Applied Learning Assignment 1
Federal Deficit and Debt
It's expensive to run a superpower. In 2012, the United States federal government spent $3.54 trillion on everything in its budget, including defense, (the largest chunk of discretionary spending at $670 billion), Social Security, Medicare and Medicaid, scientific research, grants for college students and much, much more. The federal deficit of the United States is the total debt, or unpaid borrowed funds, carried by the federal government of the United States, which is measured as the face value of the currently outstanding Treasury securities that have been issued by the Treasury and other federal government agencies. Every year, the government takes in revenue in the form of taxes and other income, and spends money on various programs such as; national defense, Social Security, and healthcare. If the government spends more than it takes in, then it runs a deficit. If the government takes in more than it spends, it runs a surplus. The terms "national deficit" and "national surplus" usually refer to the federal government budget balance from year to year, not the cumulative amount of debt. A deficit year increases the debt, while a surplus year decreases the debt as more money is received than spent. The Congressional Budget Office projects this year's federal deficit at around $172 billion dollars. The debt is the total amount of money the U.S. government owes. It represents the accumulation of past deficits, minus surpluses. Debt is like the balance on your credit card statement, which shows the total amount you have accrued over time. At the end of fiscal year 2019, the Congressional Budget Office estimates that debt held by the public will equal $16.6 trillion, or 78 percent of GDP.
Federal Surplus or Deficit
The graph above depicts the federal surplus or deficit between the years of 1910 and 2010. From 1910 until about 1980 the federal surplus seemed to have balanced out with the federal debt. As shown from mid-1990s until 2000 can recognize that the federal surplus keeps drastically decreased. It dropped tremendously in 2008 to about -1,400,000 million dollars. A government surplus can trigger a recession if, for instance, it is too large. There is a balance to be found between surplus and deficit, and this balance is precisely why the Keynesian model works. Government spending increases lead to combat the 2008 financial crisis during George W. Bush presidency. Tax receipts dropped due to the recession at the same time, decreasing revenue. The financial crisis of 2007–08, also known as the global financial crisis, was a severe worldwide economic crisis. It is considered by many economists to have been the most serious financial crisis since the Great Depression of the 1930s and the numbers from graph represent that.
Adjusted for Inflation
For every single year, the value of deficit is multiplied by CPI (Consumer Price Index) for 2018. The government budget surplus is a flow variable, since it is an amount per unit of time (typically, per year). I discovered in September, 2018 the CPI was 251.944 and that's the number I used to convert the federal deficit into real dollars ($). I noticed that 1960-1980 the federal surplus changes more significantly than it did before it was adjusted for inflation. Also, during the mid-1990s, the federal surplus drastically increased which is a very good thing for the economy. Although, on the grey recession line by the year 2000 and the year 2008, you notice that the federal surplus keeps drastically decreasing showing a deficit. At all-time low in 2010 for about -1,000,000 million dollars, the economy struggled. With the economy struggling with instability, they tried to regain power and control it as seen in the increase in federal surplus from 2010 to 2015.
Gross Domestic Product
This graph shows that in 1942, the government was borrowing money at about 4.4% in deficit. This deficit decreased until the surplus in 2000 which helped the economy until the Great Depression in 2010.
Public Debt as % GDP
Total public debt to gross domestic product is extremely important to analyze. You realize during every recession, as represented by the grey shaded areas the total public debt slightly increase. I believe that's because when we are in those recessions, the government needs to borrow more money to supply the needs of people who are struggling financially. This ratio can also be interpreted as the number of years needed to pay back debt, if GDP is dedicated entirely to debt repayment. As shown in the graph, over the years the GDP increased, which will raise the demand for money because people will need more money to make the transactions necessary to purchase the new GDP. Especially from 2010 to 2015 there was a drastic increase in GPD, indicating the economy is in solid shape, and the nation is moving forward in productivity. If we take everything produced in the given the year 2018, you realize that we are unable to pay back the entirety of the public debt as it is above the 100 marks. If it was under the 100 mark then that means every single amount in terms of all goods and/or services will be used to pay back the federal debt.
Revenue Sources for Federal Government
The federal government raises trillions of dollars in tax revenue each year, though a variety of taxes and fees. Some taxes fund specific government programs, while other taxes fund the government in general. In 2015, total federal revenues in fiscal year 2015 are expected to be $3.18 trillion. These revenues come from three major sources:
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Income Taxes Paid by the Individual: In 2015, individuals accounted for about $1.48 trillion, or 47% of all tax revenues. Not all individuals who pay taxes are being treated fairly in regards to the amount they pay. There are currently over 200 loopholes, credits and deductions in our U.S. tax code. This tremendously helps top income earners.
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Payroll taxes paid by employers and workers: In 2015, payroll taxes paid jointly by workers and employers accounted for $1.07 trillion dollars, or 34% of all tax revenues.
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Corporate taxes paid by businesses: In 2015, corporate income taxes paid by businesses accounted for $341.7 billion, or 11% of all tax revenues.
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Federal funds are general revenues, meaning Congress and the president can decide to spend them on just about anything when they conduct the annual appropriations process.
What has happened to Corporate Taxes in Federal Revenue?
Depending on how much profit a corporation makes, it pays a marginal tax rate anywhere from 15 to 35 percent. The top marginal tax rate for corporations, 35 percent, applies to taxable income over $18.3 million. By looking at the graph, I acknowledged individual income taxes make up a much larger share of all federal tax revenues than corporate taxes do, in part because the wages and salaries of all Americans are much larger than profits of all U.S. corporations. Corporate income taxes briefly became the largest source of federal revenue after the Revenue Act of 1942 raised to the top, reaching it's peak to 40 percent as shown in the graph. The share of federal tax revenue paid by corporations has also declined substantially over time.
The federal budget is the government's estimate of revenue and spending for each fiscal year. Like a family budget, the federal budget itemizes the expenditure of public funds for the upcoming fiscal year. The federal government's fiscal year begins each October first. The U.S. Treasury divides all federal spending into three groups: mandatory spending, discretionary spending and interest on debt. Some budget expenses are mandatory spending, which is spent based on existing laws rather than the budgeting process.
For instance, spending for Social Security is based on the eligibility rules for that program. Mandatory spending is not part of the annual appropriations process. Other spending is discretionary, which refers to non-essential items, such as recreation and entertainment, that consumers purchase when they have enough income left over after paying the necessary expenses such as the mortgage and utilities. This spending is also influenced by economic conditions, which influence consumer confidence, or how comfortable people feel spending money on non-essential items.