Policy Making on Federal Spending

It’s the responsibility of the government to acquire some resources to finance its spending. There are several sources from which the government gets finances. For instance, through taxation, fund raising by selling its goods and services, and also through borrowing from a potential donor among other sources.

The main sources of centralized government revenue are the taxes from the individuals’ income, and the payroll taxes (Steuerle, 2004). Taxes play a great role in contributing to federal revenues because they are compulsory payments. Taxes are not paid in exchange of anything whether goods or services. Other sources may include, organizational income taxes, excise duties, and custom duties among others.

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For the last half-century, the payroll taxes have been increasing, with organizations taxes decreasing, and the individual income taxes remaining unchanged. In mid 1950s, individual income tax was the greatest source of the government revenue, followed by the payroll taxes.

Starting from 1965, the payroll taxes became the major contributor of the government revenue (Steuerle, 2004). They increased rapidly due to the introduction of Medicare. The taxes that were received from Medicare, and the social security taxes led to the increment of payroll taxes from 1.6% in 1951 to 6% in early 1990s. Other sources that contributed to the increment of payroll taxes are national workers pension, and railroad retirement fund.

Government spending is defined in three major ways. Firstly, the government spends its money by buying goods and services for current use by its citizens. Secondly, government spends its money to buy goods and services to be used in the future, like infrastructure (Steuerle, 2004). The third way through which government spends its money is by acquiring goods and services through its own production, and by use of its labor.

The main way through which the government spends its money is by securing the future of its citizens. When the first type of spending is combined with the second type, they form gross domestic product. In the year 2010, the United States central government spent $3.6% trillion, which was an equal amount of 24% of the GDP. Out of the $3.6%, approximately $2.2% was financed from nations tax revenues, while the remaining part was borrowed, creating a deficit to be recovered by future taxpayers.

The largest issue faced in federal spending is federal debt. The financial problems and recession in US economy brought about a decrease in tax revenues, and on the other hand, spending increased. In the year 2007, the national budget had a deficit of 1.2% of the gross domestic product (Schick, 2007).

In the year 2009, the budget deficit increased to 10%, which was the highest deficit since 1945. The current reports concerning the economy declare that, the increasing government debt may turn to be unsustainable in the long run.

The greatest issue at hand is that the interest rates on the federal debts are a bit higher than the rate of income growth (Schick, 2007). This situation may lead to debt consuming the high levels of income rates, unless the debt would be settled on time. If this situation would not be considered on time, there would be a higher probability of income falling, and new debt adding to the old ones. The private sectors in turn will have an increased risk of non-payment cases. These sectors will end up with weak financial base, and reduced annual profits.

Reference List

Schick, A. (2007). The Federal Budget, Politics, Policies, Process. Washington, DC: Brookings Institution.

Steuerle, C. E. (2004). Contemporary U.S. Tax Policy. Washington, DC: Urban Institute Press.

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