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The role of government in the American economy extends far beyond its activities as a regulator of specific industries. The government also manages the overall pace of economic activity, seeking to maintain high levels of employment and stable prices. It has two main tools for achieving these objectives: fiscal policy, through which it determines the appropriate level of taxes and spending; and monetary policy, through which it manages the supply of money. By the late 1990s, the nation was experiencing a gratifying combination of strong growth, low unemployment, and slow inflation.
The federal government's chief source of funds to cover its expenses is the income tax on individuals, which in 1999 brought in about 48 percent of total federal revenues. Payroll taxes, which finance the Social Security and Medicare programs, have become increasingly important as those programs have grown. In 1998, payroll taxes accounted for one-third of all federal revenues; employers and workers each had to pay an amount equal to 7.65 percent of their wages up to $68,400 a year. The federal government raises another 10 percent of its revenue from a tax on corporate profits, while miscellaneous other taxes account for the remainder of its income.
The government budget finally returned to surplus in 1998. This led to calls for new tax cuts, but some of the enthusiasm for lower taxes was tempered by the realization that the government would face major budget challenges early in the new century as the enormous post-war baby-boom generation reached retirement and started collecting retirement checks from the Social Security system and medical benefits from the Medicare program. Monetary policy is the province of the Federal Reserve System, an independent U.S. government agency. "The Fed," as it is commonly known, includes 12 regional Federal Reserve Banks and 25 Federal Reserve Bank branches. All nationally chartered commercial banks are required by law to be members of the Federal Reserve System; membership is optional for state-chartered banks. The Federal Reserve Board of Governors administers the Federal Reserve System.
Abridged from U.S. State Department IIP publications and other U.S. government materials.
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