Handbook of Fiscal Policy_2 potx

103 Federal Deficits and Financing the National Debt Marcia Lynn Whicker Rutgers Urlitrersity, Ne~vurk, New Jersey One of the most controversial aspects of federal budgeting is the annual deficits the United States has accumulated, especially during the past two decades. These deficits have con- tributed significantly to the growth of the national debt. By FY 1993, projected deficits were $327 billion. Total outstanding federal debt in 1992 reached $4.08 trillion, more than double than the $I .83 trillion of 1985. Federal debt in 1992 was 68.2% of gross domestic product (GDP), the highest percentage ever since World War I1 and the Korean War. Net interest on the debt was $199.4 billion.' Federal deficits, then, have driven accumulated national debt to unprecedented lev- els. Why have deficits grown and persisted? Few argue that massive federal deficits are good; rather, controversy surrounds exactly how bad federal deficits are and what to do about them. Policy makers agree that something should be done, but disagree on what so- lutions should be embraced. Observers agree, however, that federal deficits have been ris- ing, despite all efforts to abate or even just ameliorate their growth. Plausible methods of reducing the deficit all create political pain, and thus are controversial. WHY DEFICITS HAVE GROWN Federal deficits have mounted despite the efforts of policy makers to curb them. Critics contend that the budget and spending are out of control. So why have deficits mounted and persisted across the past two decades? Several factors are at work, including the following. Budgets Have Dual Stabilization and Allocation Functions that May Conflict Budgets are used to implement both economic policy goals and specific program needs. This dual purpose of budgets undercuts deficit reduction.? Sometimes the goal of stabiliz- ing the economy by reducing deficits, interest paid, and debt may contradict allocation goals of increasing federal spending for desirable social and defense goals. 1360 Whicker By allocating monies to programs, policy makers express national prioritied Trend analysis may present a distorted picture of national priorities since a unified national bud- get, including programs funded through trust fund revenues, was only adopted in the late 1960s. Prior to that time, some government programs, including Social Security, were not included in the budget. However, trend analysis is often used anyway to show shifting na- tional priorities when enacting allocation goals. Beginning in 1960, this type of analysis of budget shares reveals a decline in defense, followed by a revival of relative funding. National defense received 52.2% of total federal outlays in 1960. This amount declined to 22.7% of outlays in 1980 after the disillusionment of Vietnam, and then began to climb during the Reagan years. By the end of President Ronald Reagan's second term in 1988, national defense constituted 27.3% of outlays; approxi- mately 73% of federal outlays were for nondefense programs. With the end of the cold war, defense spending began to decline relative to other functions, and by 1992 was 2 1.6% of out- lays. Social spending experienced the reverse pattern. Since 1960, human resource spend- ing has experienced a dramatic increase in budget share. In 1960, human resource expendi- tures constituted only 28% of total federal outlays. By 1987, that share had risen to 49%.' Addressing important defense and social priorities by spending may conflict, how- ever, with the macroeconomic policy goals of reducing deficits by lowering spending.' Ris- ing deficits have caused mounting national debt. National debt more than doubled during the Reagan administration. In 1980, when Reagan assumed the White House, national debt was slightly under $1 trillion, at $908.5 billion. By 1989, when Reagan retired from office, national debt had increased to $2,867.5 billion, or almost $3 trillion. Critics contend this growth resulted from deficits accumulated when the supply-side goal of cutting taxes and the allocation goal of increasing defense spending both escalated the gap between receipts and outlays.6 Interest on the federal debt also increased, both in absolute terms and as a share of total federal spending. Between 1960 and 1987, the budget share going to interests payments on national debt accumulated by past deficits had grown from 9% to 17%. In each budget year, continued spending for important allocation goals received higher priority than deficit reduction. The Budget Process Is Decentralized, with no Central Policy Structure for Controlling Deficits by Coordinating Stabilization and Allocation Federal budgets are a major tool for achieving fiscal policy goals as well as achieving the specific goals of individual programs, yet only in the past two decades has Congress adopted the structure to realize the potential for fiscal policy stabilization goals. Prior to 1974, macroeconomists often theorized about the desired level of federal expenditures to provide the appropriate level of fiscal stimulus, given the existing levels of unemployment, intlation, and interest rates.' But in the real world of congressional budgeting, the actual appropria- tions subcommittee decisions that determined federal expenditures were mostly divorced from any meaningful consideration of the state of the economy and fiscal policy needs. Nor was much weight attributed