Question

In: Economics

What are the two largest sources of Federal government revenue? Explain the meaning of ‘discretionary’ and...

  1. What are the two largest sources of Federal government revenue?
  2. Explain the meaning of ‘discretionary’ and ‘non-discretionary’ spending in the Federal budget

Solutions

Expert Solution

Approximately 50 per cent of federal income comes from individual income taxes, 7 per cent from corporate income taxes, and another 36 per cent from payroll taxes financed by social insurance schemes. The rest of it comes from a mix of sources.

Payroll taxes on income and benefits covered by Social Security and Medicare's health benefit portion make up the largest portion of social insurance receipts. Other sources include payroll taxes for the railway retirement plan and the unemployment insurance system and federal workers' pension contributions. In fact, social security levies contributed to 36% of federal income in 2019.

The federal government also receives revenue from estate and gift taxes, customs duty, receipts from the Federal Reserve System, and other fees and charges. These sources created a total of 5.0 per cent of federal revenue in 2019. These have ranged from 0.6 to 1.0 per cent of GDP since 1965. For recent years, the figure has been at the high end of the spectrum since the Federal Reserve Board's exceptionally high earnings have been related to its attempts to boost the economy since 2008.

The discretionary expenditure authority derives from the annual appropriation acts which are under the control of the House of Commons and the Senate Appropriations Committees. For example, most defense, education and transport programs are financed in this way, as are a variety of other federal programs and activities. Such expenditures are subject to a collection of rules and procedures for the execution of the budget, which vary from those for mandatory spending.

Mandatory or direct spending requires expenditure on welfare services and some other payments to individuals , corporations, and state and local governments. Mandatory spending is usually regulated by legislative criteria; it is not typically provided for in the annual appropriation acts. Expenses for the nation's three main entitlement programs (Social Security, Medicare, and Medicaid) and other smaller services (for example, unemployment compensation, federal workers' retirement plans, student loans, and deposit insurance) are mandatory expenditures.


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