican-controlled Congress to lower the top marginal rate to 35 percent.

  • Redistributing Income. The changes in taxation promised by President Obama would make the Tax Code more progressive, in effect redistributing income among Americans.

Class Activities



CLASS ACTIVITY 1: Have students debate the value of a balanced budget amendment. In particular, have them examine the costs and benefits of balancing the budget given that most of the budget expenditures are mandated. Insist that students identify which benefits and which obligations should be the first to go.

This activity encourages students to think about the complexity of the federal budget and the tradeoffs involved in achieving a balanced budget.


CLASS ACTIVITY 2: Invite a staff member from a representative’s office to brief the class about the current status of the federal budget. Who’s involved? Who wants what out of the budget? If a representative or their staffer is not available, consider inviting a state senator or representative to discuss the same questions, as well as differences between the federal and state budgetary process.

This activity provides a chance for students to engage with local elected officials and their staff on an issue of particular importance.


CLASS ACTIVITY 3: Storyboard the federal deficit. Label several pieces of poster board with the following titles: Social Security, Medicaid/Medicare, and Defense Spending

  • Ask students to write in the interest groups, demographic groups, and federal agencies that would protest cuts to each area of spending.

  • Have students discuss which groups might be the most powerful in protecting their interests.

  • Ask students to generate ideas for balancing the federal budget.

This activity requires student to critically reflect on how vested interests influence the federal budget process.
CLASS ACTIVITY 4: Analyze tax policy. Divide students into groups and give each group a different newspaper or magazine article that addresses the topic of tax policy. Articles may detail recent national, state, or local tax proposals, new tax deductions or credits, etc.

  • Ask students to summarize the issue, explain the intent of the policy, and identify the “winners” and “losers” of the policy.

  • Have groups share their information.

  • Direct the groups’ discussions toward issues of tax burden, economic efficiency, equity, and redistribution.

This activity encourages students to think about the strengths and weaknesses of different forms of taxation and the costs and benefits of tax policy reform.
CLASS ACTIVITY 5: Make a list of entitlement programs funded by the federal government.

  • Rank the following areas of spending according to which areas you think should receive the most money and which should receive the least: Social Security benefits, defense spending, income security, Medicare, health care programs, interest on national debt, education, science, transportation, and veterans’ benefits.

  • Assume that you are in a position to move the various levers that affect the national economic well-being. Assume also that we are being threatened by inflation. Indicate what you would do with these controls: tax rates, government debt, government spending, discount rate, margin requirement, reserve requirements of member banks of the Federal Reserve System, down payments and consumer credit, and open market activities of Federal Reserve Banks in government securities.

  • Conclude by contrasting the class’ priorities with the actual spending priorities of the US government, which can be found at the OMB website, http://www.whitehouse.gov/omb.

This activity provides students with an opportunity to think about how the priorities of the federal government are set and how they relate to priorities set at the local (and even the individual) level.
CLASS ACTIVITY 6: Tell students that the opposition to tax increases constrains the adoption or expansion of many programs. This opposition also makes it difficult to balance the budget. Ask students the following question: How can we reconcile our preference for low taxes with our demands for government services?

This discussion item illustrates the challenges of balancing the federal budget.


CLASS ACTIVITY 7: Why did the Founders place the majority of economic control in the hands of Congress? What effects does this have on the federal government today?

This discussion can be particularly enlightening in the context of debates over the “Fiscal Cliff” and the threat of U.S. default on its national debt following the political standoff between President Obama and the Republican-controlled House of Representatives over raising the debt ceiling in 2011 and 2012.

This discussion item brings the politics of the federal budget to the fore, highlighting recent debates over the fiscal cliff and the national debt. It also encourages students to think about how the structure of the federal government affects the politics of the budget.
CLASS ACTIVITY 8: Ask the students to prepare an impromptu debate on progressive taxation versus proportional taxation.


  • Choose two teams of four students to serve as opposing sides in the debate.

  • Give them ten minutes to prepare arguments.

  • Allot total debate time according to the demands of your class schedule.

  • Ask the remaining students to act as debate judges.