to revenue limitations, since the two finance committees-the House Ways and Means Committee and the Senate Finance Committee-operated inde- pendently in setting tax rates and in establishing modifications, exemptions, and exceptions in the tax code. What drove budget decisions was micro-level attention by members of ap- propriations subcommittees to incremental requests for increases in program expenditures. Federal Deficits and Financing the National Debt 1361 The reality of national budget making was a process impacted more by the highly de- centralized structure of the U.S. government and of Congress itself, as well as by interest group politics than by stabilization theory. Major budget refonns have created new institu- tional actors to increase monitoring of stabilization goal achievement as well as allocations, yet the process remains highly decentralized, with no single actor or institution assuming final responsibility for budgets and deficits. Partisanship increased blame shifting. The largely Democratic Congress charged that the mostly Republican presidents have not sub- mitted balanced budgets and that they are merely responding to presidential lead. Republi- can presidents, in turn, charged that the mostly Democratic Congress was spendthrift and irresponsible. The Budget Process Is Lengthy, Providing Many Points at Which Interest Groups May Block Cuts Shepherding a federal budget through the various stages of budget development is lengthy and often laborious, filled with points at which the budget can be snagged on some politi- cal difficulty and delayed, and spending cuts restored by lobbyists representing powerful interest groups. Concerns over federal deficits may take second place to reelection and lob- bying pressures placed on members of Congress to restore cuts or increase spending for specific programs. The budget process has four stages during which lobbying and pressure may occur. If interest groups fail to achieve favorable spending outcomes at one stage, the lengthy process provides other opportunities for lobbying and influence. The stages of the budget process include planning and analysis, budget formulation, implementation, and audit and review. Interest groups have the greatest access to key decision makers, particularly in the formulation stage, and to a lesser extent in the planning stage, although no stage is mmune. In the planning and analysis phase, available resources are assessed, goals are clari- fied, and alternative approaches to attain goals are analyzed. This stage is conducted in the executive branch by the budget offices of the federal departments and by the Office of Man- agement and Budget (OMB). In the legislative branch, the budget committee staffs, and es- pecially the Congressional Budget Office (CBO), conduct analyses of policy goals and op- tions. The analyses of CB0 have been particularly well regarded for their accuracy, but the analyses from the administration frequently build in assumptions that favor the interest groups that are its major constituents. Agencies also are predisposed to produce analyses that support their clientele. During the policy formulation phase, the budget is developed and approved. Interest groups have the greatest probability of exerting influence here. Budget development re- volves around the budget year (BY)-the fiscal year following the current year. Prior to budget development, executive agencies have submitted quarterly financial plans that pro- vide budget reviewers with estimates of 5-year program costs. Executive departments and agencies receive guidelines from OMB in the form of a budget call to aid in the develop- ment of budget figures. Once agency figures are prepared, the remainder of this phase in- volves budget reviews-first within the executive branch by the department budget offices and OMB, and subsequently within Congress. This stage culminates with the final passage of major appropriations bills. Lobbying efforts are particularly intense in Congress, with multiple possible points of intervention. 1362 Whicker Redistribution Drives Federal Budgeting, yet the Budget Does not Include Direct Explicit Information on Who Gets What Often thick, voluminous, weighty, and seemingly dry to the unsophisticated reader oblivi- ous to the clash of values and political battles symbolized by the numbers included, bud- gets represent a national plan for accomplishing goals within the BY .' The budget sets forth estimates of resources required and of resources available, in comparison with previous years and estimates for future year resources. Federal budgets contain five types of infor- mation. (See Table 1 .) Yet none of the information in the budget deals directly with redis- tributive impacts that drive the budget process. While beneficiaries may be implied by the Table 1 The Federal Budget and Financing Deficits Information provided in the federal budget: Estimates of outlays, revenues, and budget authority for the budget year Presidential budget requests for current and prior years Five-year projections for revenues, outlays, and budget authority Economic projections for the economy Current services estimates Federal budget legislation: 1921 Budget and Accounting Act Created a national executive budget Significantly increased the president's role in the budgetary process Created the Bureau of the Budget (BOB) Created the General Accounting Office (GAO) Extended GAO audit