Introduction
Public budgeting primarily involves the allocation of resources, with the main objective of achieving the government’s goals and objectivities within a particular period of time. It serves to reflect the financial plan of the revenues and expenditures of the various levels of government, which are federal, state and local governments (Bovaird & Loffler, 2000).
This means that public budgeting centers on the prediction of government expenditure, establishing the link that exists between the financial and human resources with the primary objective of realizing the goals, representing the governmental activities in monetary terms and recording the results of the struggle at the expense of political preferences.
The main objective of this paper is to analyze the breadth, depth and application of revenue estimation among the various forms of budgets deployed in public budgeting (Epstein & Thomas, 2000). The paper offers a description of each of the budgets, the differences and similarities of each budget and what accounts for the major sources of revenue for each of the state, local and federal budgets.
In addition, the paper discusses how the revenues are expected to change in future, how the budget fits with the mission of each domain and the ways through which the budget can be improved and revenue estimation at each level can be accurate.
Basic description of each budget
The collection of taxes and expenditure of the funds is one of the core functions of the government. This implies that the government requires a plan for the collection of revenue and subsequent spending on the public initiatives (Tax Policy Center, 2011).
The government budget can take various forms at different levels of government such as operating, capital, proposed and departmental government budgets (Epstein & Thomas, 2000).
The united stated federal government usually splits its budget into discretionary and non-discretionary expenditure, with each of the form of the budget having a particular role to play in the realization of the government’s goals and objectives during the implementation of public programs (Guillermo & Rodrigo, 2008).
The operating budgets at the state and local governments usually govern the plan of approach regarding the expenses and revenues. For instance, a budget for a city can take charge of the salaries and benefits for the employees and other expenses such as law enforcement and so on (Tax Policy Center, 2011).
Separate budgets are created for utilities that the public pay to use such as water and sewer; this is mainly because such revenue is not generated from the collection of taxes.
Similarly, operating budgets at the state level usually take charge of expenditures like appropriations in public educations, part operations at the state, government operations at the state appropriations for operations associated with economic development at the state level (Epstein & Thomas, 2000). The duration of state budgets usually vary depending on the state laws regarding budgeting.
Capital budgets are somewhat different from the operational budgets since they are used in financing long-term projects associated with infrastructure innovation and construction. Such projects usually cost a significant amount of money and are a potential source of financial burdens for the government at the state level (Smith & Lynch, 2003).
Tax increases in such a context are usually avoided through the maintenance of separate capital budgets by the state and local government and the various quasi-governmental agencies with the principal objective of financing long terms construction and renovation projects. Capital budgets are not deployed in the federal budget (Guillermo & Rodrigo, 2008).
With regard to proposed budgets, the United States president in conjunction with Office of Management Budgets has the responsibility of creating a proposed budget and puts it forward to the US Congress (Tax Policy Center, 2011). The state governors work together with the state budget officers to develop their own budget proposals that are applicable at the state level.
The propose budget at the local level is created by either the mayor or the officials who have been appointed to undertake the process of budgeting to be applicable within the local level of government.
Despite the fact that federal, state and local governments pass different proposed budgets, the power to develop a proposed budget is usually considered as a vital agenda-setting power, implying that budgetary allocations usually prioritize the urgency at that particular level rather than the national directives (Tax Policy Center, 2011).
With regard to department budgets, the various levels of government have different departments that are charged with providing the public with different services. The various departments at the federal, state and local governments usually work in collaboration with the budgeting executives to develop a budget proposal that outlines the revenues and expenditures to use in the final proposed budget (Tax Policy Center, 2011).
The legislative bodies, which includes the Congress, the state legislatures and the city councils reviews and analyzes the budget, after which the department has to create a budget in accordance with fund appropriations allocated to it.
The United States federal budget makes use of both discretionary and mandatory expenditures. There are various laws that predispose the government to finance entitlement programs such as social security, welfare programs, Medicare and Medicaid, and the interests that have been accrued on public debt.
Discretionary spending usually entails the expenditures that the government has the option of cutting (Tax Policy Center, 2011).
