Author’s Note: For source information, see Note 1
A. INTRODUCTION
In Part 2, I argued that it is not possible to eliminate the deficit through spending cuts alone. I provided readers with line-item details from the 2008 US budget and invited them to make the spending cuts necessary to eliminate the $642 billion deficit for that year. Having done this exercise myself, I am convinced that we cannot balance the budget with spending cuts alone. In Part 4 I presented what I feel is a pretty strong case for the position that we are under-taxed, not only compared to other countries but also in relation to our own taxation history over the past 60 years ago. In addition, I argued that there is little evidence to support the claim by conservatives that tax cuts will kill jobs and strangle economic growth. So where do we go from here?
B. SO HOW DO WE ELIMINATE THE DEFICIT?
(1) Spending Cuts
It would be foolish to pretend that there is not waste and inefficiency in other parts of government. Certainly there are lots of anecdotes about wasteful and stupid federal expenditures, but the truth of the matter is that it is not easy to identify and eliminate wasteful spending. There are two reasons for this. First, it is not always easy to find waste when it does exist. The budget has thousands of line items and figuring out whether a program or service is wasteful is no easy task. What may be a wasteful program in the eyes of one person may be critically important to another. Not surprisingly, such evaluations are frequently driven by ideology than by verifiable information.
It is certainly reasonable to evaluate the costs and benefits of big-ticket programs but to be of any value such assessments must be done objectively and be based on sound empirical methods. It is easy to come up with anecdotes about $800 toilet seats, but it takes a lot more study to determine what needs to change in a procurement systems that produces such results. And even if one succeeds in doing this there will always be huge political and bureaucratic obstacles to making such changes. The recent attempts by the Republican House speaker to fund an alternative jet engine that the Pentagon says it doesn’t want and doesn’t need is just one example of how difficult it is for Congress to act responsibly in managing taxpayers’ dollars[1]. Politicians know that “bringing home the bacon” means votes and it is a rare politician, indeed, who can resist the temptation to vote for a bill that will bring money into his or her home district. Corporate America and its lobbyists also skilled in opposing cuts in wasteful programs that also happen to enhance their profits and in opposing the elimination of tax breaks that do the same. In short, while politicians have talked about eliminating wasteful spending since George Washington was President, history has shown that there to be an enormous gap between theory and practice.
Nonetheless, we must try to rein in spending and try we will. A good start would be to make major cuts in defense spending. Our defense budget is equivalent to the combined defense budgets of the 25 next largest countries. But conservatives choose to focus, instead, on the so-called entitlement programs - Social Security, Medicare, and Medicaid. It is true, as noted above, that these programs are costly. But are they excessive or unnecessary? Virtually every other developed country in the world provides retirement income and basic health care services to its citizens although, with their “inefficient” systems of “socialized” medicine, these countries spend a third less to provide health care to all of their citizens than the US spends to cover only some of its citizens. The US can no longer afford to play the role of the lone super-power that unilaterally polices the rest of the world. Terrorism, rather than a conventional war, in which the US is attacked by another nation State, is now the pre-eminent security challenge faced by the US. The global economy is now so inter-locked, that wars between nation states would result in catastrophic disruptions to the world economy that would be devastating to all countries, including any potential combatants. And, if that is not a sufficient disincentive, the US retains control of enough nuclear weapons to reduce any country in the world to ashes in about five minutes. Aircraft carriers and tanks are not an effective response to terrorism, nor can single nation acting unilaterally deal effectively with terrorists who operate across national boundaries. I believe that President Obama’s approach to the Libyan conflict is a step in the right direction in that he served notice on NATO that the US would not take the lead on this one and forced our allies to step up to the plate for a change. We need to continue this policy so that the other developed countries begin to take on their fair share of the burden of maintaining order and security in the world.
Unfortunately, conservatives prefer to target their cuts on the so-called entitlement programs - Social Security, Medicare, and Medicaid. It is true, as noted above, that these programs are costly. But are they excessive or unnecessary? Virtually every other developed country in the world provides retirement income and basic health care services to its citizens although, with their “inefficient” systems of “socialized” medicine, these countries spend a third less to provide health care to all of their citizens than the US spends to cover only some of its citizens.