authority to government corporations Required that budgetary policy be used to support full employment Crcatcd the Council of Economic Advisors (CEA) to advise the president on economic policy Provided sanctions for officials knowingly overspending Expanded presidential impoundment authority 1974 Congressional Budget and Impoundment Control Act Created a top-down process to integrate fiscal policy making with allocation goals of' funding Changed executive impoundments into rescissions and deferrals Created Senate and House budget committees and the Congressional Budget Office Required 5-year forecasting on new programs, and current services, tax expenditure, and credit 1945 Government Corporations Act: 1946 Full Employment Act 1950 Federal Anti-Deficiency Act amendments program needs budgets 1986 Gramm-Rudman-Hollings Act Set deficit reduction targets to achieve a balanced budget hy 199 1 Established procedures for automatic spcnding cuts dispersed equally across social and defense spending if deficit targets were not met Set new 5-year deficit targets for 1991-1995 Retained the automatic sequestration of military and civilian expenditures when deficit targets Set discretionary spending totals in defense, international, and domestic spending Made other process reforms 1990 Budget Enforcement Act are not met. giving the president some new powers Federal Deficits and Financing the National Debt 1363 nature of programs being funded, details on how much wealth and income are being redis- tributed alnong income groups is not in the budget. Such details would likely increase re- sistance to expenditures that are regressive, increasing the wealth ofthose already relatively well off. Rather, the information in the budget is more mundane, as shown below. &&1~1.~, reverrrre.s, (7ild budget oufhorify: Each federal budget presents estimates of outlays, revenues, and budget authority for the upcoming year. Both outlay and budget authority figures are presented by agency, function, and account. Out- lays are actual federal payments or disbursements during the fiscal year. Out- lays represent the liquidation of an obligation, usually by check or disburse- ment of cash. Most frequently outlays occur in the actual year the obligation was incurred, but not always. Outlays may also represent payment of obliga- tions occurred in prior years. Revenues are anticipated receipts and collections. In addition to outlays and revenues, the federal budget contains budget author- ity estimates. Budget authority is the legal authority to enter into obligations that will result in immediate or future government outlays. The three basic types of budget authority are appropriations, contract authority, and borrowing authority. Appropriations are the most common type of budget authority and represent a legislative authorization that permits government agencies to incur obligations and to make payments out of the U.S. Treasury for specified pur- poses. An appropriation usually follows enactment of authorizing legislation. Borrowing authority is the authority that permits an agency to spend borrowed monies (debt receipts), while contract authority permits obligations to be in- curred in advance of appropriations or in anticipation of receipts. Presidetztial success: The budget provides information to assess past presidential success by including data on the most recently completed fiscal year, and a re- vised estimate of the fiscal year still in progress. Presidential requests for ap- propriations may be compared with actual appropriations. Five-year projections: Five-year projections for outlays, budget authority, and rev- enues have been included in recent federal budgets, permitting trend analysis, and providing Congress, agencies, and the public with an overview of how the current budget fits into long-term policy. While 5-year projections for certain types of budget authorities make government management easier, they also re- duce the flexibility of the budget as a fiscal policy tool. Presumably the purpose of S-year program cost projections was to reduce providing members of Congress with information about future as well as immediate costs, allowing them to avoid enacting programs whose costs increase rapidly. These projec- tions have not significantly reduced deficits, however. Ecorlomic projections: Economic projections for the economy are the basis for bud- get projections and are also included in recent federal budgets. The economic projections in the budget represent a sulnlnary of more detailed projections pre- sented in the Economic Report of’the President. If these projections are overly optimistic, they may be used to justify higher spending, which in turn may pro- duce higher deficits. Currenf services estir~rtrtes: The 1974 Congressional Budget Act requires the presi- dent to include current services estimates in his budget proposal. A current ser- vices budget consists of required outlays to maintain the current service level into the budget year, making changes for adjustments in economic and demo- 1364 Whicker graphic conditions. The current services estimates provide a baseline for com- paring the requests in the president's budget. If inflation is high or economic conditions are otherwise unfavorable, the president's requests may be higher than last year's outlays, but still represent a decrease in actual service level. Current services estimates allow Congressmembers to determine