  • To understand more about the economic distributions within the United States, visit: “15 Mind-Blowing Facts About Wealth And Inequality In America.” Read more: (http://www.businessinsider.com/15-charts-about-wealth-and-inequality-in-america-2010-4)

This debate provides students with an engaging way to think critically about the advantages and disadvantages of progressive and proportional taxation.
CLASS ACTIVITY 9: Assign students to groups representing the OMB and a federal agency. Have the agency submit their budget to the OMB for review and suggestions based on the president’s budget.

This activity brings the politics of the federal budget process to the fore, highlighting the tradeoffs involved in any budgetary decision.


CLASS ACTIVITY 10: Screen the “In Context” and the “Thinking Like a Political Scientist” videos for your class. In the first, video, Wagner College political scientist Abraham Unger talks about how economic policy has evolved in the last century and how the United States operates on a continuum of free enterprise. Wagner College political scientist Abraham Unger identifies some of the trends that have been discussed by political scientists in the last decade.

  • In the first video, Unger asserts that, “In America, it’s economics itself that drives our own thinking about our democracy and it’s from economics that we spin out a political ideology, that we spin out the way we think about public administration. The way we think about everything that is valuable to us as Americans comes from economics. And that’s different from the way other political cultures have evolved.”

  • Ask your class to explore the implications of this position. What would it mean if Unger is correct? How would our political system look and behave differently from those of other countries if has assertion is true?

  • Then ask your class to debate whether or not Unger is correct. This discussion should focus on two key questions:

  • Is Unger correct to claim that economics is the force that underlies our thinking about democracy in the United States? Can you provide an example to illustrate this point?

  • Second, is Unger’s assertion that the United States is unique in this respect correct? Why or why not?

These videos highlight the relationship between economics and politics and the particular conceptions of this relationship that underscores the American political system.

Research Activities


RESEARCH ACTIVITY 1: Have students access a website that provides simulation of the federal budget or provides students with other budgetary tradeoff or analysis games. Examples include American Public Media’s Budget Hero (http://www.marketplace.org/topics/economy/budget-hero), the New York Times’ Budget Puzzle (http://www.nytimes.com/interactive/2010/11/13/weekinreview/ deficits-graphic.html), or the National Budget Simulation (www.nathannewman.org/nbs/).

  • Ask your students to develop a current “balanced” budget.

  • Then ask them to write a short paper in which they reflect on the challenge of balancing the federal budget. What hard decisions did they have to make?

  • Consider having students compare their decisions in class, debating the value of their expenditure and revenue choices.

This active learning exercise illustrates the challenges of balancing the federal budget under specific budgetary restrictions.
RESEARCH ACTIVITY 2: Study a microcosm of the national economy.

  • Provide students with information about your state or local economy or have students research the information.

  • Economic indicators may include the cost of living (as a way to measure the local CPI and inflation), unemployment rate, gross state product, wage rates, median family income, and state revenue and spending figures.

  • Consider asking students to report their findings back to class by dividing students into three groups representing monetarists, Keynesians, and supply-siders; have each group make recommendations to improve the local economy.

This activity encourages students to think about how the politics of the budget play out in their local community.
RESEARCH ACTIVITY 3: As a library assignment, ask students to research some of the methodological issues surrounding our standard economic measures such as unemployment, inflation, and the consumer price index. In what ways are these measures biased? What don’t they measure about the economy? Are there any alternative measures of economic health that should also be considered in economic policymaking?

This activity provides students with an opportunity to engage critically with data, exploring not just how unemployment, inflation, and other measures affect politics, but what those measures actually represent as well.


RESEARCH ACTIVITY 4: Develop a graphical representations of the federal budget based on examples that can be found at the Congressional Budget Office (http://www.cbo.gov/publication/42636), the White House (http://www.whitehouse.gov/winning-the-future/interactive-budget), and the Office of Management and Budget (http://www.whitehouse.gov/omb/budget). Be sure you can explain the graphs.

This activity encourages students to develop their graphical presentation skills using themes and issues that arise in this chapter.


RESEARCH ACTIVITY 5: Ask your students to graph the increase in the federal deficit and national debt over time. Ask them to note any patterns they find.

This activity encourages students to develop their graphical presentation skills while exploring the historical growth of the federal debt.


RESEARCH ACTIVITY 6: Choose a state and research its fiscal policy. Write a short essay explaining the policy and be sure to include your own evaluation of its success or failure.

This essay prompt requires students apply the broad discussion of fiscal policy found in this chapter to a local context and critically think about what defines success or failure in the context of economic policy.