My other choices for reduced spending are shown in Table V-1.
TABLE V - 1
SPENDING CUTS - FFY 2015
CBO BASELINE OUTLAYS
|
$3,481
|
Reduce the Number of Troops Overseas Military Operations to 45,000 by 2015a
|
($122)
|
Cut other Military Spending 15%
|
($113)
|
Eliminate farm subsidies
|
($14)
|
Eliminate Earmarks
|
($18)
|
Enact Malpractice Reform
|
($8)
|
Other cuts
|
($100)
|
TOTAL SPENDING CUTS
|
($375)
|
REVISED OUTLAYS
|
$3,106
|
2. Tax Reform And Elimination Of Subsidies
We desperately need to reform the tax code to eliminate the billions of dollars in “tax expenditures” that are contributing to the deficit. “Tax expenditure” is a polite term for “loophole”, and the IRS code is full of them. Not only do they cost the US Treasury billions of dollars, but they sometimes provide perverse incentives to companies to engage in activities (such as shipping jobs overseas) that are not in the national interest. Among my favorites are the deductions for oil companies who continue to make mind-boggling profits. Agricultural subsidies have proven to be particularly prone to perverse incentives. Did you know that not only do we subsidize American farmers to grow sugar but we pay millions of dollars to compensate Brazilian farmers (to avoid being dragged in front of the World Trade Commission for anti-competitive practices) for the economic losses they suffer as a result of our subsidies to American sugar growers. One of the most objectionable subsidies, in my eyes, is the one provided for ethanol produced from corn. Production of ethanol from corn uses about as much oil (for fertilizers and farm machinery) as is saved by the substitution of the ethanol so produced for gasoline. There are other crops that are far more efficient at producing ethanol and that could actually reduce oil consumption.
(3) Taxes
Americans have been living in a dream world in which they can have what they want without having to pay for it. And this delusion has been fostered by political leaders on both sides, by right-wing ideologues who preach that tax increase are evil and unnecessary, and by feckless media outlets that have all but abandoned investigative reporting. Reporters are now stenographers who take dictation from representatives of opposing viewpoints and then dutifully regurgitate the claims of each side as if they are of equal validity, regardless of how wildly inaccurate they might be. God forbid that the media do some actual fact checking for the benefit of their readers!
Table V-2 presents the tax increases that will be needed to balance the budget. The process by which I arrived at these numbers is rather complicated so I have relegated the details to Appendix A for the entertainment of readers who like to look at numbers. All of the data in Table V-2 comes from the most the recent CBO report, “Long Term Budget Outlook”, January, 2011.
The CBO projections call for an economic recovery to begin sometime in 2012 and suggest that by 2015 the economy will be back on track and the US will be left with an ongoing or structural deficit of about 3.5% (point E in Table V-1 which I have reproduced below). A deficit of 3.5% of GDP would be equivalent to $526 billion in 2011.
Figure V-1
ource: Solving the Deficit Part III
Now more recent economic data suggest that the CBO projection is a little optimistic and that the recovery may well take longer to get underway. But whether it happens in 2015, 2016, or later, the structural deficit will be about the same - in the order of 3.5% of GDP. The CBO has provided baseline estimates, in billions of dollars, of the spending and revenue amounts that will produce that 3.5% deficit. I have already presented the spending data side; now it’s time to find the revenues to match the $3,106 in spending shown in Table V-1.
Table V-2 begins with the CBO projections of 2015 revenues (with adjustments that are spelled out in Appendix A). The spending cuts shown in Table V-1 and the adjusted baseline give us a deficit of $621 billion as our starting point. The first step in raising revenues is to allow the Bush tax cuts expire, which adds $303 billion back to the revenue estimate. (The point of removing the tax cut revenues from the baseline estimate and then adding them back is, of course, to emphasize the point that it will cost US taxpayers $303 billion just to get to the CBO’s 2015 revenue baseline from today’s level of taxation.) The deficit is now down to $319 billion.