whether the president's requests represent a real increase or a real decrease in the services provided. Current services estimates provide useful information for interest groups lobbying for increased funding by enabling them to argue that services for group members are being reduced, despite increases in nominal funds. Budgeting Has Been Incremental and "Bottom-Up" Congressional budgeting, especially before the 1974 Congressional Budget Act, was very decentralized. Major appropriations bills were examined and marked up by subcommittees of the appropriations committees of each house. The bills were approved by the various subcommittees and passed on to the full appropriations committee for approval at different times, sometimes months apart. Before the 1974 reforms, congressional budgeting was a bottom-up rather than a top-down process." Decision making remained very open to polit- ical influence, and focused on program issues rather than on economic policy goals. NO strong incentive existed for the full appropriations committees to consider the budget in its entirety."' First, the appropriations bills were forwarded sequentially at dif- ferent times, a procedure that inhibited examining the budget as a single document requir- ing trade-offs and priority setting. Second, an informal norm of reciprocity existed between members of the various subcommittees. Members of the appropriations committees in each house typically sought assignments to subcommittees that oversaw spending in programs that affected their own constituencies. Members could then take credit for government spending that their own constituents favored and increase their reelection potential. Not anxious to have their own subcommittee legislation overturned or drastically modified by the full committee, members would often give cursory approval to the legislation originat- ing in other subcommittees in exchange for equivalent treatment for their own subcommit- tee work. While some debate would occur on the floor of each house once appropriations bills were forwarded, the same incentives to logroll that existed in the appropriations com- mittees diminished the ability of Congress to set priorities, to encourage trade-offs between policy areas, and to curb deficits. Incrementalism dominated budget decision making. Little attention was directed to- ward the budget base, the amount of funds that were appropriated last year.' ' Most atten- tion was focused on the budget increment, the additional funds requested for the budget year. One result of bottom-up incremental decision making was rising federal expenditures and deficits. An iron triangle based on a common interest in increasing program expendi- tures often formed between agency officials, the affected interest groups and clientele of the agency, and the appropriations subcommittee that reviewed budget requests by the agency. Each side of the iron triangle exerted pressure to increase program expenditures. Affected interest groups and clientele were direct beneficiaries of greater funding. Agency officials preferred directing large expanding programs to small shrinking program+-em- ployees and clients were happier and life was easier when expenditures were growing. Since members of appropriations Committees typically gravitated toward subcommittees that directly affected their constituencies, they also preferred program growth to program Federal Deficits and Financing the National Debt Table 2 Characteristics of Bottom-up and Top-down Budgeting 1365 Characteristics Bottom-up Top-clown Time frame Decision mode Timing of decisions Initial focus Decision strategies Primary constituencies Branch strengthened Pre- I974 Incrementalism Sequential examination of appropriations bills only Budget margin, program issues, and line items totals Log-rolling, functional and geographic specialization and deference, quadriad power, padding, use of political gaming Special interests, subnational constituencies, specific policy groups of Iron Triangle President and the bureaucracy Post-1974 Constrained trade-offs and Early examination of the budget Budget base, economic policy goals and broad functional Forecasting, expert testimony, greater emphasis on analysis and budgetary justification National constituencies, finance and economic cross-policy groups priority-setting as a whole Congress decline. Furthermore, subcommittees that reviewed large growing programs were institu- tionally more prestigious and powerful than those that reviewed smaller shrinking pro- grams. (See Table 2.) Incrementalism led to role-playing and strategies by various budget actors.” Agency officials, knowing that most attention would be focused on the budget increment, were pre- disposed to ask for additional funds. Sometimes the incremental requests would be padded or exaggerated in anticipation of cuts by OMB and congressional committees. Agencies that were ordered to reduce spending might argue that programs popular in Congress were the only programs that could be cut, expecting Congress to restore the cuts. Members of Congress also resorted to strategies to cope with the mountains of bud- get detail.I3 In addition to focusing primarily on the increment, congressional members would use spot-checks of the figures in the budget base, assuming that if the few items that were examined closely were realistic and accurate, the remainder of the figures must also be solid. Since budget bills constitutionally were required to be initiated in the House of Representatives, House appropriations subcommittees could often play a more extreme role-inflating the budget of politically popular programs and slashing unpopular pro- grams-knowing that the Senate could modify the excess. Major Budget Actors All Have Incentives for Increasing Federal Spending Major budget actors involved in budget formulation and approval all have strong incentives for increasing funding. Agency budget offices: Agency personnel are typically advocates of increased ap- propriations.’