American Politics Today - Essentials (3rd Ed)

440 CHAPTER 14|ECONOMIC AND SOCIAL POLICY

and telephone lines). Figure 14.5 shows how the distribution of tax revenue

changed between 1962 and 2013. The proportion of personal income taxes held

fairly steady, but excise taxes and corporate taxes fell, and payroll taxes more

than doubled.

The increasing share of revenue that comes from payroll taxes has important

implications for the redistributive nature of taxes. Payroll taxes are regres-

sive because everyone pays the same rate of 6.2 percent (with a temporary rate

of 4.2 percent in 2011 and 2012) up to a certain income level ($110,100 in 2012;

everyone also pays an additional 1.45 percent on all income to support Medicare).

Thus someone who earns $110,100 pays the same amount of Social Security tax

($6,826) as a wealthy individual such as Bill Gates, but it is a much larger share of

that person’s income than it is for a person like Gates. Income taxes, in contrast,

are progressive: upper-income people pay a larger share of their income in taxes

than low-income people do (however, as the example of Mitt Romney’s taxes illus-

trated, wealthy people may pay a smaller proportion of their total income in taxes

than middle-class people if most of their income comes from capital gains and

dividends).

MONETARY POLICY AND THE FEDERAL RESERVE SYSTEM

Monetary policy includes infl uencing interest rates and the money supply and reg-

ulating the lending activity of banks. The Federal Reserve Act of 1913 established

the Federal Reserve System to bring stability and continuity to the nation’s bank-

ing system. The chair and six other governors serve on the board of governors of the

Federal Reserve System. The board is responsible for establishing monetary policy

for the nation. There are 12 regional Federal Reserve banks and more than 2,900

member banks out of the approximately 7,800 banks in the nation.^15 The Fed moni-

Source: The President’s Budget for Fiscal Year 2013, Offi ce of Management and Budget, http://www.whitehouse.gov/omb/budget (accessed 10/7/12).

MANDATORY AND DISCRETIONARY SPENDING, 1962–2013

The percentage of the budget allocated for discretionary spending has been shrinking since the 1960s. What implications
does this have for members of Congress and the president as they try to reduce the federal defi cits?

FIGURE » 14.4

Net interest

6%

Mandatory

26%

1962

Mandatory

42%

Net interest

14%

1987 2013 (est.)

Net interest

7%

Mandatory

62%

Discretionary

31%

Discretionary

44%

Discretionary

68%

regressive Taxes that take a
larger share of poor people’s
income than wealthy people’s
income, such as sales taxes and
payroll taxes.

progressive Taxes that require
upper-income people to pay a
higher tax rate than lower-income
people, such as income taxes.