TABLE V-2
Projected Expenditures for 2015 with Spending Cuts from Table V-1
|
$3,106
|
Adjusted CBO Baseline Estimate of 2015 Revenue (See Appendix A)
|
$2,485
|
Revised Deficit
|
($621)
|
(1) Allow Bush Tax Allowed to Expire
| |
Estate Tax
|
$28
|
Income Tax Breaks for Families w. Income under $250,000
|
$180
|
Income Tax Breaks for Families w. Income over $250,000
|
$95
|
Subtotal
|
$303
|
Revised Revenue Estimate
|
$2,788
|
Revised Deficit
|
($319)
|
2. Specific New Sources of Tax Revenues
| |
Reduce Tax Breaks for employer-sponsored health insurance
|
$41
|
Carbon Tax
|
$40
|
Bank Tax
|
$73
|
Increase Federal Gas Tax by $0.60 per gallon
|
$57
|
Subtotal
|
$211
|
Revised Revenue Estimate
|
$2,999
|
Revised Deficit
|
($108)
|
3. Additional Revenues Still Needed to Balance Budget
| |
Increases in Personal Income Tax
|
$66
|
Increases in Corporate Taxes
|
$18
|
On-budget Social Insurance1
|
$14
|
Increases in Excise Taxes
|
$4
|
Other
|
$6
|
Subtotal: Additional Sources of Revenue
|
$108
|
Revised Estimate of Total Revenues
|
$3,106
|
Revised Deficit
|
$0.00
|
1 Primarily Medicare payroll taxes and premiums.
In Step 2, I add some new revenue sources. The Carbon tax not only produces badly needed revenue, it provides financial incentives to businesses to control their greenhouse gas emissions, Of course, they will likely pass these on the consumer by charging more for their products, but this will provide the consumer with incentives to use these products judiciously. Economists would say these increased prices would reflect the true “cost” of the products because they include a charge for the environmental damage caused by their production. The Bank tax would be linked to the level of risk involved in the investment strategies that a bank employs. It would help to offset the implicit cost of riskier investment strategies that increase the probability of catastrophic losses that would require government intervention and the use of public funds. And finally, I would increase Federal excise tax on gasoline by $0.60 per gallon, which would put them on a par with Canada and still be much lower than most in other developed countries as shown in Table III-3. The increase would also provide long overdue incentives for consumers to buy more efficient gas powered vehicles.
These taxes provide us with an additional $211 billion in tax revenues and drop the deficit to $108 billion.
In Step 3, I cover the remaining $108 billion deficit with an additional across the board increase in all Federal taxes. To estimate how the $108 billion in additional taxes would be distributed, I used IRS data to calculate the percentage of total tax revenues contributed by each of the five major revenue sources shown in Step 3. I then used these percentages to apportion the $108 billion.
Table V-3 summarizes the spending cuts and tax increases needed to eliminate the projected 2015 deficit of $996 billion (just under a trillion dollars). My approach relies more heavily on tax increases than on spending cuts for the simple reason that, as I showed in earlier installments of this series, the deficit problem is more of a revenue problem than a spending problem.
TABLE V-3
DEFICIT ELIMINATION SUMMARY
| ||
Spending Cuts
|
$375
|
38%
|
Tax Increases
|
$621
|
62%
|
TOTAL DEFICIT REDUCTION
|
$996
|
100%
|
C. THE IMPACT ON TAXPAYERS
This is not a pretty picture. Between the tax increase that will result from the expiration of the Bush tax cuts and the increase from the taxes added in Section 3 of Table V-2, personal income taxes will increase a total of over $340 billion.
My estimates of increases in personal income taxes are a bit of a shock. I am hoping that I made an error somewhere because, if I am right, the American taxpayer is in for a rude awakening. My estimates are shown in Table V-3.