‘ The duties of agency budget offices may vary somewhat, but generally this is where the initial executive budget is developed. The functions Inay be quite diverse. Agency budget officials, in conjunction with the appro- priate operating officials, develop budget estimates for programs and offices, conduct budget reviews, and recommend budget allocations. These officials 1366 Whicker justify the submitted budget to OMB antl to Congress by using financial and personnel exhibits, budget narrative material, and additional support data. Agcncy budget officials help prepare aycncy operating personnel for testitnony bcfore both OMB and Congress. Apportionments and allotments are prepared by agency budget officials who also lnaintain overall control of the agency’s fi- nancial resources and position allocations. Other functions include ongoing re- views during the fiscal year, making recommendations for reprogramming ac- tions and other funding adjustments. Budget officials are also responsible for assuring sound financial management within the agency and for recotnmend- ing any changes needed in financial management procedures. Budget officers are usually career civil servants who work closely with politically appointed agency or department heads.I5 These officers serve as contacts with both the legislative branch and the public on financial matters of agency concern. Bud- get work is often repetitive and seasonal. When the budget is being prepared and deadlines are imminent, the budgct officer may log long hours on the job, working late at night and on weekends. Timeliness of information is crucial. Budget officials must cope with deadlincs and other pressures, including inter- est groups anxious to retain program funding. As they conduct their analyses, agcncy officials may interact with clientele, becoming sympathetic with the clientele’s view that more funding is needed. Further, as agencies expand, so do career options and the power of agency officials. Working in an expanding agency is more fun than working in one constantly beset by budget cuts. When judgment calls are made, agency officials, within budget constraints, typically advocate spending more. Deptlrt~rlent b~lget o~ires: Department budget offices service the entire federal de- partment in the executive branch rather than a single agency, yet tnany of the functions and activities of department budget officers are equivalent to those of agency budget offices. The scope rather than the nature of budget activity dis- tinguishes the two types of offices. Department budget offices also are gener- ally advocates for increased appropriations for the entire department. In order to maximize department resources, however, the office may recommend cuts in particular agencies within its jurisdiction. Under a fiscally conservative ad- ministration, or an administration in which the policy area of the department has fdlen out of favor, the advocacy role of the departnlent budget office may be more muted and subdued. Oflk of MtrrlcrKertlerlr wtd B~(yet: Currently, OMB has the powers of budget de- velopment and legislative clearance. Its personnel include a staff of several hundred budget exatniners who review agency budget requests. Transferred to the executive office of the president in 1939, OMB has been gaining in power and prestige since its creation in I92 I, accumulating additional influence and authority through legislation, execulive orders, and reorganization acts. In 1933, it gained the power to make, waive, and modify apportionments of ap- propriations, a power previously wielded by individual department antl bureau heads. This power over apportionment was expanded in I950 with the passage of amendments to the Anti-Deficiency Act. OMB was reorganized from the Old Bureau of the Budget in I970 and was given an enlarged mandate. Its au- thority to act in the president’s name extends to the entire federal administra- tion, as well as to state and local governtnents when federal funds are involved, Federal Deficits and Financing the National Debt 1367 and to federal contmctors. As a result of the 1970 reorganization, legislative clearance was centralized and most policy decisions were subscqucntly made by political appointees. Previously, decisions made by the OMB director 011 agency budget requests could be appealed over his head to the president by dis- grLu1tIed agency officials. Aftcr 1970. decisions made by the OMB director were presented as presidential decisions, making appeal much rime difficult ;111~1 Llnlikely. The general thrust of the Nixon administration reforms and reor- ganization was to heighten the role of political appointees and to make OMB 111ore responsive to the institution of the president. OMB theoretically t11:ly ad- vocatc spending cuts rather than incrcascs, especially in conscrvative presi- dential administrations. Even