RESEARCH ACTIVITY 7: Ask students to prepare briefs on current economic/regulatory issues being considered by Congress or regulatory agencies. Then have them research who supports regulatory change, the nature of such proposals, and who opposes the changes.

This activity requires students analyze the budgetary or regulatory politics of a contemporary political issue.


RESEARCH ACTIVITY 8: Ask your students to watch a recent film on the national debt, such as I.O.U.S.A. (2008), or Breaking the Bank. Then ask them to write a short paper in which they reflect on the issues raised by the film as they relate to the material covered in this chapter.

This activity encourages students to critically engage with the ideas raised in this chapter through the popular medium of film.


RESEARCH ACTIVITY 9: How high are your taxes? Use the infographic from the textbook as the basis for a short reflection paper centering on the following questions:

  • How does the source of income affect the rate at which income is taxed? Which types of income are taxed at the highest rate? Which are taxed at the lowest?

  • Do those who earn the most money pay more in taxes? How can this question be answered both in the affirmative and the negative?

  • After you have answered these questions for the United States based on the infographic, find comparative data for at least two other countries online. Explain how the two countries you found compare to the United States in terms of total tax burden and the distribution of that burden across society.

  • This discussion item helps to develop data literacy and encourages students to think about the size and scope of the advantages and disadvantages of particular tax systems.


RESEARCH ACTIVITY 10: Ask students to take the simulation “You Are the President During a Budget Crisis” in MyPoliSciLab. For many years, the national government has run up large annual budget deficits because government expenditure has exceeded revenue. In the “You Are the President During a Budget Crisis” simulation, they will learn about the sources of federal revenue facing a budget crisis as the President of the United States.

  • Have your students complete the simulation and explore the challenges of dealing with a federal budget crisis.

  • Then have them complete the associated quiz in MyPoliSciLab.

  • As an alternative short writing assessment assignment, ask your students to complete a short response paper in which they discuss the themes raised in the simulation as they relate to the material covered in lecture and the chapter.

In this active learning exercise, students address the challenges of balancing the federal budget in light of competing budget priorities.

Participation Activities


PARTICIPATION ACTIVITY 1: Write a letter to the editor on a current tax or budget issue at the local, state, or national level. Examples might include the proposed balanced budget amendment, a proposed state sales tax (or its repeal), or a local bond measure.

This activity provides students with an opportunity to practice short, focused writing skills while applying the themes and issues raised in this chapter to their local community.


PARTICIPATION ACTIVITY 2: Visit the website or local offices of one group supporting and one group opposing a local bond measure, either in your local community or another of your choice. Write a short paper contrasting their positions.

This activity encourages students to engage in their local community around issues of budgeting and finance for local government.


PARTICIPATION ACTIVITY 3: Have students investigate and identify the number of federal agencies they and their families received benefits from within the last five years. Then have them evaluate the importance of these services to their and their families’ standard of living. Finally, have them identify what they would have to do if these services were no longer available to them.

This activity requires students to think critically about the wide range of services provided by the federal government and how those activities influence their everyday lives.



Suggested Readings
READING 1: Martin Gilens (2012). Affluence and Influence: Economic Inequality and Political Power in America. New Haven: Princeton University Press. An analysis of the implications of inequality on American politics.
READING 2: Roger LeRoy Miller, David K. Benjamin, and Douglas C. North (2012). The Economic of Public Issues, 17th edition. New York: Prentice Hall. A series of short essays applying economic principles to a variety of public issues.
READING 3: Thomas Sowell (2010). Basic Economics: A Citizen’s Guide to the Economy 4th edition. New York: Basic Books. An accessible introduction to macroeconomics, focusing in particular on public policy.
READING 4: Several recent publications have outlined alternative visions of American economic policy. Examples include:

  • Neil Boortz and John Linder (2009). The Fair Tax Book. New York: William Morrow. Provides an argument in favor of abolishing income taxes and replacing them with a national sales tax.

  • Mark Green and Michele Jolin, eds. (2009). Change for America. New York: Basic Books. A progressive blueprint for the Obama Administration’s economic policy

  • Edward N. Wolff (2002). Top Heavy, updated edition). New York: Century Foundation. A critical take on growing inequality in the United States.