TABLE V-4
Increase in Personal Income Tax Payments Needed to Balance Budget - Amount per Return
| |||||
Incomes Under $250,000
|
2008 Income Tax Payments per Return
|
Increase to Reverse Bush Tax Cuts
|
Additional Increase to Balance Budget
|
Total Increase in Tax Payments per Return
|
% Increase from 2008
|
Under $15,000
|
$303
|
$133
|
$30
|
$164
|
54.1%
|
$15,000 - $30,000
|
$1,181
|
$303
|
$69
|
$371
|
31.4%
|
$30,000 - $50,000
|
$2,839
|
$1,398
|
$316
|
$1,714
|
60.4%
|
$50,000 - $75,000
|
$5,246
|
$2,155
|
$488
|
$2,643
|
50.4%
|
$75,000 - $100,000
|
$8,037
|
$3,656
|
$828
|
$4,484
|
55.8%
|
$100,000 - $200,000
|
$16,903
|
$7,197
|
$1,629
|
$8,826
|
52.2%
|
$200,000 - $250,000
|
$26,592
|
$10,517
|
$2,381
|
$12,898
|
48.5%
|
Incomes Over $250,000
| |||||
$250,000 - $500,000
|
$94,159
|
$32,290
|
$6,669
|
$38,959
|
41.4%
|
$500,000 - $1,000,000
|
$163,513
|
$68,765
|
$14,202
|
$82,968
|
50.7%
|
$1,000,000 - $1,500,000
|
$299,480
|
$127,759
|
$26,386
|
$154,146
|
51.5%
|
$1,500,000 - $2,000,000
|
$429,877
|
$182,713
|
$37,736
|
$220,449
|
51.3%
|
$2,000,000 - $5,000,000
|
$739,377
|
$317,314
|
$65,536
|
$382,849
|
51.8%
|
$5,000,000 - $10,000,000
|
$1,638,990
|
$712,741
|
$147,204
|
$859,945
|
52.5%
|
$10,000,000 or more
|
$6,247,810
|
$2,392,691
|
$494,168
|
$2,886,859
|
46.2%
|
Filers with adjusted gross incomes in the $50,000 to $70,000 range will be hit with an average increase of $2643. Those with incomes between $70,000 and $100,000 will face an average hike of around $4,484. And, of course, personal taxes will be only part of the added financial burden since my revenue proposals include an increase in gas taxes that will fall directly on consumers, not to mention the fact that much of the increase in corporate taxes will be passed on to consumers in the form of increased prices for goods and services.
I was surprised by these numbers, and they are really just a crude “back of the envelope” estimate. I hope I made a mistake somewhere, but if I am remotely near the mark, our political leaders and the media have been doing a woefully inadequate job of educating the American public about the nature and severity of the problem. While the numbers are startling, they become a little more plausible if we remember that we started from a position of historically low levels of taxation - much lower than in 1960. And to make matters worse, we have added huge expenditures since 1960 - Medicare, Medicaid, Homeland Security, two unfunded wars, and all the while maintaining a defense budget equal to the combined military budgets of the next 25 largest countries.
And making a bad problem even worse, health care costs are spiraling out of control and interest payments on the national debt will be approaching $500 billion per year by 2015. At the moment, it appears that health care costs will be, by far, the biggest driver of future deficits, but that could quickly change if there is an increase in the interest rates the US has to pay on its debt. Interest rates are now at historic lows. The rate for three-month treasury bills is just one tenth of one percent. Rates on 10-year treasury notes have dropped from 5% in 2007 to 3% in 2010. An increase of just 1% in the rates for 10-year notes would result in a 33% increase in the amount of interest paid.
Unfortunately, the Affordable Care Act of 2010 (aka “health care reform”) does virtually nothing to slow the growth of health care costs. Many of the alleged “savings” included in the budget projections are dubious at best and are based on the unfounded assumption that tinkering with payment systems will produce meaningful reductions in expenditures. The truth is that it will take a wholesale revamping of the US health care system to produce serious reductions in the rate at which health care costs are rising. By “wholesale”, I mean nothing less than the abandonment of our current employer-based system that relies on private, for-profit insurers and the adoption of a European style system in which the government either takes over the insurance function or delegates it to private, non-profit insurance companies that are strictly regulated. This, of course, is a political impossibility at the moment, which is tantamount to saying that the economic survival of this country is not presently politically feasible.
