Functions of the Federal Government - Assignment Example

1. What are the three major categories of revenues for the federal government? Please comment on each and indicate their relative importance to each other.  In United States the three main categories of revenues for the federal government are: Individual income taxes Corporate income taxes Social insurance taxes The individual income tax gets determined by applying tax rate, which may increase as income increases. All the individuals and corporations are directly taxable; also the estates as well as trusts may be taxable on their undistributed income. Individual income tax receipts are expected to go up by 3.3 percent in 2010, after declining in 2008 and 2009, according to CBO’s baseline projection. The Corporate tax is imposed in US at Federal, most state, & some local levels on the income of entities treated for tax purposes as corporations. Generally, the Federal tax rate that is levied on corporate varies between 15% and 35%. CBO here has projected that corporate income tax receipts is expected to rise in dollar terms in 2010, increasing by 6.1% to $147 billion but remaining near 1.0 percent of GDP. The Taxes on federal social insurance programs, including Social Security, Medicare, and Medicaid, gets taxed separately from the income. After a temporary dip in the year 2010 and 2011, social insurance taxes has been projected to remain steady at 6.3% of GDP in 2012 and then same as the percentage recorded in 2009. There are different tax rates which the government imposes on the individuals and corporations. The major reason for doing this is to distribute the tax burden on individuals, corporate and classes of the population involved in the taxable activities. All the three tax heads have their own significance over each other as they are well planned out and divided in order to contribute towards the requirements of development of the country and the society as a whole. It is said that the tax system of a country is the reflection of its communal values of the people in power. Thus the distribution of tax burden on the heads mentioned is one of the most important aspects of a taxation system of a country. 2. What are the three major categories of expenditures for the federal government? Please comment on each and indicate their relative importance to each other.  In United States the three major categories of expenditure for the federal government are: Discretionary spending Mandatory spending Net interest Discretionary spending is a spending category through which governments can spend through an appropriations act. In the United States of America, discretionary spending is the spending set on a yearly basis which is decided by the Congress. CBO has estimated that discretionary budget authority in 2010 would total to $1.2 trillion. The expenditures that should go into the U.S. budget which are mandated by programs outside of the budgetary process is known as Mandatory Spending. These include Medicare, Social Security, Medicaid, and Income Support programs. They are also known as Direct Spending or Entitlement Programs. In 2009, mandatory outlays raced to $2.1 trillion from $1.6 trillion in 2008. The projections by CBO here states that mandatory spending would range between $1.9 trillion and $2.1 trillion in the year 2013 which afterwards would steadily increase to about $3.0 trillion in 2020 Net interest includes interest paid on Treasury securities and other interest of the government minus interest that the government collects from various sources e.g.: commercial banks. Net interest is determined by the size as well as the composition of the government’s debt, annual budget deficits or surpluses, and market interest rates. Between 2003 and 2008, net interest costs increased, on average, by 11% annually. The reason behind the rise in the costs is attributable mostly to rising short-term interest rates as well as the increases in debt held by the public.  Discretionary spending accounts for 1/3 of total federal spending. This amount is what the president and Congress has to decide which needs to be spent next year. All these bills allocate money to activities such as the housing, FBI, education, Coast Guard, highways, space programs, foreign aid, and defence. Mandatory spending accounts for 2/3 of the total federal spending that is authorised by permanent laws. They include entitlements, like Social Security, Medicare, veterans benefits, and Food Stamps. 3. Discuss the current level of the Federal debt, the past trend of that debt, and the future forecast for its level. Discuss whether or not you are concerned about the current and future projected debt and level of associated interest expense.  Federal debts are about $7.5 trillion out of which the debt held by public outstanding at the end of the year 2009, was 52 percent ($4.0 trillion) by the domestic investors whereas the foreign investors held 48 percent ($3.6 trillion). Severe economic downturn with unprecedented turmoil in the financial system in the past years and the federal policies implemented in response to the rising concerns has caused deficits to increase drastically. Although the economy seems to have recovered, the budgetary costs that are associated with federal policies have increased considerably. In the coming years the projections say that the budget outlook would be daunting. Federal debt held by public is expected to reach 67% of the GDP by year 2020, which is the largest share ever since 1950. Also if the expiring tax provisions would be extended or the spending pattern grows faster than expected, all those deficits along with the corresponding debt would be much larger. The concerns regarding the future projected debt seems to be rising with the expected projections. It is expected that beyond the 10-year projection period, the rising health care costs and aging population of U.S. would be a major factor contributing to increase fiscal challenges that are faced by the nation. National Savings would further reduce with the recurring large deficits which would result in increase in federal debt over time. 4. Assume you are the Chief Economic Advisor to the President of the United States and the President has asked you to review the deficit reduction proposals that were submitted by his commission (see link above). Choose the two commission recommendations you agree with the most and write an explanation to the President as to why those two should be enacted into law.  There were various proposals for deficit reduction which were submitted to his commission by the president. Some of the proposals were: Raising the Social Security age to 69, Cutting Medicare outlays, Limiting the mortgage interest deduction to loans under $500,000, Getting rid of the Alternative Minimum Tax, Tossing out preferential tax rates for capital gains and dividends All these are just few of the proposals which were proposed by President Obama and his co-chairs on the issue of Deficit Reduction. However the two commission recommendation that seems to be good to make an impact are: As per the plan of The Simpson-Bowles the discretionary spending would cut about $100 billion from both defence and the domestic programs by the year 2015. This would freeze additional spending on the domestic programs for about 4 years and about 5 years on defence. This would make it sure that the growth in spending for each would get limited to the overall GDP growth. Shift more cost onto beneficiaries but impose an annual catastrophic cap to limit total out of pocket costs. The estimated savings from 2011-2020 is stated to be $85 billion. With this plan the costs would be shifted on to the beneficiaries while encouraging people for purchasing private health insurance which would come along with higher premiums for Medicare. References: John Skeen and Sherry Snyder (Editors), The Budget and Economic Outlook, Fiscal Years 2009 to 2019, The Congress of the United States O Congressional Budget Office, Web Retrieved on June 10, 2011 Retrieved from http://www.cbo.gov/ftpdocs/99xx/doc9957/01-07-Outlook.pdf. Carla Fried (Author), The Daily Money, Money Watch, November 17, 2010, Web Retrieved on June 10, 2011 Retrieved from http://moneywatch.bnet.com/economic-news/blog/daily-money/deficit-reduction-proposals-what-they-could-mean-for-you/1567/ Read More