READING 5: Bryan D. Jones and Walter Williams (2007). The Politics of Bad Ideas. New York: Pearson Longman. An engaging book that examines the persistence of many of the bad ideas surrounding budgetary politics.
READING 6: Allen Schick (2007). The Federal Budget, 3rd ed. Washington, DC: Brookings Institution. A useful, “hands-on” view of federal budgeting.
READING 7: Aaron Wildavsky and Naomi Caiden (2004). The New Politics of the Budgetary Process, 5th ed. New York: Longman. The seminal textbook on the budgetary process.
READING 8: Douglas L. Kriner and Andrew Reeves (2012). “The Influences of Federal Spending on Presidential Elections.” American Political Science Review. 106 (2): 348-366. Examines whether federal spending in local constituencies affects voter preference, concluding that while voters often express a desire to reduce the deficit, they reward candidates who deliver benefits at the ballot box.
READING 9: Steven Callander (2011). “Searching for Good Polices.” American Political Science Review. 105 (4): 643-662. Examines the role of “stickiness” in policymaking under democratic conditions.
READING 10: The Economic Report of the President (www.whitehouse.gov/administration/eop/cea/economic-report-of-the-President) provides an overview of key economic, tax, and budgeting issues.
READING 11: The Internal Revenue Service’s website (www.irs.ustreas.gov) contains extensive information on tax policy in the United States.
READING 12: Several key think tanks develop and critique US economic policy. The most famous are:

  • The American Enterprise Institute http://www.aei.org/), a conservative think tank that addresses a variety of issues. Its website offers information on their calendar of events, a variety of articles, and links.

  • The Brookings Institution (http://www.brookings.edu/) is the oldest think tank in America and has the reputation of being fairly moderate. Its website offers policy briefings, articles, books, The Brookings Review, discussion groups, and links.

  • The Cato Institute (http://www.cato.org/) is a libertarian think tank promoting free market ideas. Its website offers a variety of articles and links.

  • Center for American Progress (http://www.americanprogress.org/) is a prominent liberal think tank with information about social policy.


READING 13: Several groups maintain websites exploring the federal budget and US tax policy.

  • The Tax Policy Center (www.taxpolicycenter.org) is a cooperative endeavor by the Urban Institute and the Brookings Institution, containing many studies of budgets and taxes.

  • The Tax Foundation (www.taxfoundation.org) is a nonpartisan research group providing a wealth of tax information.

  • The nonpartisan Concord Coalition (www.concordcoalition.org) also provides extensive analysis of budgetary issues.

  • The Center on Budget and Policy Priorities (www.cbpp.org) examines the impact of federal budget policy on low- and middle-income families in the United States.


READING 14: The two key governmental agencies dealing with the federal budget are

  • The Congressional Budget Office (CBO) (http://www.cbo.gov/) offers Congress’s opinions on budget matters including statistics, reports, budget reviews, testimony, and more.

  • The Office of Management and Budget (OMB) (http://www.whitehouse.gov/OMB/) offers budget information, reports, testimony, regulatory policies, and more from the perspective of the administration.


READING 15: The Council of Economic Advisors (http://www.whitehouse.gov/cea/about.html) website offers the Economic Report of the President and CEA publications, as well as basic information about the CEA and its members.
READING 16: Fedstats (http://www.fedstats.gov/) provides statistics and data from a broad range of federal government agencies, including those most relevant for economic and social welfare policy in the United States. These include the Federal Reserve Board, the Bureau of Labor Statistics, the Social Security Administration, the Bureau of Census, the Bureau of Economic Analysis, and Administration for Children and Families.
READING 17: The U.S. National Debt Clock (http://www.brillig.com/debt_clock/) maintains up to the second estimates of the national debt.
READING 18: Who Owns America? Economic Crisis in the United States. (2007). Films for the Humanities and Sciences. This program examines the financial pulse of America through the eyes of noted economists and common citizens.
READING 19: Bill Moyers Journal: February 15, 2008. (2008). Films for the Humanities and Sciences. Bill Moyers examines the impact of the federal debt on future generations with members of PublicAgenda.org.
READING 20: Several popular films have addressed the growing budget deficit in recent years. Noted examples include

  • I.O.U.S.A. (2008), which focuses on the growing national debt.

  • Frontline’s The Warning and Breaking the Bank both deal with the onset of the 2008 global financial crisis.


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