conservative presidents, howevcr, may want sig- nificant increases in defense and military spending. OMB has not been particuIarly successful at holding down spending in other areas. either. HOrIsc B//t/p>t Cottlttljttcv: Thc House Budget Committee conducts hearings on the state of the economy, appropriate levels of fiscal stimulus, the need for new programs, and overall spending priorities. Along with the Senate Budget Com- mittee, the House Budget Committee is also responsible for developing and passing a first and second concurrent budget resolution, which is the framc- work of the congressional budget. When first established by the 1974 Con- gressional Budget Act, thc House Budget Committee had 23 members whosc membership overlapped in specified ways with the memberships of other pow- erful financial committees. Five members of the House Budget Committee came from the Appropriations Committee, five from the Ways and Means Committee, 1 I frotn other committees, one from the Democratic leadership, and one from the Republican leadership. Two more at-large members were added in 1975, increasing the total membership to 25. Membership on the House Budget Committee is on a rotating basis, a feature that weakens the committee institutionally vis-h-vis permancnt standing conmittees such as Ap- propriations and Ways and Means. Originally, members could serve only 4 out of 10 years on the House Budget Committee. Across time, the committee membership has been cnlarged and the tenure has been made more generous. By the Ninety-seventh Conprcss, the committee had thirty members. Tenure was lengthened to allow members to serve 6 out of 10 years before rotating off the committee. House Budget Committee chairs may serve 8 out of 10 years. In theory, the macroecononlic fiscal targets for total revenues and spending hold down deficits. In reality, partisan clashes on the colnmittec at times have been divisive. The conmittcc tnust rely on tnoml suasion to persuade revenue committees to increasc taxes, or authorizing committees to cut spending au- thority. Thus, the success of the Housc Budget Conmittee in holding down spending has been limited. Srtrtrte Bdgot C'ottttnittee: Thc Senate Budget Committee, also established by the 1974 reforms, fulfills a role in the Senate equivalent to the role played by thc House Budget Committee in the House of Rcprescntatives. Originally the com- mittee had fifteen members, ;I number that had been increascd to twenty-two by the Ninety-seventh Congress. Like other committees, members of the Sen- ate Budget Committec are chosen by the Democratic and Republican caucuses. Unlikc the House Budget Colnmittcc, however. the Senate Budget Committee is a stnnding comtnittee with permanent membership, a fact that cnhances its 1368 Whicker power in the Senate to a greater level than the power achieved by the House Budget Committee. Despite the greater relative power of the Senate Budget Committee, it was more willing during the era of Democratic control of the Senate between 1974 and 1980 to accommodate requests by standing autho- rizing committees than was the House Budget Committee. Generally, the Sen- ate Budget Committee has been more political and accommodating than the House Budget Committee, which is known for its greater attention to technical budget detail. Many of the limits on increased spending confronting the House Budget Committee are also felt by the Senate Budget Committee. Congressiotltrl Budget Office: The 1974 Congressional Budget Act mandated that as- sist congressional committees and members by specified hierarchy. Foremost, it is required to provide assistance to the two budget committees; secondarily it provides information upon request to the two appropriations committees and the two revenue committees. Next it is required, to the extent that is practica- ble, to provide information to additional committees on budget, tax, and eco- nomic issues. Finally it is charged to provide information to individual mem- bers of the House and the Senate. The CB0 director is jointly appointed by the speaker of the House and the president pro tempore of the Senate to a 4-year term. The CB0 director has the authority to hire experts and consultants as well as to use CB0 staff to secure information from the various executive and con- gressional agencies. The 1974 Congressional Budget Act charges CB0 with providing Congress with two kinds of information-budget analysis and pol- icy analysis. Several CB0 duties relate to the provision of budget analysis- the computation of budget and tax estimates. One major budget analysis func- tion is scorekeeping-keeping Congress regularly informed of how enacted appropriations legislation compares with the most recent budget resolution. The agency also keeps committees that report spending and tax expenditure legislation, especially the Appropriations, Ways and Means, and Finance Com- mittees, informed about the compatibility of their legislation with the most re- cent budget resolution. Five-year cost projections for every authorizing bill re- ported by a House or Senate committee are the responsibility of CBO, as well as preparing and issuing an annual report soon after the beginning of each fis- cal year that projects total spending, revenues, and tax expenditures for the next 5 years. The CB0 produces an annual report by April 1 on alternative budget courses that Congress might pursue in the upcoming fiscal year