Introduction to Finance

Discretionary spending
 
is government spending provided through 
passage of appropriations bills that set aside funds for specifi c federal agencies and programs.
Actual results for federal budget operations are known only after revenues and 
expenditures have been recorded for a fi scal year. Thus, there is a lag between when a 
federal budget is implemented and results are measured. The Internal Revenue Service of 
the Department of the Treasury provides useful summary information on the major sources 
of revenues and the major programs being funded. For fi scal 2014, federal income was 
$3.0 trillion and outlays were $3.5 trillion, resulting in a budget defi cit of about $500 billion. 
Figure 7.1
provides a graphical illustration of the percentage breakdown of revenues 
(income) and expenditures (outlays) for fi scal year 2014. The major income sources are 
personal income taxes (40 percent) and social insurance receipts (Social Security, Medi-
care, and unemployment and other retirement taxes), which accounted for 29 percent of 
revenues. Corporate taxes accounted for 9 percent of income, and excise, customs, estate, 
gift, and miscellaneous taxes contributed 8 percent of income. The remaining income of 
14 percent came from borrowing to cover the defi cit.
The primary expenditures for fi scal year 2014 were in the form of Social Security, Medi-
care, and other retirement outlays that accounted for 42 percent of the total outlays. Outlays for 
national defense, veterans, and foreign aff airs activities amounted to 22 percent. Social pro-
grams (Medicaid, food stamps, temporary assistance for needy families, supplemental security 
income, etc.) accounted for an additional 22 percent of fi scal 2014 expenditures. The remaining 
outlays were for physical, human, and community development (5 percent), net interest on the 
debt (6 percent), and law enforcement and general government activities (2 percent).
Local governments depend heavily on property taxes for their revenues, while state 
governments depend largely on sales taxes and special taxes, such as those on motor fuel, 
liquor, and tobacco products. In contrast, the federal government relies primarily on individual 
income taxes, social insurance taxes, and corporate income taxes for its revenues. 
Fiscal Policy Makers
ETHICAL
In Chapter 5 we noted that Congress and the president determine the nation’s fi scal 
policy. These individuals are elected by the people under the belief that they are to serve the