In any organized society there is spending and taxes. Government spending and taxes go hand in hand since taxes provide means for spending. Government spending involves all the government investments, consumption as well as transfer payments. Government investment spending includes the acquisition of goods and services by the government for future benefits, for example, infrastructure and research. Government consumption spending is government acquisition of goods and services to satisfy the current collective or individual needs of the community. Transfer payments include spending on money transfers for example payments on social security. Transfer payments neither absorb the resources nor create output directly. Taxes are money we pay to the government to provide for us the goods and services that the free enterprise system cannot provide. The paper looks at U.S government spending, the forms of taxes, and the influence of government spending on economic growth.
There are two types of government spending within the U.S government, and they include discretionary and mandatory spending. According to Byers (par.3), discretionary spending includes expenditure determined through appropriations processes in yearly basis in the Congress. Examples of discretionary spending include education, defense budget, transportation, security, and state department. Mandatory spending includes expenditure on particular programs the existing law necessitates and they include Medicare and Medicaid, Social Security, Affordable Care Act as well as interest on the national debt (Byers par.2). In the 2016 financial year, discretionary spending was 29 percent of the total budget and mandatory spending was 71 percent of the budget. More spending on mandatory programs crowds out spending on discretionary programs, and it is detrimental to long-term economic growth.
The government spends money for various reasons including reducing inequality, provision of public goods, provision of critical public services, and payment of interest on national debt. In the financial year 2016, the total government spending was 6.67 trillion dollars, with the federal government spending 3.85 trillion dollars, state governments 1.77 trillion dollars, and local governments 1.71 trillion dollars. Primary areas of U.S government expenditure in 2016 included health care, pensions, education, defense, welfare, protection, transportation, general government, and interest on the national debt (Chantrill par.1). Spending on health care and pension was highest as compared to other areas.
To finance government spending, the U.S government has a tax system; taxes are the primary source of revenue for the government. Taxes have been in existence since the start of organized societies. Taxes are of various forms including income tax (individual and corporate income tax), capital gain tax, property tax, estates tax, imports tax, and user taxes (taxes on goods and services people use) and many other various fees. In the year 2016, the federal, state, and local governments collected taxes worth 6.3 trillion dollars with federal government raising 3.3 trillion dollars, state governments 1.7 trillion dollars, and local governments 1.3 trillion dollars (Chantrill par.1 & 5). Levying taxes on businesses and individuals meets the expenses the U.S government incurs.
Change in government spending and taxes influences short as well as the long-term economic growth of the country (Zagler and George 401). The government can raise government expenditure and reduce taxes to elevate the GDP level thereby increasing the rate of economic growth in the short-run as well as stabilizes the long-term economic growth rate. The government increases government expenditure to raise demand for goods and services thereby increasing production and reduces taxation to raise consumption so as to increase the GDP level and hence the government indirectly regulates the short-term rate of economic growth. However, continuous increase in government spending and reduction in tax in harmful to the economy as it will reduce national saving thereby reducing investment in capital goods which is critical in the long-term economic growth of the country (Zagler and George 402-405).
Additionally, increased government expenditure increases the burden of tax on the citizens leading to reduced private spending and investment (Mitchell 5). Besides, increase government spending and reduction in taxes creates a crowding out effect. Government expenditure exceeding the revenue from taxes compels the government to borrow money resulting in additional usage of available domestic savings and demand for finances in the domestic economy thereby leading to increased interest rates. High-interest rates discourage individuals and businesses from borrowing thus reducing consumption expenditure and private sector investment (Mitchell 5). Crowding out private investments is detrimental to the countrys economy.
Besides, government spending and taxation influences potential output and regulates income inequalities among its citizens. Increased government spending on public capital including education, transport, and health care play a significant role in potential output growth. Reduced taxation increases incentives for people to work more and spend more thereby increasing demand for goods and services which in turn increases production calling for hiring more people to meet rising demand (Zagler and George 406). Also, increase in government expenditure in transfer payments manages income distribution among individuals. The U.Ss progressive tax system means that people pay according to their income; the higher you earn the more tax you pay. Hence, the government uses this revenue in making transfer payments thereby helping in income redistribution (Zagler and George 414).
In conclusion, government spending and taxes helps the government to meet the needs of its people and regulate the economy. The United States of America has two government spending types including discretionary and mandatory spending. In 2016, the total U.S government was 6.67 trillion dollars and tax revenue of 6.3 trillion dollars. The government uses government spending and taxes to manage its economic growth and income redistribution among its citizens. Taxes are the primary revenue source for government spending.
Byers, Bess. Mandatory Vs. Discretionary Spending. Generation Empowered, 2014, November 14, http://www.agenerationempowered.org/blog/2014/11/17/mandatory-vs-discretionary-spending. Accessed 29 May 2016
Chantrill, Christopher. Current Revenue in the U.S. U.S government revenue.com, n.d., http://www.usgovernmentrevenue.com/total_revenue_2016USrn. Accessed 29 May 2016
Chantrill, Christopher. Total U.S Government Spending. U.S government Spending.com, n.d., http://www.usgovernmentspending.com/total_spending_chart. Accessed 29 May 2016
Mitchell, Daniel J. "The impact of government spending on economic growth." The Heritage Foundation 1831 (2005): 1-18.
Zagler, Martin, and George, Durnecker. "Fiscal policy and economic growth." Journal of economic surveys 17.3 (2003): 397-418.
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