with an em- phasis on fiscal policy and spending priorities. The agency also produces anal- yses requested by the budget committees on specific aspects of federal policy. Scorekeeping (data on the amount of money appropriated toward the budget to- tal so far) and other CB0 analyses were designed to curb excessive spending and deficits. Analyses by CB0 have gained the reputation of being more accu- rate and less biased than executive branch estimates, in part because CB0 serves so many masters. Once its estimates and analyses are released to mem- bers, however, political forces become more powerful. Of major budget actors, then, CB0 has among the least incentive to increase spending, but it does have some incentive since Congress is its major client, and Congress as an institu- tion is under pressure to spend on constituents. Mostly in CBO, however, the multiplicity of “bosses,” some conservative, some liberal, some moderate, pro- vide countervailing pressures, leaving CB0 the most neutral of budget actors. [...]... ( 1 I % of potential GNP in 1966,2.4% in 1967, and 1.870 in 1968) TheFederal Reserve did not employ monetary policies to offset these expansionary full-employment deficits, decade-long inflation resulted." and Fiscal Dividend or Drag Both of the terms fiscal dividend and fiscal drag have been used to describe an upward creep in full-employment revenues in times of economic growth Critics of fiscal drag... development tax bills initiated within the of executive branch is supervised by the assistant secretary tax policy withinthe Treasury for 3.) Department (See Table The assistant secretaryfor tax policy has three staffs: the the the officesof tax analysis to estimate impacts of revenue changes; office of the tax legislative counsel to provide legal analyses; and the office of the international tax counsel to... concerning tax policy Internal Revenue Service: Collects federal taxes Office of Tax Analysis: Analyzes tax issues and makes revenue projections Office ofthe Tax Legislative Council: Reviews and approves IRS regulations Office of International Tax Council: Provides legal analyses for foreign source incomc and related issues Office ofMarlagemvlt urd Bttdger: Includes revenue estimatesin its analyses and... government services Fiscal dividend and drag result from the elastic nature of the federal tax structure-the fact that tax revenues grow faster than the tax base during expansions and shrink faster than the tax base during periods of retrenchment The elasticity of the tax structure depends in turn on the fact that it is progressive Both terms -fiscal dividend and fiscal drag-refer to the samefiscal policy... assuming an unemployment rate of 6% and an inflation rate of 4%, federal tax receipts would automatically increase by $60 billion a year, or 1.3% of GNP This would produce a fullemploynlent budget surplus of approximately $60 billion, minus cost -of- living adjustments in transfer payments Assuming a 6% inflation rate producesa full-employment budget surplus of $80 billion, or 1.5% of GNP Some policy advocates... taxpayers who are fearful of the economic future may choose to savea portion of the additional tax dollars, while more optimistic taxpayers may spend the entire amount,or larger portions of it Thus, the fiscal policy effect of a tax cut is less than that of a government spending increase, because taxpayers benefiting from the tax cut may choose to saverather than spend some of their tax-cut income Additionally,... this, the strengthof the economy produced substantial tariff revenues until the War of 18 I2 cut off trade, resulting in a reimposition of excise taxes Tariffs remained the mainstay of federal revenues for the next hundred years, producing rare agreement between the two political parties Democrats, in principle, often preferred lower tariffs than did Republicans, but in practice often argued for tariffs... privilege of doing business could be measured by corporate profits The history of the corporate income tax has been one of declining importance in the overall federal revenue structure For 17 of 28 years between 1913 and I94 1, corporate income tax receipts exceeded those derived from the individual income tax Between 1941 and 1967, the corporate income tax was the second most important source of federal... By 1986, it accounted for only 8% of total federal revenues, compared to 28% 30 years earlier During that time frame, corporatetax rates have been reducedfrom 52% to 34% of taxable profits The corporateincome tax has a flat rate schedule, but is still complicated by the myriad of special applications for various types of businesses and business situations Critics of the corporate income tax have charged... measured by the multiplier The valuefor the multiplieris determined in large part by the rate of turnover of dollars in the economy Theimpact of the multiplier is influenced by both its own value and the size of the tax change The Differential Impacts Tax and Spending Changes of Taxation is a somewhat less precise fiscal policy tool than government spending While policy makers can calculate spending increases . followed by a revival of relative funding. National defense received 52. 2% of total federal outlays in 1960. This amount declined to 22 .7% of outlays in 1980. the policy area of the department has fdlen out of favor, the advocacy role of the departnlent budget office may be more muted and subdued. Oflk of