Differences between federal, state and local governments with respect to budgeting
The federal government has a responsibility for the mint, implying that it has the capability of printing currency. Therefore, the federal government, through its budget can monitor the circulation of currency using the Federal Reserve. On the other hand, state and local governments cannot monitor the circulation of money using their budgetary allocations and capabilities (Baumol & Alan, 2006).
The federal government also regulates the national economy through the use of interest rates in order to keep check of inflation and stimulate the economy during cases of stagnation. The state and local governments cannot make use of their budgetary tools to control and monitor the interest rates, meaning that their budgets cannot have a direct impact on the economy compared to the federal budget (Epstein & Thomas, 2000).
Owing to the fact that the federal budget can be deployed to control and monitor the national economy, there is a possibility that it could make a fuss of deficit expenditure to realize eider economic goals and microeconomic policies. During recession, the federal budget can make use of increased expenditure irrespective of reduced sources of government income to stimulate the economy (Epstein & Thomas, 2000).
During economic surplus, the federal budget can make use of reduced expenditure in order to maintain the surplus; this is a theoretical model of the Keynesian economics (Epstein & Thomas, 2000). The significant challenge is that the government deficit in the federal budget has increased irrespective of the surplus duration imposed by the internet boom.
The difference is that state and local governments can make use of the concept of budget deficit to influence the economy. With respect towards the scope of applicability, federal budget is applicable with matters of national defense, the state and local budgets on the other hand are applied on a smaller scope revolving around state and local issues respectively (Epstein & Thomas, 2000).
Major sources of revenue for the federal, state and local budget
The sources of revenue vary in accordance with the level of the government. Despite the fact that federal government collects the largest amount of tax, the government at the state and local level has various options concerning their taxing approaches (Baumol & Alan, 2006).
Sources of revenue for Federal budget
The federal budget relies mostly on the federal taxes, which comprises of individual and corporate taxes, excise taxes, social security taxes, inheritance and estate taxes and capital gains tax (Bovaird & Loffler, 2000). Individual income taxes and payroll taxes are the primary source of revenue for the federal budget.
It is approximated that individual and payroll taxes contribute USD 4 out of USD 5 of the federal revenue (Tax Policy Center, 2011). The corporate taxes comprise of approximately 12 percent of the federal revenue. The balance is filled by the excise taxes, estate and inheritance taxes, custom duties and capital tax. There has been a significant change regarding contributions towards the federal tax revenue.
The fractions of the payroll taxes have been growing while the contributions by corporate, income and excise taxes diminishing with respect to the share of the full amount of federal tax revenue. The amount contributed by the individual income tax has been somewhat constant.
The following shows the federal tax contributions for the federal budget revenue for the year 2011. Other sources of revenue for federal budget include government borrowings such as treasury bonds and user charges (Tax Policy Center, 2011).
Source: Tax Policy Center, 2011.
The tax policy is defined by the tax descriptions and tax expenditures. It is notable that the United States federal income tax is usually progressive, implying that marginal tax rate that is high results to higher ranges of the government revenue.
For instance, during the 2010 fiscal year, the tax rate applicable to the initial USD 17000 with respect to taxable income for joint couples was approximately 10 percent (Tax Policy Center, 2011). The tax rate applicable to income above USD 379150 was approximately 35 percent. There has been a significant reduction in the top marginal tax rate since the year 1980.
The tax rate reduced from 70 per cent to 28 percent during 1980-1988 (Guillermo & Rodrigo, 2008). The recent tax cuts implemented the Bush administration, were further reduced by the Obama administration to 35 percent. The federal payroll tax is a considered as a flat tax, which is mainly used in financing social security and Medicare (Tax Policy Center, 2011).
The social security fund has a capping at the USD 106800, implying that any income that is more than this amount is not liable to tax.
The employers are supposed to pay the Medicare funds and it has no capping, and the payroll is usually viewed as a social insurance instead of tax because of the potential benefits accrued the individuals who have qualified to participate in this program. The employee payroll tax was significantly reduced to 4.2 percent with the aim of stimulating the economy (Tax Policy Center, 2011).
Sources of Revenue for State budget
The description, analysis and evaluation of the expenditures at state and local level are mainly centered around the issue of the establishment of the relationship that exists between the present and long term requirements on a manner that is satisfactory.