D. A FAILURE OF LEADERSHIP
I am sorry to have to paint such a bleak picture, but I believe that what I have presented is the reality that America’s political leaders and news media have failed to present to the public. They have failed miserably in meeting the most critical task of leadership - providing voters with accurate information about the problems facing the country and presenting them with solutions along with an honest assessment of what these solutions will cost. For short-term political gain, politicians in both parties have conspired to conceal from American voters the seriousness of the problems they face. President Obama, while he has recently made some noises about “revenue enhancements” and has called for an end for the Bush tax cuts for wealthy Americans, has also failed to challenge the Republican narrative that spending is the problem. Unless they understand the true nature of the problem, Americans will continue to live in a fantasy realm in which they continue to enjoy the highest standard of living ever achieved on this planet without having to pay for it. And while Democrats have been too timid to state the truth to voters, Republicans have been actively fueling the delusion that we are living in an alternate universe in which the normal laws of physics, logic, and mathematics do not apply.
================================
APPENDIX A
About the CBO Baseline Spending and Revenue Estimates Baseline estimates assume that laws currently on the books remain unchanged. If current law calls for changes in tax policy at a future date, the CBO revenue estimate will reflect those changes. For example, the Bush tax cuts of 2001 and 2003, which were extended in 2010, are now due to expire at the end of 2012. The CBO projections for 2013 and subsequent years reflect the presumed expiration of those tax cuts. Since the CBO recognizes rising concern about deficits may lead Congress to allow those tax cuts to expire, it has provided estimates of the impact that change would have.
Table V-A lays out the step-by-step process by which I arrived at the numbers in Table V-2. I. I start with the CBO baseline estimate of 2015 revenues. However, I must deal with a slight complication before proceeding. The complication arises because the CBO revenue estimate assumes that the Bush tax cuts expire at the end of 2012. In order to provide a true picture of how taxation levels will have to change from the present (with the Bush tax cuts still in place) so as to produce a balanced budget in 2015, I must revise the CBO estimate. We need to know how much of the CBO’s estimated 2015 revenue will result from its assumption that the tax cuts expire. Failing to do so will be to ignore a big part of what it will cost US taxpayers to move from today’s taxation levels to the level needed just to get to the CBO’s 2015 revenue baseline. Fortunately, the CBO has provided its estimates of these amounts and these are shown in Table V-A1[2].
TABLE V-A1
ADJUSTMENTS TO CBO 2015 REVENUE ESTIMATES
| |
A. CBO Baseline Estimate
|
$2,840
|
B. Assume Bush Tax Cuts Still in Place
| |
Estate Tax
|
($28)
|
Income Tax Breaks for Families w. Income under $250,000
|
($180)
|
Income Tax Breaks for Families w. Income over $250,000
|
($95)
|
Subtotal
|
($303)
|
Revised Revenue Estimate
|
$2,537
|
C. Restore AMT Relief
|
($52)
|
Revised Revenue Estimate
|
$2,485
|
Deficit
|
($621)
|
2015 REVENUE TARGET (After spending cuts)
|
$3,106
|
The CBO revenue estimate assumes that the expiration of the Bush tax cuts will yield increases of $31 billion in estate tax revenues, $203 billion in personal income tax revenues from families with adjust gross incomes less than $250,000, and $63 billion in personal income tax revenues from families with adjust gross incomes greater than $250,000. Eliminating these assumed sources of added tax revenues produces a reduced revenue estimate of $2,543. In Section C of Table V-A1 I make one additional departure from the CBO's assumptions: I assume that Congress will either enact a long-term fix to the AMT penalty or, at the very least, will still be passing year to year extensions of the over-ride[3] This reduces my estimate of 2015 revenues by an additional $58.0 billion leaving us with a revised revenue estimate of $2,485 billion and a deficit of $621 billion. This is the departure point from which we set out to balance the 2015 budget.
