Budget and Tax Policy Issues

Our government responsibility is divided between the federal government, the states, and local government; taxes are collected by all of these branches. Income tax is the principal tax collected by the federal government. Federal tax level ranged between 17% and 20% during recent decades until it precipitously dropped under the 17% level because of the Bush Administration tax cuts. Defense expenditures have gone down while Social Security, Medicare and interest expenses have gone up. When the state and local government sector of the economy is added, the total government portion of the GDP is between 25% and 30%. This rate of government spending and revenue is approximately equivalent to Japan and far less than Canada and other European countries. a budget deficit occurs when taxes do not generate enough income to cover the costs of government programs. When there is high unemployment, tax revenues will decrease but government spending will not correspondingly decrease unless Congress cuts spending programs. Congress accepted much of President Bush's proposal for tax relief and passed a major tax reduction package in 2001. Now there is no longer a budget surplus and the budget deficit is growing faster than projected. The income tax is a progressive tax which means that individuals with larger incomes bear a larger tax burden. The estate tax has been a permanent part of the federal taxation system since 1916. The current estate tax consists of the traditional estate tax, plus two additional components designed to close loopholes. There is a wide difference between the two parties. Republicans favor lower taxes and low marginal rates for the wealthy. Republicans overwhelmingly supported the tax package passed by Congress in 2001. Democrats supported the 1993 legislation which raised the maximum tax rate.