The composition of the revenue for the state and local budgets plays an important role in determining the relationship connecting the long term requirements and short term goals (Guillermo & Rodrigo, 2008).
State and local governments are usually under high pressures to increase their source of revenues, which is mainly implemented through the use of taxes, which in turn affects the material status the members of the public who are supposed to pay for using public utilities.
The revenues for the state and local budgets can be categorized into 3 main classifications; including revenue collected using their sources, grants from federal and state governments and loans (Tax Policy Center, 2011).
The primary source of revenue for the state governments include intergovernmental transfers, state taxes, licenses, lottery and borrowing such as state bonds. State taxes includes individual and corporate taxes, sales taxes, fuel taxes, inheritance and estate taxes and special taxes that are imposed on particular commodities such as alcohol and tobacco (Smith & Lynch, 2003).
During the year 2008, states in the US collected approximately USD 1.5 trillion, with 28 percent of the revenues coming from inter-governmental transfers from the federal government and a small percentage from the local government. The remaining revenue comprised of the state taxes, miscellaneous receipts and fees.
A breakdown of the revenue estimates for 2008 fiscal year reveals that state earned approximately USD 446 billion from intergovernmental transfers, which contributed to approximately 29 percent of the revenues for the state budget (Guillermo & Rodrigo, 2008).
The taxes associated with sales and gross receipts contributed the largest amount in the category of state taxes during 2008, which comprised of USD 360 billion, making approximately 25 per cent of the total state revenues. Individual income and corporate taxes contributed approximately 20 percent of the revenue for the state budget during 2008 (Tax Policy Center, 2011).
The individual income taxes totaled approximately USD 280 billion, while the corporate income taxes contributed approximately USD 50 billion. The miscellaneous taxes, state receipts, charges and fees were approximately USD 380 billion, which is approximately 25 percent of the state budget revenues (Epstein & Thomas, 2000). The following chart shows the revenue contributions for the state budgets.
Source: Tax Policy Center, 2011.
Sources of revenue for the local government
The local government primarily relies on intergovernmental transfers, local taxes such as property and sales taxes, special assessments, user charges and borrowings. During the 2008 fiscal year, the local government collected revenues of approximately USD1.4 trillion. About 40 percent of this amount came from intergovernmental transfers from the federal and state governments (Tax Policy Center, 2011).
The remaining percentage was collected from the local taxes, fees and various receipts deployed at the local level. A breakdown analysis of the revenue for local budget reveals that intergovernmental transfers contributed USD 525 billion, which was about 37 percent of the total revenues for the local budget.
Property taxes contributed the largest amount of the local taxes, which totaled to USD 400 billion, making up 28 percent of the total revenues for local budget. Charges and other receipts deployed by the local government contributed to approximately 23 percent of the total revenues for local government budget (Tax Policy Center, 2011).
Taxes from sales and gross receipts, individual income taxes and miscellaneous revenue made up 12 percent of the total revenue for the local governments budget. The following figure shows the contributions by the various sources of revenue for the local government budget (Smith & Lynch, 2003).
Breakdown of the federal, state and local revenue and how the budget fit within each of their domain
Federal revenue usually contributes the largest portion of the total national revenue. For the 2007 fiscal budget, the Tax Policy Center reports that federal revenue comprised 50 cent of the total national revenue, state contributed approximately 30 percent while the local government contributed the remaining 20 percent.
The transfers between federal government and the state and local government can be reviewed in three perspectives (Epstein & Thomas, 2000). Firstly, the inter-governmental transfers from the federal government to the state and local government comprised of approximately 20 percent of the federal revenue, making up 10 percent of the total national revenue.
Secondly, a significant percentage of intergovernmental transfers were directed towards state governments, which was equivalent to 110 percent of the revenue collected by the local governments. Thirdly, the state retained about 29 percent of the revenue while the local government budget benefited from the intergovernmental transfers from both the state and the federal government (Guillermo & Rodrigo, 2008).