TABLE V-A2
CHANGES IN TAXATION NEEDED TO BALANCE 2015 BUDGET
| |
D. Assume Bush Tax Cuts Expire
| |
Estate Tax
|
$28
|
Income Tax Breaks for Families w. Income under $250,000
|
$180
|
Income Tax Breaks for Families w. Income over $250,000
|
$95
|
Subtotal
|
$303
|
Revised Revenue Estimate
|
$2,788
|
Revised Deficit
|
($319)
|
D. Specific New Sources of Tax Revenues
| |
Reduce Tax Breaks for employer-sponsored health insurance
|
$41
|
Carbon Tax
|
$40
|
Bank Tax
|
$73
|
Increase Federal Gas Tax by $0.60 per gallon
|
$57
|
Subtotal
|
$211
|
Revised Revenue Estimate
|
$2,999
|
Revised Deficit
|
($108)
|
D. Additional Revenues Still Needed to Balance Budget
| |
Increases in Personal Income Tax
|
$66
|
Increases in Corporate Taxes
|
$18
|
On-budget Social Insurance
|
$6
|
Increases in Excise Taxes
|
$14
|
Other
|
$4
|
Subtotal: Additional Sources of Revenue
|
$108
|
Revised Revenue Estimate
|
$3,106
|
Revised Deficit
|
$0
|
=================================
NOTES
NOTE 1 - Wherever possible I have provided original source citations for data cited in this series. In addition to these citations, I have posted Excel workbooks containing the underlying data for Tables, Figures, and my calculations for derived numbers.
Workbook 1 - Budget 2008 to 2012.xls
Workbook 2 - Budget Historical Data.xls
Workbook 3 - CBO Projections Jan 2011.xls
The workbooks can be found at Google Docs at:
Each workbook contains an index with clickable hyperlinks to the data sources for specified Tables and Figures. The hyperlinks do not work in Google.docs but will work if you download the document to your computer.
NOTE 2 - Growth in real GDP is from the Bureau of Economic Analysis, National Income and Product Accounts, Table 1.1.1 (http://www.bea.gov/national/nipaweb/SelectTable.asp)
and can be found in Workbook 2 [BEA GDP Chg %]. The data are merged in worksheet in Workbook 2 [Graph Data].
NOTE 3 The data for Figure V-1 is in Workbook 2 [Graph Data]. The data comes from two sources. For the years 1953 through 2011 it is from the Budget of the United States for 2012, Historical Tables, Table 1-2. For the years 2012 through 2020 it is from the CBO report “Long Term Budget Outlook” Table 1-4, published in January, 2011. This publication includes baseline projections of revenues and expenditures for the period 2012 through 2020. The key CBO table in Workbook 3[3.1] and my treatment of the CBO data is in Workbook 3 [3.1b]. The CBO projections are based on the following assumptions:
1) Extensions of unemployment compensation, the one year reduction in the payroll tax, and the two-year extension of provisions designed to limit the reach of the alternative minimum tax all expire as scheduled at the end of 2011;
2) Other provisions of the 2010 tax act, including extensions of lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, (i.e. the Bush tax cuts) expire as scheduled at the end of 2012; and
3) Funding for discretionary spending increases with inflation rather than at the considerably faster pace seen over the dozen years leading up to the recent recession.
4) The cuts in Medicare payments to physicians called for by the Sustainable Growth Rate (SGR) formula will be implemented.
I have modified the CO’s baseline figures in two ways:
· In keeping with my practice of excluding social security from my analysis of the deficit, I have removed revenues and expenditures of the social security trust funds.
· Because the SGR reductions in Medicare physician payments will never take place, I have removed those “savings” by increasing Medicare expenditures $23 billion.
[1] I trust the reader will not be shocked to learn that the jet engine in question is manufactured in the Congressman’s home district.
[2] The numbers in Appendix A are from Table 1-7 of the CBO report, “Long Term Budget Outlook” January, 2011. A copy of the table can also be found in Workbook 2 [1-7].
[3] As a result of legislation passed some years ago, tax payers with adjusted incomes in the $100,000 to $250,000 range would have been hit with substantial tax increases in recent years had Congress not passed over-rides in each of those years. The over-rides are year-to-year exemptions from the AMT. However, since Congress has not gotten around to enacting a permanent fix to the AMT problem, the laws now on the books do not include an exemption to the AMT in 2015. Since the CBO is required by law to base its estimates on current law, their revenue estimate for 2015 assumes that the AMT has expired and that the $58 billion in added taxes that would result are included in their revenue estimate.
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