The different levels of budget have different objectives and different scopes of applicability. This is mainly because they deploy different financial tools in achieving their goals and objectives. The federal budget can be adjusted in order to meet the macroeconomic policies adopted at the national level.
In addition, it is primarily concerned with mandatory expenditure and entitlements at the national level. Mandatory expenditures are usually financed by means of permanent appropriations in the federal budget and they include social security, Medicare and Medicaid (Tax Policy Center, 2011).
The federal budget meets its mission at the national level through deployment of financial and economic tools that can have an effect on the entire US economy (Guillermo & Rodrigo, 2008). This is usually done through varying the government expenditure and revenue in order to maintain a surplus or combat a deficit (Guillermo & Rodrigo, 2008).
Fiscal policy significantly depends on government revenue and taxation. Changes in this variables of fiscal policies usually affect various variables of the economy such as aggregate demand, resource allocation pattern and income distribution. The principal objective of fiscal policy is to make use of the government budget to control the economy of a country (Tax Policy Center, 2011).
This scope of applicability cannot be deployed in state and local budgets because they are not allowed to operate under deficits, that is, they are supposed to balance, and potential shortfalls are funded appropriately (Epstein & Thomas, 2000).
The fiscal policy is one of the most effective strategies deployed by governments to chase their economic goals and objectives. This implies that the impact of governments in stimulating the economy is noticeable in the nature of fiscal policies deployed.
In the short term, the fiscal policy can be used by governments to attain short-term economic stability, while in the long-run, fiscal policy provides a framework for realization of economic growth and development. Fundamentally, the fiscal policy can be used to manipulate the Gross Domestic product, inflation rates and the rates of economic growth and development through balancing government taxation and expenditure.
There are three potential positions of fiscal policy, which are neutral, expansionary and contractionary stances. A fiscal policy that is neutral is characterized by a balanced economy (Epstein & Thomas, 2000). The outcome of this is a large tax income, whereby the funding of the government expenditure is from the tax income. The outcome of the government budget normally has a neutral effect with respect to economic stimulation.
An expansionary fiscal policy is characterized by the government expenditure exceeding the tax income, while a contractionary fiscal policy is characterized by the government fiscal policy being lesser than the tax income from tax. The fiscal stance can be defined as the government expenses divided by the tax ratio, which represents the revenue of Gross Domestic Product (Epstein & Thomas, 2000).
Changes in government revenue in future
The sustainability of government revenue is a significant concern for most of the rich countries; this is primarily because of the increasing debt burden due to the financial crisis and the global recession.
The issue is further worsened by the fact that costs of healthcare are increasing and at the same time, the aging population is also increasing. In the context of the US, this is likely to be a significant challenge to federal, state and local governments (Epstein & Thomas, 2000).
A reduction of the tax revenues, global recession and financial crisis have had negative implications on state and local budgets, which has compelled the states and local governments to deploy strict measures in order to maintain their budgets.
Despite the fact that the financial crisis and global recession has significantly reduced tax revenues collected by the state and local governments, the loans and grants from the federal government has played a significant role in maintaining the revenue levels for the state and local government budgets (Guillermo & Rodrigo, 2008). After the end of recession, taxes associated with receipts began tom increase.
In addition, other classifications of revenue from taxes such as individual income and corporate income tax, sales tax and property tax have been increasing steadily (Epstein & Thomas, 2000). The situation is likely to continue this way in case there is no looming financial crisis in future. The basic implication is that government revenue is projected to increase on condition that financial crisis do not occur in future.
The budget appropriations under the federal government have also been increasing at a modest rate; an increase in the federal revenue also means an increase in the revenue for the state and local government budget (Bovaird & Loffler, 2000).
In cases where the federal aid has proved inadequate to help in stabilizing the revenue for state and local budgets, governments at this level are deploying strict policies in order to meet their financial goals and objectives. It is arguably evident from the tax raises by most of the state and local governments. The National Association of State Budget Officers reports that 23 states have raised their tax rates during the 2011 fiscal year.
It is anticipated that this will increase the tax receipts by approximately USD 6.2 billion. Same tax rises were implemented during the 2010 fiscal year, which increased the state tax revenues by approximately USD 23.9 billion (Tax Policy Center, 2011).
The nature of the fiscal policies deployed by the state and local governments will also determine the changes in the revenue for the state, federal and local budgets. It is anticipated that federal aid for the state and local governments is likely to drop significantly during 2010.
Deficits and shortfalls in the state, federal and local budgets cannot only be attributed to economic crisis, but also structural causation factors. For instance, some states opted to reduce their tax rates without a prior analysis of the underlying effects of recession, in the sense that it would sharply reduce the tax base, resulting to a reduction in revenue accrued from taxes (Guillermo & Rodrigo, 2008).
Additionally, tax rules that are restrictive impose significant constraints when implementing corrective strategies to combat structural failures. In addition, some states make use of an outdated tax collection system resulting significant inefficiencies in tax collection. This has the potential of reducing tax revenues in future if these issues are not addressed appropriately.
Other structural failures include tax imposed on commodities and not on services. This poses the need for tax reforms in such situations in order to ensure that tax systems are efficient and effective in order to improve the total government revenue (Smith & Lynch, 2003).
It is projected that taxes are bound to increase in future depending on the policy scenarios that will be implemented by the coming governments.
In case the policy of tax cuts adopted by the Bush administration is subject to expiry and that more American citizens that are from the middle-class are compelled to pay out the Alternative Minimum Tax (AMT), then there is a probability that the tax revenues will increase to first-time high levels. The issue of the tax burden is likely to increase even if the policy of tax breaks is subject to extension (Smith & Lynch, 2003).
According to the President Obama’s budget, which aims at reducing the tax rates for other taxes while also increasing others, it is evident that this will increase the tax burden on American citizens, which translates to increased government revenue in form of individual income taxes.
The following graph shows high the tax burden is likely to increase in the United States given the current state of policies that have been implemented by the government (Epstein & Thomas, 2000).
A general theory is that tax cuts can generate extra taxable income, resulting to higher revenue compared to the collection of tax at higher rates. The long-term macroeconomic effects of tax cuts are impulsive; this is because it depends on the various ways that the taxpayers spend the extra revenue, and how the government copes with reduced levels of revenue.
There are two perspectives to view the role of tax cuts in reviving the economy; they are the Keynesian economic theory and the supply-side view (Guillermo & Rodrigo, 2008). According to the Keynesian view, as the revenue grows, there will be an increase in the tax revenue and the incentive to increase earnings.
This implies that a reduction in taxes from high tax rates translates to a higher economic stimulation than if tax rates reduced by the same amount from lower tax rates. The basic argument is that as the government reduces the tax rates, there will be more money for people to spend, implying that there will be an incline in the aggregate demand, which in turn results to an increase in the Gross Domestic Product.
This approach is an effective strategy in reviving the economy. According to the supply-side perspective, lower tax rates serve to fuel aggregate supply (Epstein & Thomas, 2000). The reasoning here is that if people save more of their income, they tend to work more, and companies can use this opportunity to produce more. This serves to increase the aggregate supply.
This can be effectively implemented during cases of economic recession or during times where there is a small economic activity with the main objective of establishing a tool for economic expansion. A theoretical approach to this reveals that such deficits will be countered by the increasing economic expansion that is anticipated to follow (Guillermo & Rodrigo, 2008).
Governments can effectively make use of the surplus during budgeting to regulate the pace a fast growing economy and stabilization of prices in cases whereby inflation rates are high. However, economists have different views regarding the effectiveness of the fiscal policy in economic stabilization (Guillermo & Rodrigo, 2008).
References
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Bovaird, T., & Loffler, E. (2000). Public management and governance. Oxon: Routledge.
Epstein, G., & Thomas, F. (2000). Monetary Policy, Loan Liquidation and Industrial Conflict: Federal Reserve System Open Market Operations in 1932. Journal of Economic History , 44, 56-60.
Guillermo, P., & Rodrigo, L. (2008). Fiscal policy, stabilization, and growth: prudence or abstinence? Washington DC: World Bank Publications.
Smith, R., & Lynch, T. (2003). Public Budgeting in America. New York: Pearson/Prentice Hall.
Tax Policy Center. (2011). Tax Topics. Web.